EDITOR NOTE: In case you’re not familiar with it, the Warren Buffett indicator is a way to measure where stock valuations stand at any given moment. It takes the total market cap of a country's publicly traded stocks and divides it by the latest quarterly GDP figure. And right now, the indicator is at record-high levels, flashing red, signaling that a major market crash may happen very soon. Investment wizard Cathie Wood--popularly called the “next” Warren Buffett but more like the “Anti-Warren Buffett”--disagrees with the indicator. She says it’s outdated, and its reading is relatively low if you were to take into consideration the new technologies that have come into play. Market experts will take either side, but what makes the whole thing frustrating for most investors is that the debate calls out two polar extremes--the indicator is either too “hot” or just “cold.” Nothing in-between. We’re leaning toward the indicator’s bias. But what does it matter? Since humans are awful at timing markets and predicting future outcomes, diversification is always the most prudent choice. That includes not only equities, but non-correlated physical assets like real estate, commodities, and non-CUSIP gold and silver.
The Ark Invest chief initially dismissed the gauge as outdated but told the Tesla boss on Sunday that her team would analyze it.
"@ARKInvest will research this metric pre-WWII to assess its validity," Wood tweeted.
The star stock-picker disclosed the plan after suggesting that the Buffett indicator had reached double or triple its current level in the late 1800s. Transformative technologies such as the telephone, electricity, and the automobile sent the gauge skyward, she explained, adding that modern innovations such as robotics, blockchain, and artificial intelligence are far more revolutionary in her book.
"'This time is different' are dangerous words in forecasting markets," Wood said, before doubling down on her view that the Buffett indicator is relatively low and that disruptive technologies justify its elevated level.
Chris Bloomstran, the head of Semper Augustus Investments, swiftly rebutted her comments. The US stock market peaked at 90% of national GDP in 1929, he said, highlighting that public companies generated a far smaller proportion of economic output back then and that global trade was a fraction of its current level.
Moreover, Bloomstran argued that Wood's vaunted technologies "will not be remotely more transformative than those from 1870 to the 1950s." He pointed out that, despite the innovations she outlined, the US stock market plummeted almost 90% during the Great Depression.
The so-called Buffett indicator takes the total market capitalization of a country's publicly traded stocks and divides it by the latest quarterly GDP figure available. Based on the Wilshire 5000 Total Market Index's level of $43.3 trillion and the latest estimate for fourth-quarter US GDP of $21.5 trillion, the yardstick has reached about 201%.
Buffett described his namesake gauge in 2001 as "probably the best single measure of where valuations stand at any given moment." It should have been a "very strong warning signal" of a crash when it skyrocketed during the dot-com boom, he added.
Now the indicator has soared to new heights, it's no surprise to see Musk's querying someone like Wood on whether he should be worried and Wood's deciding to take a closer look.
Original post by MarketsInsider