Buffett indicator

 The current high values ​​of the Buffett Indicator are often mentioned (see fig.). This is the ratio of Market Capitalization to GDP. The indicator is in many ways similar to the P / S multiplier (the ratio of market capitalization to company revenue), which shows how much investors are willing to pay for 1 unit of revenue. The P / E multiplier has a similar idea.


The analytical / predictive value of these indicators has always been low, but especially today.



With unprecedented low interest rates, investors' demands on stock returns are reduced. Logically, when government bonds yield 5%, the desired stock return could be 15%. But when money is extremely cheap, and risk-free instruments bring in 1-2%, investors can be satisfied with a yield of 6-10% - and they will not mind buying shares at higher prices, raising the values ​​of multiples.


In the era of almost free money, investors are willing to pay much more for 1 unit of GDP, revenues or profits than ever before. This means that the Buffett Indicator, multiples of the P / S, P / E, etc. stock valuation may be much higher not only the current, but also the maximum historical values.

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