The BUFFETT INDICATOR is WRONG - STOCKS ARE CHEAP 🤑

Parsley Energy $PE announced that they are going to acquire Jagged Peak Energy for $1.62 billion in all-stock transaction. The premium is only at 15%. I have not looked at it in details yet so I cannot tell you exactly for now, how will this affect the business of Parsley Energy. $PE is down by 11% today after this announcement. This is pretty normal to see when an acquisition is going on. The acquiring company's stock price will fall. I took the opportunity to invest more in $PE since now it is only trading at 0.7 book value which is pretty amazing. We won't even need $OIL to go to $80 to expect great returns at such prices. Stocks doing great today are $POLY.L with higher $GOLD prices, $DGE.L and $AAPL, which is at all time high.

The BUFFETT INDICATOR is WRONG - STOCKS ARE CHEAP 🤑

The Buffett Indicator is supposed to predict a market crash and consequently a recession. It uses two metrics, the GDP (Gross Domestic Product) which is the total economic output of a country over the past year and the Total Market Cap of the US stock markets (The Wilshire 5000 Total Market Index) . The GDP of the of the United States is about $21 Trillion and the Wilshire Index is $30 Trillion. The Buffett indicator tell us that if the GDP is bigger than the stock market, stocks re cheap. If they are about the same size, stocks are fairly valued and if the stock market is bigger than the GDP then, stocks are expensive. Right now the ratio Total Market Cap/GDP is 144%. It seems that stocks are expensive and it is time to sell. If we look in the past, in 2000 and 2007, this ratio was larger than 100% and the stock market crashed both times. If you look in the 1980s, the ratio was about 80%. Were stocks cheap then? Not really. People were not buying stocks because they were buying bonds instead. The interest rates were very high and so were the yields on bonds. It made more sense to buy bonds. If you look at Warren Buffett $BRK.B he has been buying stocks lately and he admitted that they are cheap because of the low interest rates. Nobody wants to buy the 10-year treasury bonds when the yield is only 1.69% and the inflation rate is 1.75%. The Earnings yield on the S&P 500 $SPX500 is 4.69% which is much more attractive.

When Warren Buffett first proposed this indicator, the world was not that open. Now companies are selling more and more overseas. Only 37% of Apple $AAPL sales are in the Americas(the whole continent) while about 50% of Microsoft $MSFT sales are in the US. Most countries have much of their revenues coming outside the US. They are thus contributing to both the economy of the US and the other countries(A capitalist economy is not a zero sum game, everybody can win). But when it comes to buying stocks. If you want to buy Apple shares $AAPL , you buy them on the NASDAQ which is an American exchange. That's why the US stock market will be much bigger than the economy in our age. If we look at Switzerland, the Buffett indicator there is 250%. It is because Switzerland has a population of only 8 million people and doesn't have such a massive economy. But on their stock exchange, there are giant companies such as Nestle $NESN.ZU , Roche $ROG.ZU and Novartis $NVS . All of these companies derive most of their outside Switzerland.

Dividends also have an effect. When a company pays dividends, the stock price will go down and also the market cap. If you look at the FTSE 100 $UK100 , it has been moving sideways for over 20 years. But if we include dividends, then we can see the real growth. That's because British companies pay much in dividends. In the US, companies are paying less and less in dividends. 3 out of the six largest US companies, Amazon $AMZN , Facebook $FB , Google $GOOG and Berkshire Hathaway don't pay dividends. This causes inflation in the stock market without contributing much to the economy.

I'm not saying that stocks are cheap. It is getting harder and harder to find a good deal. Even Warren Buffett has a big cash pile. What I want you to do is not to rely on a single indicator to predict a market crash or recession. Some indicators work best in only certain conditions. You should always try to think of consumers think, how CEOs think, how investors think instead of focussing on a number.

https://www.youtube.com/watch?v=OZRhHLh5KbI&list=UUPO3uUyoXSaFWG-Ldq1mqEQ

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