Eric Mansson @ManssonEric: "𝗪𝗵𝘆 𝗧𝗵𝗲 𝗠𝗮𝗿𝗸𝗲𝘁𝘀 𝗪𝗶𝗹𝗹 (𝗘𝘃𝗲𝗻𝘁𝘂𝗮𝗹𝗹𝘆)..."

Sweden

𝗪𝗵𝘆 𝗧𝗵𝗲 𝗠𝗮𝗿𝗸𝗲𝘁𝘀 𝗪𝗶𝗹𝗹 (𝗘𝘃𝗲𝗻𝘁𝘂𝗮𝗹𝗹𝘆) 𝗖𝗿𝗮𝘀𝗵 “The Buffett Indicator says the stock market will crash.” That’s a headline you’ve probably seen a dozen times lately — right alongside claims that Trump will either crash it himself or somehow save it. But in reality, many misunderstand what it truly means. The Buffett Indicator measures the total market capitalization of all U.S. stocks relative to the country’s Gross Domestic Product — essentially comparing the size of the stock market to the size of the economy. It’s one of Warren Buffett’s preferred valuation tools, and right now, it sits just below 2.2x market cap-to-GDP. That number might not sound alarming until you realize it’s far above what it reached during the dot-com bubble and well beyond the long-term historical average. 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 ≠ 𝗧𝗶𝗺𝗶𝗻𝗴 Since 2009, easy monetary policy and near-zero interest rates have led many investors to dismiss valuation metrics entirely — arguing that if they don’t predict short-term moves, they’re irrelevant. That’s a mistake. Valuation measures were never meant to time markets. They simply tell us how expensive stocks are relative to fundamentals. High valuations are better viewed as a measure of investor psychology — a sign of how far the “greater fool theory” has stretched. When valuations are excessive, future returns are generally low. It’s simple math: if you overpay for future cash flows today, your future returns will disappoint. 𝗧𝗵𝗲 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗥𝗲𝗮𝗹𝗶𝘁𝘆 𝗕𝗲𝗵𝗶𝗻𝗱 𝘁𝗵𝗲 𝗥𝗮𝘁𝗶𝗼 The Buffett Indicator links market value to economic output. And since about 70% of GDP comes from consumption, there’s a natural limit to how much corporate profits can outgrow the economy. Since 1947, corporate earnings have risen 7.7% annually, while GDP has grown 6.4% — a logical and fairly tight relationship. So, when the market’s total value climbs much faster than economic growth, it’s a red flag that valuations are detached from reality. 𝗪𝗵𝗮𝘁 𝗜𝘁 𝗥𝗲𝗮𝗹𝗹𝘆 𝗠𝗲𝗮𝗻𝘀 Does that mean the stock market will crash tomorrow? No. But it does mean future returns are likely to be disappointing. To test this myself, I ran a small statistical experiment. I built my own version of the Buffett Indicator using the S&P 500’s total market capitalization (I call it the Buffettish Indicator) as one column, and in another, I calculated the average annual return for the following 10 years — the so-called forward return. Then, I plotted the results in a scatter chart: the Buffettis Indicator on the horizontal axis, and the 10-year forward return on the vertical. The trend line that emerged showed a clear negative correlation — the higher the Buffettish Indicator climbs, the lower the subsequent 10-year returns tend to be (see picture in the comment section). So, if you’re counting on a 10% annual return from today’s levels, you’re basically betting on the best-case scenario in history repeating itself. That’s not a bet I’d personally go for. As Warren Buffett himself once said: “𝘗𝘳𝘪𝘤𝘦 𝘪𝘴 𝘸𝘩𝘢𝘵 𝘺𝘰𝘶 𝘱𝘢𝘺. 𝘝𝘢𝘭𝘶𝘦 𝘪𝘴 𝘸𝘩𝘢𝘵 𝘺𝘰𝘶 𝘨𝘦𝘵.” 𝗙𝗢𝗠𝗢 𝘃𝘀. 𝗙𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹𝘀 Right now, markets are driven by momentum and FOMO — not fundamentals. And while valuations don’t tell you when a reversal will happen, they do tell you that one will. Eventually. As David Einhorn once put it: “𝘛𝘩𝘦 𝘣𝘶𝘭𝘭𝘴 𝘦𝘹𝘱𝘭𝘢𝘪𝘯 𝘵𝘩𝘢𝘵 𝘵𝘳𝘢𝘥𝘪𝘵𝘪𝘰𝘯𝘢𝘭 𝘷𝘢𝘭𝘶𝘢𝘵𝘪𝘰𝘯 𝘮𝘦𝘵𝘳𝘪𝘤𝘴 𝘯𝘰 𝘭𝘰𝘯𝘨𝘦𝘳 𝘢𝘱𝘱𝘭𝘺 𝘵𝘰 𝘤𝘦𝘳𝘵𝘢𝘪𝘯 𝘴𝘵𝘰𝘤𝘬𝘴. 𝘛𝘩𝘦 𝘭𝘰𝘯𝘨𝘴 𝘢𝘳𝘦 𝘤𝘰𝘯𝘧𝘪𝘥𝘦𝘯𝘵 𝘵𝘩𝘢𝘵 𝘦𝘷𝘦𝘳𝘺𝘰𝘯𝘦 𝘦𝘭𝘴𝘦 𝘸𝘩𝘰 𝘩𝘰𝘭𝘥𝘴 𝘵𝘩𝘦𝘴𝘦 𝘴𝘵𝘰𝘤𝘬𝘴 𝘶𝘯𝘥𝘦𝘳𝘴𝘵𝘢𝘯𝘥𝘴 𝘵𝘩𝘦 𝘥𝘺𝘯𝘢𝘮𝘪𝘤 𝘢𝘯𝘥 𝘸𝘰𝘯’𝘵 𝘴𝘦𝘭𝘭 𝘦𝘪𝘵𝘩𝘦𝘳. 𝘞𝘪𝘵𝘩 𝘩𝘰𝘭𝘥𝘦𝘳𝘴 𝘳𝘦𝘭𝘶𝘤𝘵𝘢𝘯𝘵 𝘵𝘰 𝘴𝘦𝘭𝘭, 𝘵𝘩𝘦 𝘴𝘵𝘰𝘤𝘬𝘴 𝘤𝘢𝘯 𝘰𝘯𝘭𝘺 𝘨𝘰 𝘶𝘱 – 𝘴𝘦𝘦𝘮𝘪𝘯𝘨𝘭𝘺 𝘵𝘰 𝘪𝘯𝘧𝘪𝘯𝘪𝘵𝘺 𝘢𝘯𝘥 𝘣𝘦𝘺𝘰𝘯𝘥. 𝘞𝘦 𝘩𝘢𝘷𝘦 𝘴𝘦𝘦𝘯 𝘵𝘩𝘪𝘴 𝘣𝘦𝘧𝘰𝘳𝘦. 𝘛𝘩𝘦𝘳𝘦 𝘸𝘢𝘴 𝘯𝘰 𝘤𝘢𝘵𝘢𝘭𝘺𝘴𝘵 𝘵𝘩𝘢𝘵 𝘸𝘦 𝘬𝘯𝘰𝘸 𝘰𝘧 𝘵𝘩𝘢𝘵 𝘣𝘶𝘳𝘴𝘵 𝘵𝘩𝘦 𝘥𝘰𝘵-𝘤𝘰𝘮 𝘣𝘶𝘣𝘣𝘭𝘦 𝘪𝘯 𝘔𝘢𝘳𝘤𝘩 𝟤𝟢𝟢𝟢, 𝘢𝘯𝘥 𝘸𝘦 𝘥𝘰𝘯’𝘵 𝘩𝘢𝘷𝘦 𝘢 𝘱𝘢𝘳𝘵𝘪𝘤𝘶𝘭𝘢𝘳 𝘤𝘢𝘵𝘢𝘭𝘺𝘴𝘵 𝘪𝘯 𝘮𝘪𝘯𝘥 𝘩𝘦𝘳𝘦 (𝘦𝘹𝘤𝘦𝘱𝘵 𝘧𝘰𝘳 𝘱𝘰𝘵𝘦𝘯𝘵𝘪𝘢𝘭𝘭𝘺 𝘛𝘳𝘶𝘮𝘱 𝘵𝘢𝘳𝘪𝘧𝘧𝘴). 𝘛𝘩𝘢𝘵 𝘴𝘢𝘪𝘥, 𝘵𝘩𝘦 𝘵𝘰𝘱 𝘸𝘪𝘭𝘭 𝘣𝘦 𝘵𝘩𝘦 𝘵𝘰𝘱, 𝘢𝘯𝘥 𝘪𝘵’𝘴 𝘩𝘢𝘳𝘥 𝘵𝘰 𝘱𝘳𝘦𝘥𝘪𝘤𝘵 𝘸𝘩𝘦𝘯 𝘪𝘵 𝘸𝘪𝘭𝘭 𝘩𝘢𝘱𝘱𝘦𝘯.” The Buffett (or Buffettish) Indicator doesn’t say a crash is imminent — but it does warn that expectations are dangerously high. Investors should temper their outlooks, manage risk, and keep emotions in check. And if you’re unsure how to balance exposure in times like these — well, that’s what the copy button is for. $SPX500 $NSDQ100 $GOLD

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