Buffett Indicator Crosses Danger Zone for Global Stock Market

Posted in: Market News
January 10, 2020 6:39 AM UTC

The last time global stock values were this high relative to global GDP was 2007. The World Bank just warned of an unprecedented debt bubble.

  • The Buffett indicator for US stocks is at a record high. It’s approaching the danger zone for the global stock market as well.
  • Global stock valuations haven’t been this high relative to global GDP since right before the Great Recession struck in 2007.
  • Worsening the outlook, the World Bank warned of a global debt crisis this week, and trimmed its global GDP forecast for 2020.

As the Mideast conflict cooled, the Dow edged closer to reaching 29,000 for the first time Thursday. But as stocks extend their record run into the new decade, investors wonder how long it can last. Market watchers are scouring the fundamentals for signs of an impending stock market crash. The global Buffett indicator is one to watch.

The Buffett indicator is simply the total value of the stock market relative to its total productivity (or total market cap / GDP). As the indicator soared in 1999, legendary investor Warren Buffett predicted a looming market correction. Then the Dot Com Bubble crashed and burned. It took the Nasdaq composite years to recover.

Global Stock Market Overvalued at 2007 Levels

Source: Twitter

The Buffett indicator for US stocks is at a perilous all time high. According to this measure, valuations are in a worse bubble than before the last two major stock market crashes. One could object the economy is more global than ever, so US stock values don’t necessarily have to track US GDP as closely.

But the Buffett indicator for the global stock market is in a bubble danger zone as well. As a market contributor for German newspaper Welt noticed, the indicator for global stock values hasn’t been this high since right before the Great Recession hit at the end of 2007. That’s horrifying given the Buffett indicator’s track record.

World Bank Warns of Unprecedented Debt Bubble

The trade war between the US and China seems to have cooled. But it’s still weighing heavily on the World Bank’s Global Economic Prospects report this week. Also concerns about the slowdown in the Eurozone and infrastructure in developing countries.

The World Bank trimmed back previous forecasts for global GDP growth in 2020. But even more frightening than a prolonged trade war, the World Bank warned the global economy faces an unprecedented global debt crisis.

World Bank’s Prospects Group Director Ayhan Kose says:

The history of past waves of debt accumulation shows that these waves tend to have unhappy endings. In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wav.

According to the GEP report the current expansion of global debt represents “the largest, fastest and most broad-based increase” in world borrowing since the 1970s.

Global Finances A US Recession Threat

A global market crash could drag the United States down with it, and foreign banks aren’t in a position to fight one with the same resources as the Fed has for a US recession.

As Ben Bernanke said over the weekend, a combination of quantitative easing and forward guidance doubled the Fed’s firepower as it wrestled down the Great Recession.

But as the Economist notes in its latest edition, “only America looks remotely close to passing [Bernanke’s] firepower test.” That’s because foreign central banks don’t have any room left in their interest rate to stave off a liquidity trap.

In a survey of 150 CFOs last quarter, Deloitte found that 97% of CFOs believe an economic slow down or recession will hit in 2020. Weaknesses in US sectors like housing and consumer credit could precipitate the crash. But this one could start overseas.

This article was edited by Samburaj Das.

Last modified: January 22, 2020 11:39 PM UTC

W. E. Messamore @thehuli

Markets Contributor for CCN living in Nashville, Tennessee. Bachelor of Business Administration from Belmont University in 2009 (majored in Entrepreneurship). Organized Senator Rand Paul's first and second online fundraisers in 2009. Correctly predicted the bitcoin bull market of 2019. Roving editor for the Independent Voter Network since 2013. Email me | Follow Me on Twitter (followed by: fmr Rep. Ron Paul (R-TX), Sen. Rand Paul (R-KY), fmr NM Gov. Gary Johnson, and Rep. Thomas Massie (R-KY))

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