Economists Uncut

ITM TRADING (Uncut) 01-19-2025

BUFFETT’S ALARM: Market Valuations Explode Past GDP as Collapse Nears

We’re currently experiencing the most overvalued stock market in history as valuations on the Buffett indicator, a tool proven to show when the market is overvalued before a crash, continue to reach alarming new levels, far exceeding anything we saw during the 2008 great financial crisis or the dot-com bubble signaling that the everything bubble that we are currently in is finally ready to burst. But it doesn’t just signal how close we are to the bubble popping. It also tells us just how painful it’s going to be.

 

So what exactly is this indicator? What is it telling us right now? And how can you use this information to protect yourself? Well, let’s get into it. The Buffett indicator named after its inventor, Berkshire Hathaway, CEO and legendary investor Warren Buffett compares the market capitalization of stocks to the GDP to determine whether they’re over or undervalued. But to say that what this chart is showing us right now is dangerous would be an understatement.

 

And I’m going to show you why. Here we are looking at the Wilshire 5000, which is the total value of all publicly traded stocks compared to GDP. Now, any time this ratio is high, the higher the ratio, the more overvalued the market is.

 

Any time it’s over 100 percent, it would be considered overvalued. Any time it’s under 100 percent, it would be considered undervalued. And I will explain why.

 

But first, let’s look at where we are today. So right now we are over 200 percent. Now, 200 percent for context, let’s look at what happened in 2007 during right before the housing bubble.

 

So in 2007, we were at one hundred and ten percent in 2000. The dotcom bubble, right, right before everything crashed there, we were at one hundred and thirty percent. Today we are at two hundred percent.

 

Now, the reason why this is so terrifying, why this is so significant is that any time we are over 100 percent on this ratio, which again, mind you, today we are double that twice at 200 percent, we are comparing the total economic output of our country, the GDP, to the valuation of these stocks. So if we have double the valuation compared to the economic output of our country, well, then that is not sustainable. That is not real growth and that is not going to last forever.

 

Something is not right. Now, you might be thinking, OK, I see what you’re saying, but it looks like it’s been going up for a while. What is behind this? What is driving this valuation so high? And it could be a number of things, but there are really three big factors here to consider that is pushing this everything bubble to the limit, with number one being market concentration.

 

Right now, there are a small handful of companies giants that are disproportionately inflating the entire market, not reflecting the broader changes that are going on. This is extremely concerning because we have not seen this much market concentration since the 1970s. That was the last time that the market was this concentrated during a period of extreme inflation in the United States.

 

Today, what could happen if one of those giants were to have lackluster profits or something came out that the growth wasn’t what everyone thought it was going to be or people lost faith? Well, suddenly, one of those going down could set off a chain reaction that could bring down the entire market, which brings us to the second driving force of what’s going on with this everything bubble, which is speculation. This is a big one, and I do not want anyone to mistake me on this. I love to see people prosper.

 

If you’ve made a profit off of the stock market in the last couple of years, good for you, amazing, incredible. But the problem I have isn’t with you. It’s with people out there who are convinced that this is the new normal, that what goes up will always go up and can never come down, that they are out there deluding themselves and telling everyone they know, their neighbor, their mailman, that they need to drain their savings, drain their retirement, put it in this, put it in that, like they are an expert.

 

When ultimately, the truth is that the type of action and behavior and thinking that we are seeing from so many people right now at the peak of this everything bubble is what we see historically right before a crash, right before despair, that the new normal cannot last, but everyone has convinced itself that it will because people never want to think about the negative. They always want to think that good things will continue to happen forever, which unfortunately, I hate to be the bearer of bad news, is not the case, especially when we look at the growth that has happened. There’s a reason that it’s overvalued, and it really all comes down to the root cause of this.

 

Why is it so overvalued? It comes down to reason number three, which is monetary policy, specifically years of low interest rates and the big one, government debt. The core of most of our problems, government overspending. Now, with that in mind, let’s take a look at this chart again and understand what we’re really seeing and what it tells us about what’s coming next.

 

So, 2007, here we have the great financial crisis hit. Of course, everything goes down, but pretty quickly, 2008, 2009, we start to see things up, up, up, up, up. Now, what is causing that? Well, of course, there was some spending, but really, it was zero, near zero interest rates.

 

So, of course, we kind of start this cycle of rebuilding as countries do during recessions, drop interest rates to stimulate economic growth, but those rates remained in place, and we continue to see easy money, easy lending, easy borrowing, cheap, cheap, cheap debt, meaning that companies weren’t really growing at a sustainable rate. They were just financing their growth in a way that didn’t cost them anything. So, at the time, it kind of felt like, why not? All these companies are growing, but the growth that they were experiencing is not sustainable.

 

Again, remember this 100% number over here, anything above that, in theory, right, is outside of the economic output that we have as a country. So, as we continue to see this grow, da-da-da-da-da, well, what happens right here, right here? Well, of course, that is 2021. Now, this period of growth, that was going to be the spending that happened in 2020.

 

So, it makes sense that we reach new highs. Why does it go down? Why does it go back down? Well, that would be interest rates rising. So, this dip that we’re seeing, that’s from interest rates going up.

 

Again, this was hurting all of these companies that had years of easy access to cheap debt. Once those rates were risen, it became clear they didn’t actually have the growth, the profit, the resources, the capital. They didn’t have anything in place to keep up with even a small interest rate rise.

 

No, they found themselves in trouble. And again, we haven’t even seen the full fallout of that yet. But then, what happens? Well, we start to see again, up, up, up, up, up, up, up, rise, rise, rise.

 

What is going on? We have spent so much as a country that even interest rates not going back down to zero cannot stop this extreme overvaluation that we are witnessing happen right now, which tells us that when this bubble bursts, when this everything bubble bursts, we are in for a world of pain because this is unsustainable. This is what unsustainable looks like. Everything in our system is so interconnected that all it takes is one tiny spark, one tiny spark to ignite a fire that will bring down the entire system.

 

And when that happens, the fallout is going to be extreme. And if anyone out there is watching and going, well, it doesn’t matter to me. I don’t mess with that bubble.

 

I don’t have anything in the stock market. No, no, no, no, no. No, this is going to impact all of us.

 

Anyone who has their assets within the fiat system is going to be impacted the same way that we saw happen during the dot com, the same way we saw happen during the 2008 great financial crisis. The stock market is not the economy. That makes me mad when people say that.

 

But should the stock market crash, what we could expect to see if the everything bubble bursts, we are going to see more companies going out of business. We are going to see more layoffs. We are going to see more jobs lost, unemployment rising.

 

We are going to feel the pain of people really struggling more than they are today in our country. And that is going to impact all of us because if our government decides at that point that the only way to help out is to spend even more. Well, at that point, you can say goodbye to whatever value you think your dollar has today because it is going to continue to chip away at our purchasing power until there is nothing left.

 

That is the trajectory that we are on. Unfortunately, we have a train that has left the station and it is our government spending. It is so out of control that I’m not really sure what they can do at this point to reel it back in.

 

I don’t want to be pessimistic about it. But that is why I personally do not put my faith into the government and their next steps as far as solving this crisis. I know a lot of people are hopeful about what’s going to happen next.

 

And that’s great. I don’t want to take away your hope. I hope so, too.

 

I hope things get better, too. But at the same time, I know that I cannot count on the U.S. dollar, on those in power. Truly, truly, I can’t.

 

All I can do is control what I can control, which is taking measures into my own hands and making sure I have my own strategy, my own plan in place so that when this bubble pops, which it will, and when the fallout happens, which it will be bad, I know that I’m protected. Outside of the dollar, outside of fiat currency, with tangible gold and silver, that personally is what I have decided so that I can sleep well at night, knowing that the government cannot inflate away the value of my wealth, that it is protected. Now, it is different for everyone.

 

I am not a financial advisor. I’m not going to tell you what to do. But I do highly, highly recommend that you make sure that you have a strategy in place before this everything bubble bursts.

 

If you don’t know where to start, if you’re concerned about any of this, if you want a second opinion, you think you have a plan, but you want to make sure that it’s right for what’s about to happen, because depending on what you’re preparing for, depending on what your concerns are and your goals are, that plan is going to look different for everyone. I highly recommend you talk to one of our expert analysts. You can call us at the number below.

 

You can click the Cal Me link in the description. Either way, make sure that you have a plan in place, because this is happening, and it’s happening faster than we think. And in the meantime, I so appreciate you being here.

 

I’m Taylor Kenney with ITM Trading, your trusted source for all things gold, silver, and lifelong wealth protection. Until next time.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button