🔒 Alec Hogg: Buffett Index suggests overheated market

I love visualcapitalist.com – a website which uses graphics to explain many complex aspects of economic life. The graphic above is a good example of the site’s offerings – this one showing how valuations of US shares are now in unchartered territory, supporting growing concerns about asset prices.

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The graph illustrates the now famous Buffett Index. Twenty years ago, Berkshire Hathaway’s chairman suggested the best way to know if stock markets were under- or over- valued was by tracking the total value of all listed companies against the size of the US economy, its Gross Domestic Product.
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The visualcapitalist.com graph shows this Buffett Index has not been at current levels for at least 70 years – and is now even above where the peak of the internet bubble in early 2000. Quite an alarm bell. Not just for Wall Street, because when US markets catch a cold, the rest of the world gets pneumonia.

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There is a counter argument: interest rates are at record lows assisted by unprecedented money creation by pandemic-panicked governments. So it is rational all this cash would find its way into tradeable assets, especially equities. Even so, savvy investors are paying attention, taking some profit off the table.

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