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Buffett Indicator Hits New High! Musk Asks Female Stock Guru for Opinion, Cathie Wood: Better to Buy in Fear, Bitcoin May Be Modern Gold Standard

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Buffett Indicator Hits New High! Musk Asks Female Stock Guru for Opinion, Cathie Wood: Better to Buy in Fear, Bitcoin May Be Modern Gold Standard

The Dow and S&P 500 in the U.S. have been continuously hitting new all-time highs since the second half of last year. This phenomenon has led Tesla's founder, Elon Musk, to question whether the market is overheated. Musk sought the opinion of Cathie Wood, the founder of Ark Invest, known as the "female stock god," who provided a series of insights and believed that Musk was overly concerned.

What is the Buffett Indicator

The "Buffett Indicator" or "Warren Buffett Indicator" comes from a 2001 interview with Warren Buffett. It is the ratio of "total market capitalization of stocks" to "gross domestic product (GDP)", which serves as an indicator to evaluate whether the stock market is overvalued or undervalued.

Buffett mentioned at that time:

Quantifying the data does not need to be too complicated. If the ratio is between 70% and 80%, entering the market at that time may bring you great returns. However, if it approaches 200%, like in 1999 and 2000, then entering the market is like playing with fire.

However, Buffett also pointed out the limitations of this indicator. The indicator has been at historically high levels in recent years. According to data from MacroMicro's data, except for January 2019 and a brief retreat to 100% last March, it has been soaring since surpassing 100% in mid-2013, and it has now even exceeded 200%.

Therefore, Musk asked Cathie Wood on Twitter for her opinion on the high ratio. He referred to the "S&P 500 market value to GDP ratio" as a reference, and the S&P 500 includes stocks of the top 500 listed companies in the U.S., accounting for nearly 80% of the U.S. stock market value, similar to the Buffett Indicator.

No Need to Worry About Market Value and GDP Decoupling

Cathie Wood replied to Musk on the 6th of this month tweeting, stating that GDP is a data point that emerged from the industrial age and has now decoupled from the digital age. Especially with the significantly increased productivity of tech startups and inflation lower than expected, it indicates a significant growth in actual capacity. She said:

The current tech boom was planted during the dot-com bubble, where technology was not yet ready and costs were high. Investors were chasing dreams back then, and after 20-30 years, dreams have turned into reality.

These concerns are healthy, but I'd rather enter the market among fearful faces than invest in a time of prosperity.

Furthermore, on the 11th, Cathie Wood responded to Musk again, mentioning Bitcoin and suggesting that Bitcoin could become the modern gold standard.

The Roaring Twenties

Cathie Wood pointed out that in the late 1800s to the early 1900s, when telephones, electricity, and automobiles were emerging, the Buffett Indicator seemed to be two to three times higher than today's market. Although obtaining this data is difficult, she makes an assumption.

She stated that during the "Roaring Twenties," telephones, electricity, and automobiles were the three major technological platforms. According to learning curves and Wright's Law, these mainstream technologies led to a deflationary trend, and factors such as the implementation of the gold standard at the time further raised the S&P 500 index:

Deflation puts pressure on the increasingly difficult-to-define denominator of GDP. The high efficiency of productivity increases the quality of profits, and low interest rates push up the numerator of capital.

The Grandeur of Current Technological Evolution

Cathie Wood believes that today's tech startups and advancements are on a different level compared to the past, including genomic sequencing, robotics, energy, artificial intelligence, and blockchain technology. She also mentioned:

In addition, Bitcoin may be the modern "gold standard," which will further increase purchasing power!

Deflation should slow the circulation of money, just like in the 1970s. If consumers and businesses expect prices to fall, the result is that people delay spending, "perhaps beyond asset prices," and rapid global monetary growth may not lead to inflation.

Further Research on the Buffett Indicator

Cathie Wood mentioned that "This time is different" is a dangerous term when predicting the market. Many people use post-World War II history as a basis for evaluation. If so, the market value of stocks has never been higher than GDP. However, at the end of the 1800s, its market value seemed to be two to three times that of GDP.