Let's talk about two red flag economic questions....

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Belle of the Ranch 4 min 1 speaker 2 chapters transcribed 1 month ago

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Why do some analysts view a rising stock market as a red flag for the economy?

Belle of the Ranch 0:01

Well, howdy there, internet people, it's Belle again. So today we're going to talk about two red flag economic questions. Okay. So today we're going over two very different questions, but they end up pointing us to the same thing. So we can talk about them together. Question one. It's typical that now that the stock market is doing well, liberals and CNN are telling us that a high stock market is a red flag for the economy. You've said it too, but you said it under Biden too. Please explain to me how the stock market going up is bad. This is the point where you know I'm gonna talk about the Buffett Indicator. But here's the next question. Question two. I was talking to a friend about the stock market and how it looks the way things did before bad economic times.

Belle of the Ranch 0:58

He said that the Buffett indicator is obsolete because it doesn't take into account that companies are multinational now. So using the US GDP isn't a good way to gauge it. Okay. So let's start with this. The stock market is not the economy as a whole. But if the economy as a whole is shaky and the stock market is hitting record breaking highs, the two are totally divorced. I don't believe the Buffett indicator is obsolete. But if a metric becomes obsolete because of new situations, in this case, revenue that isn't counted in the US GDP. You don't just discount it. You look to see if something else exists that would overcome the objection. So

What is the Buffett Indicator and why do some claim it’s become obsolete?

Belle of the Ranch 1:45

We need something that would include all of the earnings. Even those from overseas. That already exists. It's called the cake. Which stands for cyclically adjusted price to earnings ratio. Sometimes it's called the Cape Schiller ratio, or just the Schiller ratio. Nobel Prize winning economist Robert Schiller developed it and used it to warn of the dot com bubble. Then a few years later came his warning about the housing market in two thousand six. He again was proven right. It's a little more complicated than the Buffett Indicator, but not much. It compares the ten year average of inflation adjusted earnings to the share price. The higher the number you get, the more overvalued the market is. The long term average is around sixteen to seventeen.

Belle of the Ranch 2:38

Since two thousand one, it's about twenty six. If you applied this to the S P five hundred right now, you'd get a number between thirty nine and forty. Last week it crossed forty. Has it ever been that high before? Yes, it's gotten all the way to forty-four in the past, right before the dot com crash. The record high before the dot com crash was thirty one point four eight, way back in July of nineteen twenty nine. Right before the stock market crash. Runaway valuations of stocks are based on speculation, not economic fundamentals. The fundamentals always catch up eventually. So to question one. The biggest economic downturns in US history were preceded by the stock market going too high and becoming a red flag.

Belle of the Ranch 3:33

The stock market is not the economy. To question two. Even if the buffet indicator is obsolete because of overseas revenue. The metric that includes overseas earnings shows the same thing. Incidentally, the current reading of around forty is two hundred thirty five percent of the long term number of seventeen. That's pretty close to the Buffett indicator reading of two hundred and eighteen percent. There's no metric out there that says the market is fairly valued right now. Anyway, it's just a thought. Y'all have a good day.

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