⚡ IS THE BUFFETT INDICATOR BROKEN? WHY THE 'BUBBLE THERMOMETER' IS NO LONGER FUNCTIONING ⚡
The famous Buffett Indicator has hit 230%, a historic high, causing many to talk about the biggest bubble ever. But there’s a catch: this indicator was designed for an economy that no longer exists.
The first limitation is structural: it compares the global market cap of US companies to a GDP that only measures the domestic economy.
Today, giants like Apple and Nvidia generate a substantial portion of their revenues overseas, inflating the numerator without reflecting it in the denominator.
Moreover, Buffett used GNP, not GDP. GNP includes the global profits of American companies, while GDP does not.
This shift completely alters historical thresholds.
Then there’s the topic of the digital economy: services like Google, YouTube, or WhatsApp create enormous value but have little impact on GDP.
The same goes for AI, software, and intangible assets, which are difficult to measure.
Corporate profits have also changed: they now hover around 14% of GDP, compared to a historical average of 7-8%.
A higher level justifies elevated valuations.
Finally, Fed liquidity and globalization have distorted the relationship. It’s no coincidence that the indicator has signaled “bubble” since 2013, while the market has tripled.
This doesn’t mean that markets are safe.
But rather that one of the most used indicators may no longer be suited for the modern world.
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