Warren Buffett Indicator
It hasn't paid to be a skeptic, but let’s review a chart of the Warren Buffett Indicator, which is the Wilshire 5000-to-GDP Ratio. There are many factors that have allowed this ratio to go rogue, and if the Fed continues to increase the money supply to keep the house of cards intact, it can certainly become even more extreme. But this is a sobering view. In more normal conditions, the total stock market value (market capitalization) is 50% to 100% of the total US Gross Domestic Product. Two notable stock market peaks (2000 and 2007) saw this ratio exceed 100%. We are currently looking at a stock market value that is 230% of GDP. Meaning the stock market is worth more than twice the entire country’s economic output. One way to think about this is that the market has pulled forward prosperity or borrowed returns from the future. Historically speaking, this debt would need to be repaid. Those of us old enough to remember China building fake cities, or at least desolate ones to accommodate future population growth and keep its economic engine running, might see similarities in today’s US AI infrastructure buildouts. We are propelling economic growth today by constructing data centers that are anticipated but not guaranteed to be used.