Buffett’s Favorite Valuation Metric Surges Over the 100% Level

For the first time since the recovery began, Warren Buffett’s favorite valuation metric has breached the 100% level.  That, of course, is the Wilshire 5,000 total market cap index relative to GNP.  See the chart below for historical reference.

I only point this out because it’s a rather unusual occurrence and the recent move has been fairly sizable.  It happened during the stock market bubble of the late 90’s, but then occurred again just briefly during the 2006-2007 period when the valuation broke the 100% range in Q3 2006 and stayed above that range for about a year.  We all know what followed the 2007 peak in stock prices.

Here we are in this wonderful new world where everyone values nominal stock prices more than they value the actual output that underlies it.  If this indicator isn’t a sign that we are still residing in this Fed driven asset targeting mania then I don’t know what is.

To me, the whole thinking is backwards and more disruptive than anything else, but the party must go on.  Lord knows the Fed isn’t taking the punch bowl away any time soon.  So drink up.  Maybe you’ll get so drunk you’ll sleep through the inevitable bad parts when they arrive.

Chart via Orcam Investment Research:


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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    The only thing that I’d like to know is either it will crash at 2000 or 2007/8 level?

    Of course, nobody knows that.

  • LVG

    I don’t see the big deal. Corporate profit growth and revenues have slowed into the low single digits, the economy is barely growing and the consumer is still bankrupt. As long as the Fed is out there telling people to buy stocks this will all end fine.

  • Frederick

    OT – The variety of awesome information provided on this site is just awesome. It took me a while to absorb MR and your market perspective, but boy am I glad I did. Thanks for all you.

  • FactsNotLies

    What Cullen Roche is essentially stating (and correct me if I’m wrong, CR) is that the Bernanke-led Federal Reserve has monetary policy, especially the central goal-posted target of reflating equity prices, ass backwards, and in doing so, all that the Fed has managed to do is juice yet another….hmmmm…to use one of Bernanke’s favorite words, “transitory” bubbles.

    The economy is not the nominal prices of equities (nothing could be more absurd to assert).

    Bernanke & people like Dudley, Yellen and Geithner over at Treasury have absolutely guaranteed that the next gigantic bubble burst and equity/credit/bond market implosion is sooner, rather than later, and it will be a hard, hard fall.

    It all ends in tears each & every time the fiat alchemists try the same old playbook to try to use fiat printing to produce real, sustainable economic growth, let alone widespread prosperity.

    Modern Money Mechanics/Modern Monetary Theory (MMT) should be re-named to “Bubble Blowing, Popping, Re-Blowing, Re-Popping, Ad Infinitum.”

  • Nils

    Why should I be more concerned about the underlying output? The nominal value I can spend tomorrow if I want to.

  • SS

    If the underlying output doesn’t justify the current cash flows then you won’t be able to spend the nominal value for long. :-)

  • Nils

    That of course assumes I’m a dinosaur like Buffet and have to get out far in advance ;)

  • speck

    It’s a new paradigm! The stocks are cheap!

  • Brian

    I thought Buffett strictly avoids macro measures. He has said multiple times that he only looks at companies, not the overall stock market.


    The stocks have reached a permanently high plateau.



    Do you know what was the value of this indicator prior to 1929 crash?


  • TiberWulf

    Hey Cullen,

    Could you please overlay the S&P over that chart?

  • George H

    “… but the party must go on…”

    Of course.

  • hangemhi

    FNL – there is only so much the Fed can do. They aren’t Congress. Bernanke says each and every time that he testifies that Congress needs to do something because his tools are limited. Yes, you’re right…. another bubble in the making because the only thing the Fed can do is help keep the banks solvent, and force down interest rates. They can’t reform the tax code, they can’t create manufacturing jobs, etc.

    Meanwhile you seem to be blaming economic theories that point out how the system works, or predicts what certain actions like QE will do, for this mess. That’s like blaming the car manual for the accident a drunk driver had.

  • Andrew P

    If it is like the 1998 bubble it could go on for 2 years before it finally pops. Bernanke has no choice. He has to reflate the market in order to keep pensions solvent, Obama popular, and the Eurozone afloat.

  • Anon Jon

    Given the amount of foreign earnings that the US companies (and the overall index) generating, should this metric not be updated to something more with the times. Maybe global GNP vs global stock market capitalization…

  • Nils

    You can probably find a lot of contradictions in what he says people should do, what he says he does and what he actually does ;)

  • Rademaker

    If this is Buffett’s favorite valuation metric, did he turn into a big, fat, hairy bear when I wasn’t looking? I mean, wow. Mean reversal would almost cut the stock market in half.

  • Rub

    I have a very hard time believing this is Buffett’s favorite valuation metric. When exactly did it become his fave metric? It’s essentially been at historic highs continually since 1996. Would love to see some proof of Buffett referencing this worthless metric because until I do I’m here to say it’s a total crock.

  • http://www.stableinvesting.com Ryan Melvey

    I don’t really see the point in this metric. Private firms are included as part of GNP right? So if firms leave the stock market to go private than this ratio gets totally messed up, telling you nothing. Am I missing something?

  • micro2macro

    Fortune Article – 12/12/2001 – page 10 of 11 page article by Carol Loomis. There Buffett states that it is the best measure.

    You might also be interested in the following exchange

    Warren Buffett: The Ultimate Market Timer?
    July 28, 2011
    By Jacob Wolinsky

    The idea seems crazy, but my friend who runs a value oriented RIA pointed it out to me and it seems that Warren Buffett has had some great market timing. My friend does not want to be named but I wanted to share some thoughts on the topic. I was going to do a formal write up but instead decided to leave it as our emails back and forth. The bold is my writing and the regular text is my friend. I also edited parts of the email to make the conversation flow better and took out parts not relevant to this topic. See below:
    Does anyone know how Warren Buffett predicted the crashes in 69 (he closed his partnership), 87 (he wasn’t buying for Berkshire) , 00 (the famous speech) and 08 (he was 100% cash in his personal portfolio in 06-07)? In spite of his pretensions that he doesn’t predict these things he seems to have the best record in doing just that. He doesn’t use simple valuation methods by themselves. Benjamin Graham doesn’t have nearly as good of a record as WEB–Graham thought that the market was already overvalued in the 50′s! For example, WEB has said is that the Market cap/GDP ratio is the single best measure of market valuation. But it does not explain why he was not buying in early 1987. This measure does explain why he was so bullish on America in late 2008. I would like to know what else he goes by besides this ratio. He has dropped hints that he combines this ratio with the number of good deals that he finds on the stock market. In other words, when this ratio is on the high side AND there are no bargains then watch out. However, this does not completely explain 1999. There were plenty of bargains in microcaps then. So what is WEB’s system?
    me: You make good points about Buffett but you really think he timed the market so well? I know that Berkshire had a huge cash load in the mid 00s while the bubble was building but if he knew a crash was coming it would have even been worth the taxes incurred to sell all or at least a significant amount of Berkshire’s stock portfolio, especially financials. Maybe Coke would be too expensive to sell because of the long holding period and it is less cyclical but why didnt he sell Wells Fargo for example? Buffett said that I think in regards to Market cap to GNP but either way it is very similar. Right now the market cap to GDP is 96 which is modestly overvalued but not super overvalued. Also if Buffett thinks that is the best measure in 87 it was not too high in fact it was low? Warren Buffett in my eyes is super hard to understand, Benjamin Graham is much easier to understand I personally think.
    WEB times the market now with his personal portfolio more than with Berkshire’s portfolio. He wrote in one of the letters that he was not planning on selling his big positions even if prices went up out of hand. Also, in his personal portfolio he was 100% cash in 2007 while Berkshire was buying. I don’t know about his personal portfolio in 2000, although he made that famous speech a few months before the bubble burst. He is super careful never to say anything that will embarrass him later on, and therefore that speech was a good indication that he was pretty sure than the bubble would burst before 2009. When I say that Buffett timed the market very well, I don’t mean that he got it right to the day. He himself says that he cannot predict the short term.

    Here is WEB record:

    1955? Opens partnerships against Ben Graham’s advice.

    1969: Closed partnership due to lack of bargains. The market went nowhere and then crashed.

    November 1974: Great deals – Forbes interview. The market zoomed up.

    November 1979: PUBLIC ARTICLE ANNOUNCING: Stocks on sale! The market did very well starting from 1981/2.

    1987: Cash buildup in BRK portfolio. In BRK letter says that there are few good deals. Then came the ’87 crash.

    November 1999: PUBLIC WARNING: Don’t expect the market to do well! And then the bubble popped.

    2006: 100% cash in personal portfolio. No public warnings.

    November 2009: PUBLIC ANNOUNCEMENT: Buy American, I am! Buys derivatives on the stock market index saying it will for sure be worth more in a decade. It has already paid off.

    When he makes a public speech or writes a article, that means that he was pretty sure of himself. When he went against the advice of Benjamin Graham (who he highly respected) to open the partnership in spite of Grahams warning to wait for the market to cool down, that meant that he was pretty sure of himself. What were his timing signals? No bargains: 1969, 1987, 2006. Lots of great bargains: 1950′s, 1974, 1979, (2009?). In public he talks about valuation. But his timing device seems to combine valuation with a heavy dose of “# of bargains”.

    It is amazing how accurate his personal portfolio has been with timing, I know you did not mean day but rather months or years. I still find it peculiar especially 87 since you can see from these charts below that market cap to GDP was quite low then, but who knows. He definitely has something about him that is hard to understand. I even ask people Buffett can buy outright maybe 100 companies in America which company will he purchase next? almost no one can answer. Lubrizol was not on anyone’s radar to my knowledge. On the other hand, everyone thought BNI was purchased at a hefty premium by any metric but it has turned out to be fantastic buy.

    I think besides Charlie Munger there is possibly no one who understands him 100%, although people like Walter Schloss probably understand him pretty well. And I am sure other people understand Buffett far more than me. I do not know why he would follow a different strategy for his personal portfolio than for Berkshire’s?

  • Gary_UK

    Bad parts?


  • Flyonthewall


    If I may….

    Who looses when assets like stocks or other privately issued assets rise due to “lose” monetary policies like the ones we have seen implemented in the last years in the US, Europe and now Japan ?
    Globally no new wealth is created in the private sector so what gives in ?

    Thank you.

  • http://www.conventionalwisdumb.com Conventional Wisdumb

    I use this website Gurufocus for this metric, it gives you a very good visual image of it:


    “What returns can we expect from the stock market?
    As of today, the Total Market Index is at $ 16070 billion, which is about 101.9% of the last reported GDP. The US stock market is positioned for an average annualized return of 3.3%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 2%.
    As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

  • Matt

    And yet Buffett himself is buying stocks (see HNZ this morning) at their all-time high prices. So either Buffett doesn’t really care much about that indicator or we are now completely in a Bizarro world where Buffett now prefers to buy at times of maximum greed instead of maximum fear.

  • jt26

    On the other hand, the last 2 corporate profit peaks when this metric was ~100% were 10-20% lower (profit/GDP) than they are now. In one case, the market moved significantly higher.


    In the Short Term Market is driven by momentum. So, it will probably go higher before the next crash.
    Looking at the past 2 crashes, next crash might coincide with the presidential election cycle.

  • http://www.orcamgroup.com Cullen Roche

    Well, the loss comes mainly from the perception that people have more wealth than the underlying corporations can deliver. When stock prices deviate far from their underlying real operational cash flows you create an inherent imbalance in the economy where people believe their nominal wealth affords them things that they cannot actually afford. This results in bubble dynamics and ensuing disequilibrium. So, the losers end up being everyone because our economy ends up becoming far more volatile than it should be due to an illusion based on nominal wealth.

  • Rub

    Thanks for that. My only response now is that if he loved the market in late ’08 based on this metric he must have been absolutely nonstop gaga over it all the way from 1947 to 1996.

  • Old Dog

    Of course earnings have Doubled since the 2000 peak, and corrected for inflation the market is below even the 2007 peak by a long ways – Oh that’s right – earnings don’t matter!

    This must be why Warren is selling all his holdings right now – Oh that’s right – on 2/14/13 he bought another major company!

    Churn baby, churn!

  • Spikes

    Flyonthewall, simply put, savers lose. Loose credit drives up asset prices (housing, commodities, stocks) and those who have been saving or are on fixed incomes (pensioners, the middle class) see a reduction in their ability to purchase. The amount of real wealth stays constant, but net-net there is a transfer from savers to borrowers and owners.
    For a good illustration, look at how many hours the average worker would have to work to buy a house:
    It also represents a wealth transfer between generations.

  • Soonawala

    The Wilshire 5,000 total market cap index relative to GNP may see a reversal of the trend if GNP rises. The US by virtue of its shale exploration is expected to be self-sufficient in its energy requirements and again become a net exporter of energy. Access to cheap indigenous energy will give the US a significant manufacturing cost advantage vis-a-vis the rest of the world and tilt GNP upwards. Playing the stock market is taking a view of the future and the current rise in the indexes appears to be discounting a bright future. All may not be gloom and doom yet. If it works out then kudos to Bernanke and Co. for steering the ship safely through the storm.

  • micro2macro

    I think you will find that he uses this and other indicators. One argument for the Heinz purchase is that interest rates are very low so in comparison the Heinz deal might be worth it. I would doubt that Buffett would change his style. Buffett does buy companies when the market is overvalued but the thing to remember is that this is probably a lifetime deal so he is not looking at it like a trader but a long term position. If that is the case, then paying when the market is overvalued may not be of concern to him. I think he buys up big when the market is undervalued, but will still buy in other times just not as much.

  • John

    But many companies like Apple have a lagre share of their income from outside the US

  • Robert

    That chart line can move down if GDP grows faster than market cap. Isn’t it obvious? While markets move sideways or even slightly up. The chart posted does not mean imminent, deep, catastrophic correction. As was stated, GDP borders 15T as opposed to barely 9T in 1998/1999. Look at indexes adjusted for inflation!