The Pseudoscience of the "Buffett Indicator"
hive-167922·@steemmillionaire·
0.000 HBDThe Pseudoscience of the "Buffett Indicator"
Hi everyone, This post is my reaction to an article I've seen recently in an financial newspaper. The article was predicticting an imminent crash of the stock market, and was backed by a chart of something called **The Buffett Indicator**. My initial taught was something like "Wow! This guy is so smart that he built an indicator to model the complete market?" And then I went into the details: >**businessinsider.com**: The "Buffett indicator" takes the combined market capitalization of all publicly traded US stocks, and divides it by the latest quarterly figure for gross domestic product [...]. Buffett praised his namesake gauge in a Fortune magazine article in 2001, touting it as "probably the best single measure of where valuations stand at any given moment." The best single measure of the value of the stock market? This was where my enthusiasm stopped, and I started to ask myself questions... This is supposed to be the most successful investor in the world, still he have associated his name with something so silly. <center></center> **The Buffett Indicator** takes the current market capitalization of the largest 500 American companies, and normalize it to the GDP of USA. A total nonsense! First of all, the GDP is not available in real time, so the indicator uses the numbers for the previous quarter. Dividing the capitalization of a selected number of companies, and divides to the the GDP that is already 3 months old. Secondly, why would you compare the value of some global companies to the size of US economy, without considering their global footprint? For example, only 38% of **Apple**'s revenue comes from the combined Americas. And what should be the logic? The stock market should crash if the capitalization of the **S&P 500** is too high compared to the **US GDP**? Why so? What are the fundaments of this statement? Yes, correlations are nice. But don't forgot: correlation is not causation. Have fun! Posted Using [LeoFinance <sup>Beta</sup>](https://leofinance.io/@steemmillionaire/the-pseudoscience-of-the-buffett-indicator)
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