A1 Trading Company

November 11, 2019

Why is Warren Buffet Still Sitting on $122 Billion in Cash?

Frank Cabibi

Since June, the Oracle of Omaha has been keeping over 60% of his cash tucked away from any institutions. In fact, the majority of his investments have gone back into his own company, Berkshire Hathaway. Since June, he has been holding back on investing and let’s talk about why.

The Wilshire 5000 Market Cap to GDP ratio has been nicknamed the Buffet Indicator after Buffet who popularized it in his use to measure the value of the market. The indicator uses two components: the market capitalization of all U.S. equities and quarterly GDP.


Here is a visual of the math:

Buffet indicator = (Market cap)/(GDP) *100

$30 trillion/$21 trillion 1.42. 1.42 * 100= 142%

Last year we stood at a market cap around $30 trillion. GDP was $21 trillion. So we’ll take 30 and divide it by 21 to get 1.42. And then multiply by 100 to get the percent and that’s 142%. However, Buffet uses the Wilshire 5000 and GDP so the number will look different from corporate equities to GDP. This year our market cap to GDP is 140.9%, exceeding the value 136.9% during the tech bubble of 2000, and it very well surpasses the value during 2007-08 of the housing crisis.

Wilshire 5000 Version

Typically, if the ratio is 75% or lower, it’s considered undervalued. And 100% and over is overvalued. There is not much of a window there, but 75% is a generous valuation. Usually 50% and below indicates an undervalued market. So we’re standing around 141% on the buffet indicator which is obviously overvalued. And I know I keep talking about this, but the longer we stay in this bull market, the more reasons I find for it to go down. From Buffet's absence of investing, to the inverted yield curve, to China, to stock buybacks inflating their prices, and to overall debt levels in US households, I think this earnings season is the only thing driving our market right now. And the fact that we’ve reached all time highs can be appealing to an investor. But just as markets reach all time highs, and investors do not see the market coming down, is usually the common tale of how people get burned on their trades.

So that’s my two cents once again. When a billionaire investor who’s made his fortunes from investing, is not investing, I feel like that should be an indicator in and of itself. I usually follow Buffet and listen to him, but I kept trading up until late September. Now I’m starting to see less and less optimism in the market. I’m sure there are other arguments on the other side that indicate the market will continue to be green for years. But as of now, I don’t see it and I do not feel comfortable putting my money anywhere but my pocket or in shorts. My opinions may change but I will need more information to tell me otherwise.

Website that provided image: https://www.advisorperspectives.com/dshort/updates/2017/09/06/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

A1 Edgefinder

All-In-One Fundamental Dashboard!
Simplify your fundamental analysis with our all-in-one fundamental dashboard! 
Discount code: READER

Learn more

Dollar Remains Strong

Indices recover from Friday's lows as the dollar index hovers at break even. The mounting tensions in Israel-Iran escalated market worries, but financial earnings have kicked off to a good start. EdgeFinder Analysis Retail Sales came in higher than expected which is a good sign for the economy. It's also strong for the USD as […]

Read More
Hotter CPI Shakes Markets

Yesterday's CPI numbers in the US caused considerable doubt in the expectations of a June rate cut. This morning's PPI came in lower than expected. But, it might not be enough to convince investors of a summer rate cut. EdgeFinder Analysis EURUSD is a -8 now on the EdgeFinder indicating dollar strength after the higher […]

Read More
Key Inflation Data Weighs on Investor Sentiment

Wednesday's inflation report in the US will be very pivotal in how USD-related assets will react for the next month. Higher CPI has investors worried of the Fed who still looks to cut rates at some point this year, but the inflationary trend could determine when these rate cuts come. EdgeFinder Analysis We have been […]

Read More
DISCLAIMER: All comments made by TraderNick’s Forex Group, LLC are for educational and informational purposes only. All comments should not be construed as investment advice regarding the purchase or sale of any securities or financial instrument of any kind. Please consult with your financial adviser before making an investment decision regarding any securities or financial instruments mentioned by TraderNick’s Forex Group, LLC. TraderNick’s Forex Group, LLC assumes no responsibility for your trading and investment results. All information on any of the platforms utilized by TraderNick’s Forex Group, LLC was obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. TraderNick’s Forex Group, LLC, its employees, representatives, and affiliated individuals may have a position or effect transactions in the securities and financial instruments herein and or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Trading of any type involves very high risk and may not be suitable for all investors. TraderNick’s Forex Group, LLC, its subsidiaries and all affiliated individuals assume no responsibility for your trading and investment result. Read our full disclaimer here
Home
Edgefinder
Signals
There is a significant degree of risk involved in trading securities. With respect to foreign exchange trading, there is considerable risk exposure, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.
homesmartphonelaptop-phonemenumenu-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram