After the US version of the Buffett Index exceeded 200 per cent, the global version of the index, the ratio of total global stock market capitalization to global GDP, also set a new record of 142 per cent. This shows that the prices of both US and international stock markets are seriously overvalued and are likely to plummet in the coming months.
Die Welt's market analyst Holger Zschaepitz was on Twitter on Sunday."Global stock markets are up another $1.6 trillion this week," it said. The total market capitalization now stands at $120.3 trillion, the highest level in history. "
He added: "the market capitalization of global stock markets is now equivalent to 142 per cent of global GDP, which is also the highest level in history."
Buffett praised the indicator named after him in a Fortune article in 2001, saying it "could be the best single indicator of valuation at any time".
Buffett said that when the index soared to a record high during the dotcom bubble, it should be a "very strong warning signal" of the coming crash. He added that buying stocks might be profitable when the index was in the range of 70 per cent to 80 per cent, but when the ratio was close to 200 per cent, investors would be "playing with fire".
The US stock market is currently in the zone of "playing with fire", and the US version of the Buffett Index has now reached a record 208 per cent. That is up from 187 per cent in the second quarter of last year, when the outbreak was in full swing in the US, causing GDP to fall by about 15 per cent.
However, the Buffett indicator is far from perfect. For example, it compares the GDP of the previous quarter with today's stock market value. Earlier, over the past 18 months, governments around the world have artificially pushed up the reading of the index by stepping up stimulus efforts and shutting down most of the economy.