The total market capitalization of US companies exceeds the value of US GDP, and this is usually not good news for the market. For legendary investor Warren Buffett it is a serious warning of a bubble in the stock market. In 2001 and 2008, it happened just before the dot-com and subprime crisis hit. Can this scenario benefit Bitcoin?
For months there has been warning about a possible bubble in the stock market, especially in the US, where despite the pandemic, the main indices are trading at record highs.
While many tech companies have benefited from the boom in recent months, as a result of global lockdown, other highly overvalued sectors are clearly visible.
Warren Buffett indicator signals possible bubble
At the end of 2001, the investment genius, Warren Buffett, wrote one of his great lessons for traders, analyzing the collapse of the dot-com, according to elEconomista.es.
In practice it is a simple formula to anticipate the bubbles that are created in the market. Since then it has been known as the Buffett indicator, the division of the total capitalization of the US stock market by the GDP of the United States.
For the famed investor it would have been an infallible signal to see one of the biggest stock market debacles in recent history coming, “probably the best individual measure to know where the valuations are at any given moment.”
The indicator worked in the two previous crises, in 2000 and in 2008, the capitalization of American shares exceeded 100% of GDP, which translates into an overvalued market and an increased risk of attending a plummet From the market.
Buffett’s interpretation points to a mismatch between investors’ expectations and the country’s economic growth. The coronavirus crisis has caused the largest economic collapse in history in the United States. The unprecedented drop in GDP has triggered market capitalization relative to the growth of the economy.
Buffett isn’t the only one who doesn’t lose sight of this metric. Investors often use the Wilshire 5000 index, which encompasses all companies listed in the United States, although it does not include companies listed below one dollar, as a benchmark for total US market capitalization.
Historically, the average Buffett indicator has been around 65% of GDP. When it is in the range of 70% to 80%, the famous investor considers it a good entry point in the market, with listed companies undervalued.
Good opportunity for Bitcoin?
If Warren Buffett’s indicator is correct, a possible bubble may be stalking Wall Street, which in the short term would cause a strong capital outflow in American stocks. Now … Where can that money go?
In the event of a strong outflow of money in the stock market, that money can go to safer assets, such as Gold, Silver and Bitcoin.
To all this must be added the uncertainty that is experienced by the Coronavirus pandemic, which does not give truce. The only certain hope seems to be the vaccine.
The advantage that Bitcoin has at the moment is that it is at an attractive price (10.2K). Another advantage of BTC is that since mid-March it has been on a sustained rise, maintaining the clearly upward trend in the medium term.
To summarize, an outflow of capital on Wall Street would undoubtedly give a strong boost to the price of Bitcoin in the short / medium term.
I say goodbye until next time with this phrase from John F. Kennedy:
“La Bolsa is a game that consists of passing a lit match from one to another, until it reaches one that burns the fingers.”