Headed for a Crash? The Buffet Ratio.

This is an incredibly elegant graph from https://www.gurufocus.com/stock-market-valuations.php.  It shows the ratio of US total stock market capitalization to US GDP.  They attribute this ratio to Warren Buffett.  The ratio is higher than any time since the height of the last tech bubble.  And we know what happened then.

I have some questions about the economics behind using this ratio.  For example, there's been a huge move towards privatization of public companies and an increase in their debt, which means that the stock market capitalization in one way measures fewer companies than in the past, but on the other hand it is understating how large corporate assets (the sum of equity and debt) is relative to GDP.  So don't use this by itself to decide anything.  However, I think they get points for making a troubling pattern apparent with very accessible data and graphics.

Normally I'm not a fan of colored or shaded backgrounds, but in this case it's pretty restrained and pretty attractive so they get a pass.


I'd love to help you understand how to use data visualization to communicate clearly, and to understand it well for business, and in particular, for the relevant section of the GMAT.  Please don't be a stranger!  Get in touch with me here.