The Buffet Indicator

The Buffet Indicator

The Buffett Indicator is the ratio of total the United States stock market valuation to GDP. It is said to be the best predictor of market corrections or crashes. 

As of May 6, 2021:

  • Aggregate US Market Value: $51.8T
  • Current Quarter Annualized GDP: $22.6T
  • Buffett Indicator: $51.8T ÷ $22.6T = 229%

Historically, when the stock market went above GDP by 50-100% it crashed, going below GDP. 2021 is the year in the last 100 years when the ratio was over 2x the largest stock market in history.

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The impact of tech on the Buffet indicator

In 2021, Elon Musk asked Cathie Wood, the famous tech-focused investor from Ark investments, what is her explanation for the high Buffet indicator (a ratio of US stock market/GDP). Cathie suggests a few reasons:

  • while the indicator maintained its pattern over the last 100 years, in the late 1800s was much higher, suggesting tech infection points (telephone. electricity & automobile back then)
  • the new tech is deflationary, making lowering the basket included in GDP. So denominator goes down while the numerator.
  • as bonds yields ~1-3%, money is gonna move to other assets, like stocks.

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What's in a Blockchain BLOCK?

Each blockchain block contains:

  1. Data: depends on the type of chain. Bitcoin stores the sender, receiver, and amount.
  2. Hash: a fingerprint that identifies the block. If the content changes the hash will not match and the interference will be detected. 
  3. Hash of the previous block: This is what creates a chain because each block point to its subsequent one. Hashes are not generated en mass because they require a lot of computing power, through a method called proof-of-work.

How does a blockchain work - Simply Explained

Cardano (ADA coin)

Claims to be a 3rd generation crypto (1st - bitcoin aka digital gold, 2nd - Ethereum, programable money). It is based on peer-reviews papers and solves 3 problems:

  1. Scalability: increase transactions/sec & decrease bandwidth.
  2. Interoperability: Cardano allows to convert other crypto and allows meta-data to be attached to transactions, making it more government or banking friendly.
  3. Sustainability: The project maintains an independent treasury founded by a % of each transaction, which acts as a VC body.

Cardano - Simply Explained

Proof of Stake

An alternative to proof-of-work (the method of reaching consensus used by bitcoin). Instead of having miners using powerful hardware to mine, we have validators.

  • Validators have to deposit coins as a security deposit. The size of the stake matters in the probability of a validator to be chosen.
  • The validators validates the transactions and cashes in the fees. If fraudulent transactions are added the validators losses the stake.

It uses less energy, more people can participate but brings additional risks (attacks, etc). It's the future of ether and implemented in Cardano.

Proof-of-Stake (vs proof-of-work)

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