Buffett's Final Warning | Yikes.

Can the stock market keep going higher?

Well, according to Warren Buffett, we

are playing with fire. Does his Buffett

indicator matter anymore? I'll explain

that chart in just a moment. Or is it

irrelevant? After all, after he retired,

Berkshire Hathaway stock has declined

over 10%, which is pretty sad because

somewhat indicates a little bit of a

lack of faith in Mr. Ael, if you will.

You can see Birkshshire clasp B stock

here down 10.3% since Buffett announced

his departure. Uh and to understand

Buffett's Buffett indicator, it's worth

remembering what the components of the

indicator are. So think about the

Buffett indicator as and it's not

exactly a ratio, but it's almost a

ratio. Think of it as a ratio between

GDP and the stock market. So if GDP

today in the United States is $30

trillion, which is where it is, how much

do you think the stock market should be

worth? One times that, one half times

that, two times that. Well, right now

it's worth a little bit more than two

times. And that's approximately what the

Buffett indicator looks like. So we're

sitting over here above the 2.2. Now

this chart, don't get confused. Just

keep it simple. It refers to standard

deviations from a historical trend. It

just happens to roughly align with 2.2

times GDP. But if you look at a time

like 2011, for example, you go over to

the end of 2011, you get about a 16

trillion dollar economy. How large do

you think this US stock market was at

that time? $16 trillion for GDP. And

where were we in 2011? Well, we were

probably right about here. Uh so we

would have been trading

uh around these levels uh of about 17

$18 trillion. Uh and in this case, it

shows slightly under that zero times. So

a little bit confusing. And how do we

know that? Because we look over here at

the stock market chart and we can see in

2011 we're trading somewhere on Oh,

wait. Look at this. In 2011, it actually

came down again a little bit. Ooh,

that's juicy. Look at that. Yeah. So,

about 1 one in 2011, actually. So, about

one to one in 2011,

uh, which should be right aligned with

that zero there. So, close enough. It's

close enough to say that roughly the

stock market buffet indicator is just a

multiple of how much we want to pay of

our GDP. So right now we're paying two

times the gross domestic product of the

United States for the stock market. In

2011 we were only paying one time and in

2008

uh during the depth of the financial

crisis we were paying let's see 11.4

depth of the financial crisis was over

here. We were paying a discount 11.4 4

divided by 14.3.

We're paying about 80 cents on the

dollar for our stock market in the

depths of the 2008 recession, which is

kind of interesting if you think about

it. Like it's a it's a good chart. It

sort of shows us, oh, okay. All right.

This is an easy way to understand the

Buffett indicator. It's just a multiple

of how much of GDP are we willing to

pay. Well, obviously we are at the top

of that level right now. We came down

during liberation day, which is worth

paying attention to here. So, if we just

zoom in here for a moment, this little

bitty spiky right here, that Vshape

right there, that was basically your two

week liberation day. And if you align a

down arrow right here with liberation

day, you could see what a recession

feels like by following this red arrow

down on the sort of purple line here all

the way down. That's what a recession

feels like. And so there are a lot of

people that say, "Wait a minute, Kevin.

How could there be a recession that bad?

There are so many retail traders these

days. This time is different. And you

know, everybody could just buy the dip

on Robin Hood. We're never going to have

a dip again. There'll never be a

recession again because JPAL will just

bail us out." All right. Well, so far

we're already conflating two things,

right? One is retail owning stocks. Two

is the Fed bailing us out. Let's talk

about both of those. First, let's go

over here. I pasted this chart onto

here. This is the US stock ownership

annual trends.

And what you could see since 1998,

this is from Gallup Polls. Since 1998,

I'll get the non-blurry version. the

percentage of people who have owned

stocks in or households that have owned

stocks in our US stock market has

basically sat entirely stable. Now,

people don't like to hear that because

people are like, "Wait a minute, Kevin,

but but but how is that possible if so

many people use Robin Hood now?"

So, I have a thesis on this because I

too think it's odd that in 1998 60% of

households had exposure to stocks,

individual stocks, mutual funds or 401ks

or individual retirement accounts. And

today, 62% of households own stocks.

Mind you, mind you, most of these people

are higher income individuals are more

likely to own stocks. More educated

people are more likely to own stocks.

Whiter people are more likely to own

stocks. I guess whiter isn't the word. I

guess white people are more likely to

own stocks as opposed to black people or

Hispanic or, you know, whatever, right?

Uh and then uh married individuals are

more likely to own stocks. Interesting

sort of demo here from Gallup Poles. But

what's fascinating here is you don't

actually see a greater percentage of

households owning stocks. The percentage

did go down after the 2008 financial

crisis down to about 52%. But we're

really just back to where we were in

the.com bubble era. How does this

reconcile with everybody though using

like Robin Hood or all these

self-directed stock apps? Well, in my

opinion,

the reason we have the same number or

percentage of households owning stocks

is because people who own stocks today

are just more likely to own individual

stocks or ETFs directly. So, if you want

to buy an ETF, why pay a financial

advisor a 100 basis points if you could

just go pay Vanguard seven and go buy

the S&P 500? You could just do it

yourself on Vanguard or on Robin Hood or

whatever. Like, you don't have to go buy

a stock market mutual fund that has load

fees and all these complicated

nonsensical things and you don't have to

call an adviser to buy or sell or email

in your crap or whatever.

you just swipe up on Robin Hood. So, I

think a lot of money has gone from these

more frictionbased mutual fund products

to ETFs and brokerages, which means we

don't actually have a greater percentage

of Americans owning stocks today. Now,

we do know that the people who own

stocks today have more money than they

did previously because of just

inflation, overtime, stock market

growth, valuation growth, asset price

appreciation. So yes, retail flows look

higher, but again, in my opinion, that's

because you're taking from institutional

funds, from mutual funds, and you're

giving to retail. Now, that could come

with some potential consequences.

Uh, in my opinion, retail owning more

stocks, it's great because fees are

lower, but it does potentially induce

more volatility. I think this retail

volatility that we got here during

liberation when data had not really

changed was really a sign of panic. Uh

and we saw within two weeks how quickly

we fell and the effects of these tariffs

won't really be felt for you know 6

months to a year after after they're

fully imposed. Uh, and the real

recessionary impacts usually come once

jobs actually start weakening, but by

then it's usually too late. And so I do

wonder how rapidly if if basically as

rapidly as people are buying now, how

rapidly people are just going to dump

stocks uh in that next recession. And I

hope it's, you know, 10 years out or

whatever because just because we're high

on this chart does not mean we have to

collapse. It just means we're a little

restricted with how high we can go based

on this chart. So the last time we were

this high was really over here. And this

would have been the 1950s to60s. So late

50s to late60s. And what happened here

was a post-war boom. You had a massive

housing construction boom. You had a

baby boom. So familial expansion. And

you had relative peace and stability

with no longer a wartime economy, but

rather a consumer-led economy and an

entertainment and servicesled economy,

which is great for GDP growth. So, we

should look at what GDP did between 58

and 68. Uh, but the markets were very

much in this sort of overvalued level

here for 11 years. Now, they never got

past the levels where we sit today. we

pretty much always top out here. So,

there are two ways for stocks to keep

going higher. Well, really there's only

one way according to this chart, but

there are two ways practically. One way

is GDP goes up. So, every dollar GDP

goes up, our stock market is willing to

go up, let's say $2. That could keep

this chart going. Uh, and maybe it ends

up running to where we start seeing

people being willing to pay $2.5 or $3

for the stock market. I suppose that

could happen. It would be in the

strongly overvalued category per buffet.

Who knows? Maybe this time is different,

right? But historically, we never get

past this. So GDP growth could get us to

do this or which is one way or the

second way is we stop caring about this

top and markets are just willing to pay

a higher premium which I suppose is

possible but doesn't have a historical

precedent. Now this doesn't necessarily

mean that the market has to crash

because remember we sat in this level

for 11 years. Now we did bob up and

down. We generally don't sit at that red

dotted line for a very long time. We

didn't we didn't sit at that dotted line

for more than six months over here, more

than a month over here, more than a

month over here, more than a month over

here, more than six months over here,

more than, you know, a month or two over

here. And now we're in that sort of

month or two period again at at sort of

peak. Like I say, times could be

different, but understand one of the

downsides we face right now is that GDP

growth is really beginning to slow. So

if we go to percent change from a year

ago, we could really see GDP growth

fall. Now this is noninflation

adjusted. So understand when you see

this 4.6% is non-inflation adjusted.

What we could really do is we could

actually just type in St. Louis Fred

real GDP and it'll give us a little bit

of a better view of this because it will

adjust for inflation which is the GDP

number that we use anyway. we go percent

from a year ago and we can see right now

GDP is is rolling over. It's expected to

only be about 1 and a.5%

uh at you know basically the end of next

year. So

that makes it a little harder to keep

pushing all-time highs. But again, it

doesn't imply that people's willingness

to pay this multiplier, this 62

trillion dollar for the stock market

doesn't necessarily have to disappear.

uh which is fascinating. So, putting

some of the other items of this together

over here, it's also worth looking at

this chart right here. Why were we so

low during this period of time? In my

opinion, this is actually when the

Federal Reserve lost its credibility in

this box right here. This is when we

ended up having price controls over

here. Price controls were lifted. The

Fed lost control of inflation. We left

the gold standard. We had an oil price

crisis. We had an inflationary shock. We

had Arthur Burns who was way too

reactive to what was going on in the

economy, much like what Trump is

demanding of Powell today. And you ended

up with a Fed with no credibility. You

ended up having a double dip recession

in the 80s which then took five years

for the Fed to really gain respect and

to get out of this undervol or yeah it's

mostly undervalued to slightly fairly

valued market and then you had 40 years

of disinflation with falling inflation

and value valuations actually just grew

during this period on net with the

exception of obviously the crashes that

we saw during uh the dot bubble which

was the crash right here and the great

recession over here. Somebody else made

an interesting note that you don't

necessarily have to have a recession off

the top that you could have a recession

off the middle. See, valuations never

actually bubbled up like they did in the

internet bubble

in 2008.

Valuations were actually still

recovering

and uh we fell down. So that's where you

know it's it's just worth thinking about

this chart. Hopefully, it doesn't get a

crash. Technically, it doesn't say we

have to crash. It just says in order for

us to really mon like charge higher

here, we need GDP to grow. And maybe

that's why we're seeing a little bit of

this resistance. Look at, for example,

Service Now. Oops, that's Snowflake. Uh

so Service Now just had exceptional

earnings, really good earnings, and the

stock popped on earnings but just

couldn't make it ahead. You know, you've

got another big IBM company or American

company, IBM falls after earnings.

You've got Netflix after disappointing

earnings. Netflix had great earnings,

also been on a downtrend here on the day

chart. And you know, certainly since

earnings, it's been rolling over. Look

at a company like um

uh Intel. I mean, they've had many

idiosyncratic issues, you know, their

own problems basically. And I mean,

perfect reject off the meet Kevin line

here and straight down. So, you know,

maybe all of this together just suggests

that at some point this uptrend that

we're curving on right now for the cues

uh at following this recovery from

liberation,

you know, maybe we do start hitting our

head on sort of some glass ceiling

because there is concern around uh hey,

we need to see GDP growth. So far, Q the

next GDP estimates we're going to get

though are kind of misleading because Q1

GDP

had the lack of imports due to tariffs

or sorry this surge of imports due to

tariff front running which tanked our

GDP. Then you had less front running

which boosted our GDP in Q2. So Q2 GDP

looks totally fine at 2.4%. But GDP in

Q1 was.3%.

So averaged out you're really at like

you know what I mean.3

to the negative plus 2.4 divided by 2

you're really at an average of 1.05%

GDP. So if Q3 GDP comes in at 1% as well

that's slow and it just limits your

ability on that Buffett indicator to

keep moving up. Unless of course this

time is different.

>> Kevin's somebody would consider you.

Kevin is fantastic.

>> Kevin is very talented, but I don't know

it's going to be him, but he's a very

talented guy.

>> Why not advertise these things that you

told us here? I feel like nobody else

knows about this.

>> We'll we'll try a little advertising and

see how it goes. Congratulations, man.

You have done so much. People love you.

People look up to you.

>> Kevin Papra there, financial analyst and

YouTuber. Meet Kevin. Always great to

get your take.