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Buffett Indicator Sinks — Buying Opportunity or Warning Sign?

• The Buffett Indicator is the ratio of the total United States stock market to the economy (GDP).  
  
• Despite a 13.5% drop from all-time highs, the Buffett Indicator remains historically elevated - suggesting the market is still overvalued.

What you need to know: The Buffett Indicator - a metric popularized by Warren Buffett that compares the total value of the U.S. stock market (Wilshire 5000 Index) to the size of the economy (GDP) - has dropped from 208% in mid-February to 180% today. That’s a 13.5% decline in just two months. While that may sound dramatic, it’s actually moderate compared to past market downturns. Historically, during major selloffs, this indicator has fallen by 30% on average. 

Why it matters:  The Buffett Indicator is often seen as a broad measure of whether the stock market is over-or undervalued. Warren Buffett himself once called it “the best single measure of valuations.”¹ A high reading suggests that stocks are expensive relative to the size of the economy. When the ratio begins to fall, it can reflect investor caution - and may lead to a negative wealth effect, tighter financial conditions, or reduced risk appetite across markets. 

Now the Deep Dive: Oh, how fast sentiment turns. . .

Just two months ago, I wrote about this ratio flashing red - screaming that valuations were historically stretched, hopped up on euphoria, and drifting far above economic fundamentals (the Buffett indicator hit an all-time high of 208%).

• “What is the Buffett Indicator?” – In short, it’s the Wilshire 5000 Index ÷ U.S. GDP × 100 - a gauge of market valuation in the economy.
  
  
• The higher the number = the more expensive the stock market is relative to the economy.
  
  
• The lower the number = the cheaper (or more “discounted”) stocks are.

Now - two months later – the Buffett Indicator is at 180% (a 13.5% drop) – signaling potential discounts.

But what does history tell us? Is this the time for opportunity or just the beginning of a greater fall?

Well, when the Buffett Indicator has fallen in the past, it’s rarely been gentle. For instance:

Buffett Indicator Peak-to-Trough Declines

• Early 1980s Recession: Decline: ~22%
• 1987 Crash (Black Monday): Decline: ~25%
• Early 1990s Recession: Decline: ~23%
• Dot-Com Bust (2000–2002): Decline: ~48%
• Global Financial Crisis (2008): Decline: ~50%
• COVID Crash (2020): Decline: ~30%
• Post-COVID Peak (2022): Decline: ~30%

Thus, the average peak-to-trough decline since 1980 has been 31% - with a median decline of 28%.

By those standards, this 13.5% dip feels more like a nudge than a punch to the gut.

Maybe this is just a healthy repricing? A step back after too many steps forward. Valuations were very rich. Earnings are softening. Rates remain high. And trade tensions are worsening.

Maybe this is a buying window?

Or maybe this is just the first crack before a bigger break (as we’ve seen over the last 45 years)? Remember what I noted last month - the top 1% of U.S. households - those earning over $250K and holding the bulk of equities - now drive ~50% of all consumer spending.

• Thus, when stocks fall = their portfolios take a bigger hit = they may cut back spending = overall consumption drops = the economy softens

Either way, I’ll keep watching and keep you posted.

Figure 1: MicroMacro, April 2025

America’s $26 Trillion Problem: When the World Owns More of You Than You Own of It

• The U.S. now owes nearly 90% of its GDP to the world — a setup that works only as long as global capital keeps flowing.
  
  
• If foreign sentiment turns, America faces a triple threat: a weaker dollar, rising rates, and falling asset prices — all at once.

What you need to know: The U.S. Net International Investment Position (NIIP) - the balance of what America owns abroad versus what foreigners own here - now stands at negative $26.2 trillion. That’s nearly 90% of U.S. GDP².

Why it matters: A deeply negative NIIP means the U.S. relies heavily on money from abroad to fund its deficits, keep the dollar strong, and support markets. Foreign investors continue to buy U.S. stocks, bonds, and real estate, helping to keep borrowing costs low. But this dependence creates a hidden risk - if global sentiment changes and that money slows, the dollar could weaken, interest rates could rise, and asset prices could fall.

Now the Deep Dive: Put simply, the world owns far more of America than America owns of the world — and that gap keeps growing.

This negative NIIP is a major imbalance that reflects how global trade and capital flows really work.

See, there was a time when America was a net lender to the world. But that flipped in the 1980s - and since then, the trend has snowballed (I’ll go into detail on why this trend significantly accelerated post-2000s in an upcoming Morning Pour).

For instance, take a look at the NIIP as a % of GDP over the years:

• 1990: -5%
• 2000: -15%
• 2010: -20%
• 2020: -70%
• 2024: -88%, or -$26.2 trillion

Sounds bad, right? In most cases, when a country owes far more than it owns, it’s a red flag.

But the U.S. is. . . different.

That’s the power of the reserve currency. Foreign capital chases three things: stability, scale, and returns - and the U.S. offers all three.

But as I’ve exhaustively written to you about before - if countries like China, Germany, and Japan continue running chronic trade surpluses, someone must absorb those surpluses with deficits. And that someone, by default, is the U.S.

Yes, this setup brings pros – but as always, there are cons:

Pros:

• Lower interest rates
• Stronger dollar = cheaper imports
• Less reliance on domestic savings

Cons:

• We consume more than we produce = trade deficits = industrial decline
• We borrow more than we save = compounding interest to foreign creditors
• We import capital = foreign ownership of U.S. assets (national security risk)

This setup works - up until it doesn’t.

What if capital inflows slow? Or worse - completely reversed?

• Shrinking foreign demand = weaker dollar
• Weaker dollar = imported inflation
• Inflation = higher interest rates
• Higher interest rates = pressure on stocks, housing, debt servicing, etc.

So, in short: –$26 trillion NIIP = a world that increasingly owns America.

And if the world ever loses faith – or simply wants to hurt the U.S. - they could dump these assets. And the blowback could be harsh and sudden.

Just something to keep in mind amid all this trade war drama.

 Figure 2: St. Louis Federal Reserve, April 2025

Japan Is Getting Squeezed From Both Sides: Weak Demand at Home, Tariffs Abroad

• Japanese consumers are pulling back across essentials like food, housing, and clothing — a clear signal that household strain is replacing any post-COVID recovery momentum.
  
  
• A weak domestic engine and fading external demand mean Japan is running out of levers to pull just as global volatility picks up.

What you need to know: Japanese households are already pulling back, with spending slowing under the weight of stubborn inflation — a crack showing before the U.S. tariffs even land³.

Why it matters: Consumer spending makes up just a bit more than half of Japan’s economy (which is still below pre-pandemic levels) thus its slowdown is a warning sign that domestic demand is still anemic. Add in the pressure from newly announced 24–25% U.S. tariffs - especially on cars (Japan’s biggest export) - and the outlook dims further for the world’s fourth-largest economy.

Now the Deep Dive: Japan had some momentum. But it’s beginning to fade, threatening a return to its post-1990, low-growth rut.

As a major export-driven economy, Japan has long relied on foreign demand to compensate for weak domestic consumption.

• Remember, if a country can’t or won’t consume what it produces domestically, it will export it. Thus, a “surplus” also implies weak internal demand.

To highlight this point, Japan’s run large chronic current account surpluses for decades –(recently hitting a whopping 5.3% of GDP as of Q4-2024)⁴.

But now Japan faces a double dilemma:

1. Soft internal demand
2. Export headwinds from rising global tariffs

For starters, inflation has now been above target for nearly three years, sapping purchasing power. Food inflation, in particular, has stirred unrest - with rice prices up 81% year-over-year. That alone has Japanese lawmakers worried.

Meanwhile, the Bank of Japan has been raising interest rates, increasing the cost of capital (aka making debt more expensive and strengthening the Yen, further raising import costs).

And now come the tariffs.

• 24% on all imports.
• 25% on cars.

Thus, if U.S. growth slows alongside this, Japan’s export demand dries up just as its domestic engine sputters.

This is how I’m looking at it:

• Slowing spending = slowing growth
• Tariffs hit now = deeper hit later
• Confidence cracks = economic risk rises

Internal demand is key to tracking how the trade war hits major economies, as it will dictate their import and export balances.

This is a turning point Japan can't afford to ignore.

 Figure 3: Bloomberg, April 2025

Anyway, who knows what will happen?

This is just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

1. The Buffett Indicator: Market Cap to GDP - Updated Chart | Longtermtrends
2. S. Net International Investment Position (IIPUSNETIQ) | FRED | St. Louis Fed
3. Japan’s Household Spending Drops for First Time in Three Months - Bloomberg
4. Balance of Payments: Current Account: Balance (Revenue Minus Expenditure) for Japan (JPNB6BLTT02STSAQ) | FRED | St. Louis Fed

Disclosures:

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