The Real Warren Buffett Indicator

Over the weekend, a good friend asked me when I think the market bottom will come or the bull market will resume.

I’ve thought about this question for many months already and have formed a thesis around what the bottom will look like.

My opinion is that three things need to happen, and none have to do with inflation, which we believe the markets have adjusted to.

First, I want to look at one of a few data points to make sure we understand the significant resetting we already saw this year:

  • Wall Street is mostly invested in stocks and bonds using the famous 60/40 portfolio. This year is one of the WORST YEARS since the turn of the 20th century! In the past 50 years, only 1974 and 2008 were worse.
Courtesy: Zerohedge.com

What’s interesting is that the S&P 500’s performance is one of the worst but not THE WORST.

Treasury bonds are actually the asset class that is having its worst year ever.

Whenever I speak to investment managers, they all say the same thing to me: they are raising capital for distressed funds.

Getting into distressed investing is so popular that I can almost call it a mini-bubble.

When there’s real distress out there, funds don’t raise capital for that purpose – they fight to even stay afloat.

The real distress is not there, and we don’t believe that they will actually see the world ending.

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    Instead, here’s the way we think the bottom will form:

    1. Layoffs: more companies still have to cut jobs once the market is convinced that they have too many employees, too much overhead, and they need to make the tough but necessary decision to make operations more efficient.

    The big tech companies are the ones Wall Street really cares about, primarily Amazon. When this company announces layoffs, we will be on our way to recovery.

    That is only one of the three steps towards the ultimate bottom signal and a path to recovery because the second requirement is:

    1. We need a GDP contraction recession that is declared by the government. We are already in a technical recession, which means that the market isn’t pricing in the true recession yet, and what we think is that as the official recession arrives, the market will be ready to price in the recovery.
    2. Lastly, for the markets to truly hit a bottom, Warren Buffett needs to get aggressive.

    It sounds childish, but Wall Street looks at the godfather and his conviction level to see when distress is upon us.

    Courtesy: Zerohedge.com

    As you can see, next year will statistically be bullish and green, but not before these three things happen. We don’t think that they will materialize before the June 15th meeting.

    Therefore, we think the next six months will be huge for alternatives such as gold.

    On Thursday, I will be covering the FED meeting, especially after this CPI report we just saw come out.

    Best Regards,

    Protect Yourself Now, By Building A Fully-Hedged Financial Fortress!

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