Thread by @ChrisBloomstran

Interesting thoughts on the vagaries of deflation. Curious @CathieDWood what your research team learned when you had them study market cap to GDP, famously now the Buffett Indicator? Perhaps by now you have discussed and published your findings? I haven’t seen anything. 1/

https://twitter.com/CathieDWood/status/1393628558824808449

Recall you had written on April 11 that you believed the measure was 2 to 3 times today’s level in the late 1800s and early 1900s. I’d replied but you probably missed it. At today’s level of 200% your premise suggests the stock market was 4 to 6 times the size of GDP. 2/

Of course the peak then was 90% in 1929, followed by an 89% stock market decline and 45% plunge in GDP. Earlier, despite the industrial revolution, the economy was very agrarian & very private (not publicly traded). The market largely consisted of utilities, railroads & banks. 3/

Good data exists which demonstrates the measure would have averaged no more than 50% during the late 1800s and early 1900s, not the 400% to 600% you suggested. Bob Uecker’s great baseball and Miller Lite line comes to mind. 4/

If your premise that “good deflation” resulting from innovation and disruption in the earlier period justified the higher prices in the earlier period turned out to be factually incorrect and not high at all, which was the case, would you rethink your approach to valuation? 5/

Would not deflation that arises as a result of a debt bubble, particularly in government and corporate debt, not come with little growth or even economic collapse? Overlay high stock prices, margin debt and speculation in new era technologies and 1929 looks a lot like 2021. 6/

It would be hard, at least by those oriented toward conventional valuation and risk management, to make the case that the dangerous valuations now assigned to so many disruptive innovators would not collapse under a slow-growing or even shrinking economy. 7/

The market has never touched 200% of GDP until now. In fact it’s never remotely approached it. By many yardsticks, valuations have never been higher and speculation on “disruptive” businesses and unknowable outcomes is rampant. 8/

No need to beat a dead horse here, but if you recognize erring on market cap/GDP by a factor of 10x, would this bear on your argument for materially higher prices and stocks being undervalued? History shows paying very high multiples to sales is a dangerous, often losing game. 9/

Inadequate prospective returns often result. Further, if you are wrong on the high side regarding the stock market relationship to GDP by a factor of 10, could you also be wrong by a factor of 10 in, say, your model and target price valuation for companies like $TSLA? 10/

In any event, having spent a lot of time on my end working toward an understanding of market cap to GDP and nuances such as the proportion of both business conducted by public companies and that done globally, I’d love to see the results of your work.