Warren Buffet is followed like a Himalayan Guru. Rightly so, as he is the most successful investor ever. 

He is a humble, uncomplicated man who has lived in an ordinary-looking suburban home most of his life. 

But as the principal of Berkshire Hathaway Inc., he has done well enough to become one of the wealthiest men alive. 

So unsurprisingly his sage advice and his wise quotes are clung to by investors and non-investors all over the world.

Well he thinks its pretty obvious that if the stock market is getting ahead of the economy that is not healthy.

It is simple enough for a simple man like me to have warned of that in my earlier post on gold. 

But Mr Buffet reduces the logic to a simple equation, called the Buffet indicator.

It is the ratio between total market value for all stocks, divided by GDP. If that is say 80%, it means the market has not caught up with the economy, so buy, because share prices will rise. 

But right now its over 100%. Maybe there is room to move as it reached 120% just before the market crashed in 2008.

And it reached just under 110% when it last corrected sharply down at the end of 2018, beginning of 2019.

Right now it may also be that the economy needs to catch up with shares, which are trading on the expectation of a full recovery. 

Maybe, but the principles remain the same. If prices of stocks, which are often driven by sentiment, do not reflect the underlying economy, expect problems. 

And yet, that is how the world works. It gladly over-extends on debt and on investments as if there were no tomorrows. 

If the global economy does stay flat for the next year or two, that ratio could start flashing warnings that having got through Covid-19, we are headed into a worse storm. 

I am not in this to be pessimistic, but I am a pragmatist, which sadly a lot of the world isn't. 

Indeed, economists in the US Central Bank are largely detached from stock markets. They influence the economy only. 

Out of ignorance of that fact, Donald Trump not so long ago tried to arm-wrestle the Fed Chairman into lowering interest rates to stimulate stock markets, but the Fed declined. 

So really, other than Securities laws and supervision around ethical behavior, no one regulates overblown sentiment. 

Nor should they. Its supposed to be an efficient, free market that reflects supply and demand. Its best left that way. 

But at some stage the potential impacts on an economy that is reeling from a pandemic, may need to be weighed. I don't know. 

I do know that if the world keeps on over-reaching, it will hit a wall, sooner or later.  We cannot live our lies forever. 

And if the economic system does collapse, the world will succumb to the wolves that love to exploit broken play and chaos. 

(c) Peter Missing @ me2u2all.blogspot.com