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progree

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Gender: Male
Hometown: Minnesota
Member since: Sat Jan 1, 2005, 04:45 AM
Number of posts: 7,072

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Warren Buffett's favorite stock market indicator reaches internet bubble extreme

Warren Buffett's favorite stock market indicator reaches internet bubble extreme , Yahoo Finance, 8/20/20

The ‘Buffett Indicator’ as it’s called in Wall Street circles — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is at its highest level since before the internet bubble crash in 2000. Currently, the ratio of 1.7 is some 70% above its historical average of one.

Back before the internet stock crash, Current Market Valuation points out the ratio stood at 1.71 — or the market being 71% overvalued.

“Normally, this ratio is around 1, meaning that total market cap of all U.S. stocks generally equals annual U.S. GDP. When stocks are considered to be fundamentally overvalued, the ratio increases to 1.3 (so total stock market capitalization is 30% larger than U.S. GDP),” explains Sevens Report Research founder Tom Essaye.

More: https://finance.yahoo.com/news/warren-buffetts-favorite-stock-market-indicator-reaches-internet-bubble-extreme-165447233.html


In short, currently it's virtually at the same level, 1.70, as it was before the dot com crash, 1.71

I've never been a big fan of valuation measures of the market since all the well-known ones, including the Buffett indicator, ignore the interest rates that one can earn on fixed income investments like bonds, which compete with stocks. Interest rates today are lower now (and that was true too pre-Covid) than they were back in 2000 and 2007 before the big crashes. People naturally gravitate towards stocks more than they did in the past, unwilling to settle for 2% on bonds.

However, the valuation metrics are getting rather extreme, and I can't just blow them off forever. Particularly since the low interest rates are deliberately artificial -- by the Fed reducing the Fed Funds rate to zero, and by buying massive quantities of both Treasury bonds and corporate bonds to push their prices up (and thus their yields down).

World's coal has been falling since 2013, albeit not in a straight line. 2019 lower by 3.3%

IEA: coal globally peaked in 2013, and has fallen since, albeit not in a straight line: there were small increases in 2017 and 2018
https://www.iea.org/data-and-statistics/charts/world-coal-consumption-1978-2019

In Mtce (millions of tons of coal equivalent)

1980: 2524
2000: 3328
2013: 5591 - peak
2016: 5349 - down 242 from 2013
2017: 5399 - up 50 over previous year
2018: 5433 - up 34 over previous year
2019: 5407 - latest from this source - down 26 from previous year
Down 3.3% from 2013 but way far higher than 1980 and 2000

The business model for carbon capture is broken - biggest use of captured carbon is now uneconomical

The business model for carbon capture is broken, Quartz, 8/13/20

In the months since the pandemic cratered the price of oil, the financial fallout has spread from drilling companies to refineries and oilfield maintenance companies. Now the crash has claimed another, more unlikely victim: The only system built to capture carbon emissions from a coal plant in the US, one of only two worldwide.

... But on July 28, E&E News broke the story that the facility has been shuttered since May. And while the plant’s owners have said they plan to get it running again once the economy improves, Petra Nova’s shutdown exposes the weird market dynamics that could threaten the sustainability of carbon capture facilities in progress around the world.

... The trouble is, there’s not a whole lot you can do with the CO2 after you capture it. That makes the economic case for installing a big, expensive piece of equipment a bit shaky.

... the use with the greatest market potential today is, ironically for a climate project, oil drilling. That’s what Petra Nova went after.

So-called “enhanced oil recovery” (EOR) projects inject CO2 into oil wells to shake loose the dregs stuck in subterranean rocky pores.

... In order to operate, the system requires oil prices of at least $75 per barrel. Otherwise, it’s not worth the oil company’s money to bother purchasing CO2 for EOR. Even before the pandemic, the oil price was around $60; after briefly dipping below zero in April, it’s now around $40. Few experts expect the price to return to pre-pandemic levels anytime soon, if ever.
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