Just when everyone’s guard is down, Bank of England warns of potential asset price sharp correction; The “Buffett Indicator” is flashing red.

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WSJ: BOE Warns That Investors May Be Too Complacent About Risks

“The Bank of England on Wednesday warned that investors may be too complacent about the challenges facing the global economy, with the result that there is an increased risk of a “sharp correction” in asset prices.

In its latest, quarterly report on the threats to financial stability, the BOE highlighted problems in commercial real estate globally, China’s property sector in particular, and rising levels of government debt as potential “vulnerabilities.” It also said investors are underestimating the possibility that economic growth will disappoint, or that interest rates will have to stay high to tame inflation.

It said despite those and other threats to stability, asset prices have risen across a range of markets and investors are demanding less compensation for the risks they face than they have previously. It noted that “U.S. equity risk premia remain particularly low.”

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“The risk of a sharp correction in a broad range of asset prices and a widening in credit spreads has grown,” the BOE’s Financial Policy Committee said in a statement.”

Warren Buffett’s favorite market indicator is flashing red

“The “Buffett Indicator” is flashing red.

In 2001, Warren Buffett came up with what he called in Fortune Magazine “probably the best single measure of where [stock] valuations stand at any given moment.”

Today that barometer has soared to a two-year high, signaling that a market retreat could be coming.

What’s happening: Widely known as the “Buffett Indicator,” it measures the size of the US stock market against the size of the economy by taking the total value of all publicly traded companies (measured using the Wilshire 5000 index) and dividing that by the last quarterly estimate for gross domestic product.

The resulting ratio is supposed to tell us how fairly priced stocks are by providing a simple gauge of whether the market is overvalued or undervalued relative to economic output. If the stock market is growing a lot faster than the economy, that could be a sign of a bubble.

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Buffett’s Berkshire Hathaway says that a reading of 100% is fair, if it’s closer to 70% stocks are at a bargain price, and if it’s anywhere near the 200% mark, investors are “playing with fire.”

The indicator is currently sitting near a two-year high, at nearly 190%.

The last time the indicator was this high was in 2022, when it hit 211% and the S&P 500 dropped by 19% over the next year.”

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