Why last decade holds the key to the bubble question?

In the past few weeks , I have heard Michael Burry calling for a mother of all crashes , while Ray Dalio and Cathie Wood defending the current valuation of the market. So I decided to look at some data with the sole intention of understanding each of their point of view. First data point I looked at is the Market Cap / GDP ratio , also known as the Buffet Ratio. It is supposed to be an equivalent of Price/Sales ratio.

I took quarterly data starting from 1989 to 2021 , including nominal GDP and market cap(Wilshire 5000 broad index). My expectation before drawing the chart was that I will see a reverting ratio(trying to come back to 100% ) as the market goes through cycles of value and growth investing.

The chart obtained is below:

This ratio at the start of the year was around 178, and the market hasn’t corrected at all , so I expect this ratio to be the same or higher today.

Let us look at the chart , and see if there is a pattern to it . Starting from 1989 , the 100% level was crossed in 1997 and reached a high of around 130% before the dot.com bubble hit. Then it continued to come down reaching a 70% level before another uptrend started which ended when the financial crisis of 2008 hit. But it seems there was no bubble in 2008 , because the ratio was sitting around 100 only when the world economy got hit. It was more a result of risk mismanagement , which caused that crisis. After that Fed started Quantitative easing , and the ratio has refused to come back below 100 since then.

Now for someone who thinks it is a bubble it is a great visual , pointing towards an over expensive market. Growth and Tech stock backers might say that in the last decade technology innovation has shifted the markets fundamentally and such ratios are no longer relevant .

It is something to think about , I will go deeper into this in my next post.