Stock Market Bubble? By Ray Dalio, Founder of Bridgewater Associates

LONDON (Capital Markets in Africa) – Ray Dalio has seen a lot of bubbles in his time and he has studied even more in history, so he knows what he means by a bubble and he systemized it into a “bubble indicator” that he monitors to help give him perspective on each market. We now use it to look at most markets we are in. He wants to show you how it works and what it is now showing for US stocks.

What he means by a bubble is an unsustainably high price, and how he measures it is with the following six measures.

1. How high price relative to traditional measures?
2. Are prices discounting unsustainable conditions?
3. How many new buyers (i.e., those who weren’t previously in the market) have entered the market?
4. How broadly bullish is sentiment?
5. Are purchases being financed by high leverage?
6. Have buyers made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains?

Each of these six influences is measured using a number of stats that are combined into gauges. In the stock market, we do it for each stock that we are looking at. These gauges are combined into aggregate indices by security and then for the market as a whole. The table below shows the current readings of each of these gauges for the US equity market as a whole, and the chart below it shows the aggregate reading derived by combining these gauges into one reading for the stock market going back to 1910. It shows how the conditions stack up today for US equities in relation to past times.

To read more click Stock Market Bubble? By Ray Dalio 

Ray Dalio is the Founder, Co-Chairman, and Co-Chief Investment Officer of Bridgewater Associates. He started Bridgewater out of his two-bedroom apartment in New York in 1975 and under his leadership, the firm has grown into the fifth most important private company in the US according to Fortune Magazine.