Elon Musk asked Cathie Wood about the Buffett indicator flashing red. The Ark Invest chief explained why she isn't worried.
Elon Muskasked Cathie Woodabout the Buffett indicator's record readings.
ArkInvest CEO criticized GDP as a measure and trumpeted innovation.
- Warren Buffett's favorite market gauge surged before the dot-com crash.
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Elon Musk asked Cathie Wood this week what she thought about
"What do you think of the unusually high ratio of S&P market cap to GDP?" the
The Ark founder also drew a line between the dot-com bubble and the current hype around tech stocks."Back then, investors chased the dream before the tech was ready and while costs were too high," she said, adding that "after gestating for 20-30 years, the dream has turned into reality."
Wood predicted that companies that have failed to innovate and instead have borrowed money to fund stock buybacks and dividends would "pay a steep price." She expects them to be forced to cut prices to shift inventory and make debt repayments.Read more: MORGAN STANLEY: Buy these 25 highly reliable stocks set to perform well in any market environment as rising prices threaten to crush profit margins In short, Wood's view is that the disconnect between the S&P 500's market capitalization and national GDP isn't worrying because GDP is a flawed measure, unprecedented innovation justifies higher company valuations, and technological advances are cutting costs so inflation won't be a problem either.
Her stance clashes with Buffett's praise of his namesake gauge in a Fortune article in 2001 as "probably the best single measure of where valuations stand at any given moment." When the indicator peaked during the dot-com boom, it should have been a "very strong warning signal" of a crash, the
Musk might have to wait a few more months to find out which investor is right.
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