The strategist who called stocks 'too big to fail' says US wealth and income is dangerously tied to a market that's at record valuations

• Michael Kantrowitz, Cornerstone Macro chief investment strategist, told Bloomberg on Monday that the stock market is becoming a larger portion of the economy, and consumer wealth and income are "more leveraged than ever to the stock market."

• The strategist also said because interest rates are so low, there's few effective tools the Fed can harbor if a market decline has a negative impact on the economy.

• Kantrowitz recently released a note titled "Stocks Are Too Big to Fail."

• The strategist also discussed the market-cap to GDP ratio, often referred to as "The Buffett Indicator."
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Michael Kantrowitz, Cornerstone Macro chief investment strategist, told Bloomberg on Monday that the stock market is becoming a larger portion of the economy, and a market drop could have a large impact on the nation's economic well-being.

"We knew the stock market was an important component of the economy through the wealth effect and over the last 30 years. Fed policy and the reduction of interest rates have made markets ultimately a larger component of the economy," Kantrowitz said. He added that "there's fewer tools if a market decline has a negative impact on the economy," because the Fed is "less effective" and cannot lower interest rates further.

The strategist recently released a note titled "Stocks Are Too Big to Fail." According to Bloomberg he wrote: "We view record highs in the market-cap to GDP ratio, at a time when consumer confidence, wealth, and income are more leveraged than ever to the stock market." He added: "Stocks are too big to fail here because a big drop in the stock market could leave the U.S. government an enormous bill."

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The market-cap-to-GDP ratio is often called the "Buffett Indicator" because it's one of legendary investor Warren Buffett's favorite market indicators. It's a ratio of a nation's stock market capitalization to its overall gross domestic product. The gauge surged to a record 170% on July 30 after the US released second quarter GDP numbers.

Kantrowitz said he's looking at the metric in a slightly different way than Buffett. Instead of "just a valuation metric, and more of a way of how much is the economy leveraged to the market? In other words, given the size of the market today relative to the economy which is at an all time high, a drop in the market could have a much greater impact when you look at how large it is," the strategist said.

The S&P 500 was just shy of a record high on Friday. It closed about 1% away from its all-time high back in February.