The coming asset price crash.

This web page for clients will be updated from time to time as extra material comes to hand.

10/3/21   I have a growing sense that a major US share market crash will probably commence somewhere over coming months - and that this will become part of a set of major asset price crashes around the world.

Why do I hold this view?

First, let us look at what are the "normal" preconditions for a crash.

There are usually a number of prerequisites for a major crash in share markets.

The above-indicators tell us a crash (or major bear market) is going to happen, but they do not tell us when.

  • Super-enthusiasm / speculative fever.  Or at least, the only one of the above indicators that tells anything about timing of a crash is "speculative fever" as Jeremy Grantham explains ”   ( 22/Jan/2021 ), 10:00-10:30 “When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.”    

    • But even Grantham's comment does not give a precise forecast. That said, Grantham's comment (together with my extremely high regard for Grantham's knowledge about speculative bubbles) would make it a very high probability of the major crash commencing before mid 2021. This is a very important piece of information in my view.

  • Acceleration of a trend. Ever since I joined his newsletter service nearly 20 years ago, David Fuller has regularly has warned that "acceleration of a trend is an ending signal of unknown duration". And since the November 2020 US presidential election, we have definitely has seen acceleration upwards in a number of trends like Nasdaq, Bitcoin, GameStop, SPACs etc.    So by this David Fuller measure, we are in an end-phase of a long bull market that began at the bottom of the Global Financial Crisis.

  • Rising interest rates.

    • Gabelli Mathers compiled the following chart, which reflects on the historical linkage between rising US cash rates and a US share market crash or economic crisis.   See chart at Appendix A below.

    • In this cycle, the US Fed (and developed world central banks more broadly) have anchored cash rates at zero or near-thereto. Therefore, the interest-rate indicator that is likely to be the key wrecker will almost certainly be rising bond yieldsAnd clearly this indicator is flashing a major warning signal now  See Jon Pain Newsletter 7/March/2021 for more discussion on this

So what can help us narrow down the timing of the crash commencing more precisely? There are 2 main things that I also look to, to gain greater confidence of a crash being underway (i.e. having commenced)

  • Historically, I have found that key opinion leaders often will tell you when it is happening.

    •  some of the analysts, some of my research services and some other opinion leaders give clear warnings that the crash has commenced. That said,  I do not think that any one particular source should be relied on absolutely

  • Ultimately, the marker of the crash having commenced has to be able to be see in the charts - there is no other way.

    • There will be a break of the 200-day moving average ..... but I would like to be picking the crash well before that because:-

      • at the very least, by the time the 200-day moving average has been broken, the market has already fallen quite some distance and.

      • in 1987, by the time the All Ordinaries Index broke the 200-day moving average, the market was already in free-fall, and so you would have missed getting out before the crash if that was your only indicator.

      • So you need to be looking at changes in the consistency of the up-trend to give you a warning.

      • And to a degree you need to be looking at "commonality of markets" eg some markets have significant degrees of commonality

        • Gold and Silver and other precious metals often have similarities in their charts, and so the charts of one can often tell you something about an other.

        • In 1987, the growing bear market in the US S&P500 was a good early warning of the coming crash in the All Ordinaries.

Is it useful to summarise some of the extreme's in valuations right now?

Who are some of those warning that the market will crash soon - but not saying that the crash is under way yet?

  • Jeremy Grantham. eg January 22 interview whose link is above or this 26 Feb 2021 interview. "GameStop to Tesla: investor Jeremy Grantham on 'crazy' markets"

  • EWI - eg March 2021 forecast

Now, let us start documenting some of warning signs that we can see in front of us now.

  • Jon Pain 7/3/2021 - a good summary of what is happening in markets from a broad macro perspective

    • "In the meantime capital markets are experiencing a dislocation which unsettles those who live in the world of neat and elegant linear extrapolation. The dislocation is being driven by a rupturing in inflationary expectations which is then sending shock waves through the global capital markets. Financial assets that have been driven higher by the powerful, and linear, extrapolation of low inflation are now facing unfamiliar headwinds. Unfamiliarity then engenders a sense of uncertainty, which in turn leads to higher volatility. All of this leads to the rapid-fire recalibration of relative valuations that we have seen over the past several weeks."

    • "Today, we have something that pretty much everyone agrees has massive significance, namely the U.S Treasury market, which is experiencing some pretty violent convulsions. This suggests, does it not, that we will see shockwaves that cascade across the global capital markets? What am I trying to say? The most important market in the world is the U.S Treasury market. What happens in the U.S Treasury market has enormous significance for the pricing of all global capital markets. In fact I would go so far as to say that the ‘shape’ of the U.S Treasury yield curve has the capacity to shape and define, and price, the global financial landscape. I cannot put it more strongly than that."

Speculative leaders falling in price 22/May/21

 The sharemarket crunch has begun, warns Grantham (    3/Jun/21

  • A fall in the most speculative corners of the US sharemarket threatens to presage a broad drop in stock prices as investors begin to question lofty market valuations, veteran investor Jeremy Grantham has warned.

  • The famed value investor has pointed to a decline in US tech stocks and a painful fall for special purpose acquisition companies (or SPACs) over the past few months as evidence that equity investors are beginning to sour on record high share prices.

  • The comments come as US stocks trade at record highs, fuelled by easy central bank policy that has pushed sharemarkets from New York to Sydney and Mumbai to new highs this year.

  • The Nasdaq peaked quite a long time ago,” Mr Grantham said, speaking at the Morningstar Australia conference on Wednesday. “My guess is ... maybe in a few months the termites might get to the rest of the market,” he said.

  • “The developed world [equity market] is merely overpriced, no big deal, but the US is heroically overpriced,” he said.





Appendix A.  Historically, rising cash rates have been what has triggered an economic crisis or asset price crash
Appendix B. Nasdaq vs US 10-year Bond yields

Notice how as the US 10-year yield accelerated upwards from January 2021that this is negatively correlated with the Nasdaq which began falling during that period. This makes sense because a raising bond yield increases the discount rate by which Net Present Value of the cash flow from shares in the Nasdaq are calculated. And since Nasdaq stocks tend to be much-higher-growth-rate stocks than are found on average in the S&P500, the rising bond yields should be expected to have a bigger impact one the Nasdaq than the S&P500. 

Appendix C.   Nasdaq vs value of a 10-year US Treasury Bond.

Notice the dramatic fall in the value of a US 10 year Treasury Bond since last October (2020). 50% fall. Wow.


This chart really tells you a lot about the story of bull market in shares since the GFC .... and it may well now be heralding the end of that very same bull market.    Since 2007, the declining bond yield has meant lower discount factors for valuing shares - particularly growth shares - and now we seem to be seeing the beginning of the reversal of that trend

Appendix D.   Hussman's estimated 12year annual return

4/Feb/2021 John Hussman (who I have high regard for) posted this chart of estimated 12-year annual nominal returns from that date with a "conventional" mix of assets. Would you be happy with an average annual investment return of -2.15%pa over the next 12 years?   This is a worse average annual return than the previous extreme that included the 89% fall in US shares 1929-1932.  That is what happens when valuations are driven to extreme levels.

Appendix E.   High share valuation since 1927 - Hussman


Wall Street: "We are all driving prices up now, in anticipation of someone driving prices up later, in response to strong economic data that all of us expect, and every single one of us is already positioned for."