The big issues on the minds of investors right now are, in no particular order: Trump; UK Budget; China; US equity bubble; gold. I’ll dash through the first three.
Trump is unhinged*. For many he is favourite to trigger the final snowflake that will bring down the whole wobbly avalanche-prone US financial markets. But what and when is unknown, even to Trump.
I covered the UK Budget last week. I see no need to panic. The UK is most susceptible to chaos from the outside rather than within.
China is in the very early stages of a recovery from a bear market, sideways and down, which began in 2007.
That leaves the bubble and gold, and I will give these a longer treatment.
It is October. It is typically the season for lots of media coverage on bubbles and crashes, and you have undoubtedly read that such concerns are behind gold hitting new highs almost every day (more on that shortly).
We are told that the risk of the crash derives from a “bubble” in US equities. But it tends to be a bit vague. And my industry doesn’t help as too often they foster complacency amongst their clients and investors, which is extremely dangerous, for reasons I will explain. Firstly, what is needed are some definitions, then a quantification of the risks being taken by retail investors just like you, and what action you can take.
Firstly, the two essential ingredients which create a Crash risk worthy of a capital C are a valuation bubble and an investor mania. Bubble and mania combined are to financial markets what nitro and glycerine are to demolition. Let’s look at them in turn.
A valuation bubble can be identified by crunching some numbers and comparing the output with prior periods where, with the benefit of hindsight, there was unquestionably a bubble. For example the Shiller price earnings ratio, or similar work by the likes of John Hussman, enables us to compare where we are today with the US stock market in 1929 and 2000 (the tech bubble), or Japan in 1989. It is clear that the US stock market is now on a par with these extraordinary precedents, which had ugly outcomes.
To achieve such bubble valuations it is a prerequisite that there is also an investor mania, with highly emotional investors, driven by a potent mix of greed and euphoria. This is more than a passive risk myopia – it is wilful denial. The old Gold Members amongst you will remember the evidence of this which we laid out month after month in our webinars from 2019, and I won’t bore you by repeating this substantial list. The latest and most extreme evidence is the extent to which retail investors have piled into non-traditional ETF’s (leveraged, inverse or single stock ETF’s for example). Year-to-date over $60bn has flown into these much higher risk products, with 99% owned by retail investors…
Accepting this bubble/mania combination, what about size of falls, longevity of the bear market, and timing?
On the extent of falls, we can look back at the three precedents mentioned above and observe that in two instances falls were 70-80%, and in the other, from 2000-2003, it was 50% (though tech stocks fell 80%).
It is also possible to gauge the possible extent of falls by calculating what is needed to be to get those valuation measures back to middling levels. Here are three scenarios which I have set out previously:
If S&P fell to “Median Fair Value” on PE ratio, it would be 30%+ down.
Shiller PE ratio requires S&P to fall 50%+ to hit the median valuation.
Hussman calculates S&P to lose 73% for run-of-the-mill valuation.
And these are just falls to “average” levels. You should expect an overshoot on the downside as panic takes hold – this is an important point to remember.
On longevity, it took 16 years for the US market to return to the high of 1966, another 16 years to recover losses from the 2000 Tech Bubble, 25 years to recover the peak of 1929 and 35 years for the Japanese market to recover the peak of 1989. Our regulators should be paying more attention to this as there will be hell to pay when the US bubble bursts.
From the perspective of UK-based investors, never has a generation of investors been so exposed to such risks at the most vulnerable point of their lives – the Boomers haven’t got time to go around the block and rebuild their wealth.
On timing, no one knows. As I have said many times, a mania has no calculable end point. So don’t predict, prepare.
How to prepare? You are told to diversify. But that doesn’t work when markets are all falling together. Just because the UK, Japan, and China are cheap doesn’t mean they can necessarily resist downward pressure from US turmoil – what is cheap can get cheaper. So what can you do that is practical and effective?
It is extraordinary that my industry is not actively using stop-losses. One ordinarily excellent writer from within the fund industry said in recent days:
“We’d all like to avoid big market corrections that take a meaningful chunk out of our savings or upset our retirement plans. But given how difficult it is to time the tops and bottoms of the market cycle, it is perhaps more useful to simply understand the risks we are taking.”
I have a lot of respect for this gentlemen, but this isn’t good enough. Applying a stop-loss is not market timing. It is accepting a small loss to avoid the possibility of a much larger and devastating loss. I don’t like predictions, but I will make one… When the investment industry launches a raft of products with advertised stop-losses, you can be confident that this is near the market bottom, and it will be a great signal to “buy”.
I know some of you struggle applying stop-losses. Behaviourally it is not easy. Practicing selling is important, so do this with some of your smaller holdings on less dramatic days for markets, and you must use our free and unique stop-loss tool. If you prefer, do talk to one of our Dennehy Wealth team as our discretionary portfolios have stop-losses by default, and we can take the stress away. You can also just reply to this email and let us know what’s on your mind.
Turning to gold, you will know my long term scepticism around gold (see here), and the silly claims made on its behalf e.g. it’s insurance, protects you from inflation and deflation, it’s a safe haven, etc. These have been repeated ad nauseum in recent weeks.
On the inflation angle, it’s really unexciting. Looking back over the last 750 years (no short termism here!), in 58% of rolling 50-year periods gold did NOT beat inflation.
On its “safe haven” status, the evidence is limited. On the occasions when the US stock market has fallen by at least 25%, on average gold only fell by 2%. But this only covers the period from 1990, and tells you nothing of golds ability to crash independently of other financial markets. In recent decades golds volatility has been broadly similar to stock markets, and this “safe haven” can suffer some painful and prolonged setbacks:
Down 65%, 1980-1985
Down 35%, 1987-1993
Down 45%, 2011-2015
Down 22%, 2020-2022
In each of these instances the fall in gold miners, rather than just the gold price, was far greater, with double the size of falls in gold being a decent guide.
In recent days one of our esteemed national dailies had three separate articles on gold, and it also grabbed the headlines on BBC TV and radio. In the 2-3 years before 2025 we highlighted that gold was building momentum, and that by the time retail investors got on board (which has only occurred in 2025), and there is persistent media coverage (ditto), plus rolling TV and radio ads on how to buy gold coins (ditto), the upward trend in the gold price will be mature.
That doesn’t mean gold is necessarily in a bubble. The problem with gold is that there is no simple valuation metric which reliably tells you whether there is over-valuation or even a bubble. Our best guide is investor behaviour, and it is certainly enthusiastic. Yet it is not a useful timing indicator. Better to take substantial profits when they are at hand (no one ever got poor by taking profits) and don’t get greedy.
If I had to guess, I wouldn’t be surprised by a few weeks of the gold price coming off. That might be a great entry point to buy into a long term trend which will persist, and there are decent arguments in favour of such an outcome. But don’t over do it. There is no certainty here, the same as there is no insurance, no inflation protection, and no safe haven.
In markets over the last week, Japan, China mainland, India, and Germany had gains in excess of 1%. Japan is the star, up 8% on the new Prime Minister, the Iron Lady – more on that next week. Over in commodities, silver, platinum and palladium enjoyed gains in excess of 5%, with gold miners down 2%.
Take care until next week.
* looking beyond pure investment angles, we must acknowledge the long overdue steps towards peace in the Near East. But it is very early days and Trump must stay focussed as there is much to be done.
P.S. It was confirmed this morning that the ABA trade is building - Anything But America - on which see last weeks Friday Note.