Froth Fallout

Quite a few serious “crash-o-meters” are flashing red right now. The Buffett Indicator is sitting at more than twice its historical average, the Shiller CAPE for the S&P 500 hovers around 39 versus a long-term median of 16, and FINRA margin balances hit a record $1.18 trillion in October. Even the so-called Hindenburg Omen decided to make an appearance in late October.

Any one of these has been enough to send markets spiralling in the past. So, why haven’t we crashed? Well, it depends on where you look. The parts of the market that inflated far beyond any reasonable definition of exuberance are already in full bear-market territory. AI darlings, speculative tech ETFs, and defence momentum plays, the likes of Palantir, ARKK and Rheinmetall, are down more than 25%.

It’s even uglier in the frothier corners. Data-centre infrastructure stocks and quantum-computing names, many of which tripled between September and early October, have given back all their gains. Cryptocurrencies aren’t faring much better. Bitcoin is down roughly 35% from its recent highs, and Ethereum, having lost support at 3000, has fallen nearly 40%.

With so much carnage in the fringes, it certainly seems plausible that general markets could follow suit. Yet for now, bond yields are stable, FX isn’t doing much, commodities are drifting, and the real story is that the S&P 500 is only down about 4% from its record high, which is hardly panic. Makes you wonder what else needs to happen before we have a proper sell-off.