US – The High Risk of Another Financial Crisis.

Andrew Smithers
London, 5th January 2022


A detailed explanation of the economics on which this paper is based is set out in The Economics of The Stock Market (“TEOTSM”) due to be published on 10th March this year by Oxford University Press. Footnotes below give the chapters and figures in TEOTSM which set out the evidence supporting the claims and elaborate on the explanations made in this paper.

Summary.
• Since 1900 the US stock market has had 6 peaks from which major bear markets followed. In four of these the degree of overvaluation shown by q and CAPE were the same.

• The two outliers were 1929 and 2021, when the overvaluations shown by q were significantly greater.
• 1929 and 2021 were also years in which financial profit margins were at levels unmatched in any other period. As q excludes financials their exceptional profitability explains the difference,

• Neither interest rates, money supply nor inflation were similar in 1929 and 2021. The only common characteristic appears to be the high level of the “Carry Trade.” The current uninsurable level of “option risk” is high and suggests that the next bear market will be accompanied by a financial crisis.

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US – The High Risk of Another Financial Crisis
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