Why the US Share Market Is Extremely Overvalued

There we were, within touching distance of the All Ords all-time peak of 6873 points…reached on 31 October 2007.

After nearly 11 years of waiting for the Aussie share market to deliver on its promise of ‘shares always go up’, it looked like 2018 would be the market’s banner year.

But not now…

Graph of the All Ordinaries

Source: Google

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Since the end of August, the Aussie share market has fallen 10%.

Interestingly, we turned down nearly a month before the US market (as measured by the S&P 500 index)…

Graph of S&P 500

Source: Google

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The US market has also fallen 10%.

We underperformed the US market (by a huge margin) on the way up, yet, we have managed to match its performance — so far — on the way down.

Go figure.

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Recent market action casts some doubt over the reassuring comments of ‘we never went as high so we won’t fall as far.’

Maybe. Maybe not.

If the US market falls 70% in value, you can be assured our market will be caught in the downdraft. The ‘good news’ may be that we only fall 60%. Some consolation that’ll be.

The recent action on Wall Street has been greeted by the typical ‘buy the dip’ commentary.

Now’s the time to grab good stocks at discounted levels.

It’s these fleeting moments of optimism that provide the occasional relief in the downward trend…giving the market graphs their ‘saw toothed’ pattern.

The ‘saw toothed’ trend is captured in the following chart.

The chart shows the correlation of US Margin Debt (red line to LHS) and the very broad US Index, Wiltshire 5000 (blue line to RHS).

Graph of Margin Debt

Source: Yardeni Research

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As the market goes through is ‘up and down’ process, indebted borrowers follow in lockstep.

Since the collapse in both lines in 2008/09, there have been two discernible downturns.

The Greek crisis in 2011 and the meltdown on China’s share market in 2016.

Now, it looks like there’s a third…in October 2018.

Why the US market is vastly over-valued

The volatility on Wall Street has obviously unnerved some of those who are playing with the bank’s money.

Some of the reduction in margin debt could be due to investors having to ‘pony up’ on a margin call…the lender requires the borrower to provide cash or additional security or to sell down in order to restore the lender’s margin of safety.

Others — the smart or the nervous — may have cashed out and decided to watch the action from the safety of the sidelines.

In dollar terms, this is largest monthly change in margin debt levels since the dark days of 2008…even eclipsing the sell-off during the Greek crisis.

Margin debt plunges most since Lehman moment

Source: wolfstreet.com

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Is this a sign of worse to come?


What the Margin Debt chart does show is there’s a lot of borrowed money riding on that blue line (Wiltshire 5000 index) continuing to go up.

When, not if, this market provides a repeat performance of 2000/03 and 2008/09, the selling volume — forced by margin calls — will send that red line into a vertical descent.

These are very dangerous times to be playing with someone else’s money.

Almost everyone knows, that after nearly a decade of stellar gains, the US market is due — sooner or later — for a (massive) correction.

And surely almost everyone knows the adage, ‘higher you climb, the harder you fall’.

When you put ‘two and two together’ it won’t take much for a few nervous hands to fold.

As they say markets when are ripe for a fall…‘it only takes a few snowflakes to cause an avalanche’.

Most people don’t realise how little actually takes to move a market.

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According to Wikipedia…

‘ASX [Australian Stock Exchange] has an average daily turnover of A$4.685 billion and a market capitalisation of around A$1.9 trillion…’

On a daily basis, the buying and selling of 0.25% (yes, zero point two five percent) of stock moves the market.

That means 99.75% of stock stays in the drawer.

Very few people realise that markets move at the edge of a very thin margin.

This wafer thin volume of trading determines whether portfolio values rise or fall.

All it requires is for daily turnover to double — to 0.5% — and we have an avalanche.

The remaining 99.5% of stock holders will stand there with mouths wide open…trying to comprehend what just happened.

With margin debt of US$600 billion, it’s not hard to see how daily volume on Wall Street could suddenly double…especially, if the down days start to mount up and a pattern of ‘lower lows and lower highs’ emerges. 

Bitcoin investors are witnessing first-hand how panicked selling at the margin can drive prices lower.

This is an extract from the 15 December 2017 edition The Gowdie Letter


‘This chart bears an uncanny resemblance to the first half of the South Sea Company share price chart.

Graph of Bitcoin price

Source: Coindesk

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‘I do not profess to know much, if anything at all, about technology.

‘From what I’ve read and I think I understand, there appears to be some real commercial value in Bitcoin’s underlying blockchain technology.

‘But on the current price, is there really US$200 billion worth of value?

‘I think not.

‘For a little context, this chart compares bitcoin’s meteoric rise (as a multiple of starting price) to some famous asset bubbles since 1900.

Graph of the rise and fall of some famous asset bubbles since 1900

Source: Value Walk

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‘In due course, I expect bitcoin will plummet well below US$1000 and possibly end up closer to US100 by the time this goes full cycle.

‘Losses of 95+% are in order for the bigger fools who bought into this madness.’

When did Bitcoin peak in 2017?

‘Bitcoin reached a peak of $19,666 on December 17’

Financial Times 24 December 2017

The latest bitcoin price is…US$4,000…a fall of nearly 80% in less than 12 months.

Has every bitcoin investor sold out?


All it’s takes is for few to sell to day and a few more to sell tomorrow and pretty soon volumes increase and it’s a case of ‘watch out below’.

The ‘buy-the-dippers’ who thought bitcoin was a ‘bargain’ at US$16k and then at US$12k and again at US$8k have paid a hefty price to learn the lesson of how over-over-priced markets can fall much, much further than you could ever have imagined.

The ‘buy-the-dip’ brigade will pile in at US$4k thinking this is the bottom.


When bitcoin goes below US$1k, they’ll being sitting on a 75% loss.

Share investors should take note of bitcoin action.

I know ‘they are not the same asset class’, but the human nature behind the price action is identical.

The US share market is over-over valued and all it’s going to take is for those wafer-thin margins of trading volume to increase a little bit and investors will be sitting on big fat losses.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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