The End of "The Everything Bubble": Why Record Valuations Signal Imminent Market Collapse

Crestcat Capital's macro analysts explain why their 50-indicator model shows markets at dangerous extremes with China's credit bubble as potential catalyst.

Key Takeaways

• Record valuations across eight different US equity metrics coincide with longest economic expansion in history, creating dangerous late-cycle conditions.
• Crestcat's macro model combines 50+ indicators showing current market extremes comparable to tech bubble and housing crisis peaks.
• Nearly 50% of US yield curve spreads are currently inverted, matching levels seen at previous recession peaks unlike 2016's mild inversions.
• China has created $45 trillion in credit since 2008 with 400% banking asset growth, representing history's largest credit bubble exceeding European and US pre-crisis levels.
• Corporate balance sheets show unprecedented weakness with 82% of Canadian, 71% of Australian, and 60% of US non-financial companies losing money on free cash flow basis.
• Gold investment thesis focuses on safe haven demand rather than inflation, with gold-to-S&P ratio historically rising during yield curve inversions regardless of consumer price trends.
• Three primary investment themes: short global equities (especially US), long precious metals, and short Chinese yuan anticipating credit bubble collapse.
• Current "triple top" pattern in markets since January 2018 suggests bear market rally rather than sustainable recovery from December lows.
• Consumer confidence extremes and unemployment rate minimums typically coincide with business cycle peaks, indicating recession risk within months of Fed pause.

Timeline Overview

• 00:00–12:30 — Introduction and Fund Background: Crestcat Capital's Denver-based global macro approach, 41% and 32% returns in flagship funds, Stanford and Chicago educational credentials
• 12:30–25:45 — Everything Bubble Thesis: Record valuations across eight US metrics, longest expansion in history, triple top formation since January 2018 vol-mageddon event
• 25:45–38:00 — Macro Model Construction: 50+ indicator system combining timing, valuation, and technical factors, yield curve inversion analysis comparing current conditions to 2016
• 38:00–50:15 — Fed Policy and Recession Timing: Nine of twelve Fed hiking cycles led to recession, bear markets start two months before Fed pause, recession follows five months after
• 50:15–62:30 — Gold Investment Thesis: Safe haven focus over inflation hedge, central bank accumulation patterns, gold-to-S&P ratio performance during yield curve inversions
• 62:30–74:45 — China Credit Bubble Analysis: $45 trillion credit creation since 2008, trade war catalyst potential, current account deterioration and capital flight pressures
• 74:45–87:00 — Corporate Debt Crisis: Record leverage ratios, majority of companies in major economies burning cash, comparison to tech bubble narrative versus current reality
• 87:00–99:15 — Investment Themes Overview: Canadian and Australian housing bubbles, cyber security longs, marijuana sector shorts, European disunion implications

Record Valuations Meet Unprecedented Economic Expansion Duration

Crestcat Capital's analysis reveals that US equity markets have reached record valuations across eight different metrics while simultaneously experiencing the longest economic expansion in American history, creating a dangerous confluence of late-cycle conditions that historically precede major market corrections. This "everything bubble" encompasses not just traditional equity valuations but extends across asset classes from corporate credit to private equity.

• The current economic expansion has exceeded the 1990s expansion by one quarter, making it the longest on record while featuring consistently deteriorating underlying fundamentals rather than accelerating growth.
• Eight different valuation metrics for US equities have reached all-time highs, suggesting broad-based overvaluation rather than sector-specific imbalances that might correct independently.
• The January 2018 "vol-mageddon" event, followed by September 2018 and December 2018 peaks, creates a "triple top" formation that Crestcat interprets as classic late-cycle market behavior.
• Record global debt-to-GDP ratios mean that traditional monetary policy responses to economic downturns will face unprecedented constraints, potentially amplifying both recession severity and recovery difficulty.

This combination of extreme valuations and maximum cycle duration creates conditions where even minor external shocks could trigger significant market dislocations.

50-Indicator Macro Model Signals Dangerous Market Extremes

Crestcat's proprietary macro model aggregates over 50 different economic, technical, and valuation indicators to provide systematic assessment of business cycle positioning, currently showing readings within two percentage points of record overvaluation levels. This comprehensive approach addresses the common critique that individual indicators can provide false signals by examining broad patterns across multiple data series.

• Approximately half the model consists of valuation and imbalance indicators including debt metrics, while the other half comprises macro timing and technical indicators for more immediate market signals.
• Current yield curve inversion analysis shows nearly 50% of all possible spread combinations are inverted, matching conditions at both the tech bubble peak and housing crisis peak.
• Consumer confidence measures show extreme highs that historically coincide with business cycle peaks, while unemployment rates have reached minimum levels typical of late-cycle conditions.
• Corporate credit spreads remain extremely tight despite deteriorating fundamentals, suggesting credit markets have not yet priced recession risk appropriately.

The model's historical back-testing to 1987 demonstrates effectiveness in identifying major market turning points, though timing precision remains challenging given the complex interaction of multiple variables.

China Credit Bubble Represents Systemic Global Risk

China's credit expansion since the 2008 financial crisis dwarfs previous debt bubbles in both absolute terms and growth rate, with $45 trillion in new credit creation and 400% banking asset growth representing the largest credit bubble in human history. This exceeds the scale of both European banking imbalances before the eurozone crisis and US housing credit before the 2008 crash.

• The Chinese banking system has engaged in systematic "extend and pretend" operations for over a decade, rolling over non-performing loans rather than recognizing losses.
• China's current account surplus has declined dramatically since 2008, creating currency pressure that typically forces devaluation in market economies but has been offset by capital controls and government intervention.
• Illicit capital flight from Chinese elites has inflated real estate markets in Canada and Australia, creating derivative bubbles that would collapse alongside Chinese currency devaluation.
• A 40% correction in Chinese median stock prices during 2018 represented recession-level market damage despite continued government stimulus efforts.

The trade war with the United States provides a potential external catalyst that could trigger the "Minsky moment" where China's Ponzi finance system becomes unsustainable.

Corporate Balance Sheet Deterioration Reveals Structural Weakness

Analysis of non-financial public companies reveals unprecedented levels of cash flow negative operations across major developed economies, with 82% of Canadian companies, 71% of Australian companies, and 60% of US companies losing money on a free cash flow basis. This represents a fundamental departure from historical norms where profitable operations were prerequisites for public market access.

• The ultra-low interest rate environment has enabled companies to survive and expand despite negative cash generation, creating artificial demand for labor and capital that may reverse rapidly during credit tightening.
• Unlike the 1990s tech bubble where growth narratives justified profitless companies, current market conditions lack compelling productivity or innovation stories to explain widespread cash burning.
• Corporate debt levels have reached record highs measured by various leverage ratios, while debt service capabilities remain dependent on continued access to cheap refinancing rather than operational cash generation.
• The "everyone will be the next Amazon" narrative fails to acknowledge that Amazon's ultimate profitability required unique scale advantages and market positioning not replicable across thousands of companies.

This combination of widespread unprofitability and high leverage creates vulnerability to credit market stress that could force rapid liquidations across multiple sectors simultaneously.

Gold Thesis Emphasizes Safe Haven Over Inflation Protection

Crestcat's precious metals allocation focuses primarily on gold's safe haven characteristics rather than inflation hedging properties, recognizing that traditional inflation measures may remain subdued even as financial system stress increases. This approach acknowledges gold's historical performance during credit crises regardless of consumer price trends.

• The gold-to-S&P 500 ratio increased 300% during the 2006-2010 period, demonstrating precious metals' outperformance during financial crisis conditions even when broad inflation remained contained.
• Central banks have become net gold accumulators in recent years, with China and Russia leading purchases as they seek alternatives to dollar-denominated reserves.
• Gold prices in local currency terms tend to rise during emerging market credit crises regardless of whether equity markets rise or fall in nominal terms, supporting the "trade of the century" thesis for gold priced in yuan.
• Two-year Treasury yields typically decline significantly during late-cycle conditions as credit markets price increasing Fed easing probability, creating favorable conditions for non-yielding assets like gold.

This safe haven focus allows the gold thesis to succeed even if deflationary forces from Chinese currency devaluation offset potential inflationary pressures from fiscal stimulus.

Multiple Derivative Bubbles Amplify Systemic Risk

The credit expansion of the past decade has created interconnected bubbles across geographic regions and asset classes, with Canadian and Australian real estate markets serving as derivatives of Chinese capital flight while multiple sectors exhibit bubble characteristics similar to previous crisis periods. These interconnections amplify potential contagion effects during market stress.

• Canadian household debt-to-income ratios and housing price-to-income ratios match or exceed US levels reached during the 2006-2007 housing bubble peak, while Canadian banks trade at valuations similar to US banks before the financial crisis.
• Australian housing markets have avoided recession for 25+ years but show similar bubble characteristics and dependence on Chinese demand for commodities and real estate investment.
• Private equity valuations have reached extremes comparable to public market conditions, suggesting that traditional "flight to alternatives" during public market stress may not provide protection.
• Cryptocurrency markets, marijuana sector speculation, and unicorn startup valuations all exhibit classic late-stage bubble behavior with massive capital allocation to unprofitable ventures.

The breadth of bubble conditions across asset classes and geographies suggests that traditional diversification strategies may fail to provide portfolio protection during the next downturn.

Crestcat Capital's comprehensive analysis reveals that current market conditions represent the convergence of multiple historic extremes: record valuations, maximum expansion duration, unprecedented corporate cash flow deficits, and the largest credit bubble in human history centered in China. Their 50-indicator macro model suggests these conditions create unstable equilibrium requiring only external catalysts to trigger significant market dislocations, with gold offering safe haven protection while short positions in overvalued assets provide profit opportunities during the inevitable correction.

Practical Implications

• Portfolio Defense Strategy: Consider reducing equity exposure and increasing safe haven allocations given record valuation metrics across multiple asset classes and late-cycle economic indicators
• Credit Risk Assessment: Evaluate corporate bond and loan exposure to cash flow negative companies that depend on continued cheap refinancing rather than operational profitability
• Geographic Diversification Limits: Recognize that traditional international diversification may fail given interconnected bubble conditions across developed markets and Chinese credit exposure
• Alternative Asset Scrutiny: Question private equity, real estate, and other "alternative" investments that may offer less protection than assumed during broad-based market stress
• Currency Hedging Considerations: Prepare for potential Chinese yuan devaluation that could trigger deflationary pressures globally while benefiting dollar-denominated assets
• Recession Preparation Timeline: Plan for potential recession onset within months of Fed policy pause rather than years, given historical patterns of bear market timing relative to monetary policy shifts