The Case For A 30% Market Crash
The problem, of course, is that we’re no longer operating in a vacuum.
The main thesis for being bullish this year, as I see it, is simply: the rules don’t apply anymore and everything is broken, so the market will never again trade on historical fundamentals or with any semblance of sanity ever again. I wrote about this again just days ago…
So far, this is the case that has been winning out in markets over the last few years, thanks to caustic monetary policy and an unsophisticated retail investor base, layered on top of a passive bid that doesn’t care about P/E ratios or the like.
And yet, if you happen to be of that increasingly endangered species — like myself — that still clings, perhaps masochistically, to the notion that fundamentals are supposed to matter, then the case for a meaningful pullback in equities doesn’t just exist… it almost demands to be made at this point.
My friend Mark Spiegel is one of those stubborn, “tethered-to-reality” types. To him, the idea that markets are trading at current levels is not merely questionable, it’s borderline absurd. And honestly? A large part of me is right there with him. In any rational vacuum, he’s not just right… he’s obviously right.
The problem, of course, is that we’re no longer operating in a vacuum. We’re operating in a financial ecosystem distorted by unprecedented monetary intervention, speculative reflexivity, algorithmic momentum, and a collective willingness to suspend disbelief as long as prices keep going up.
Which raises the only question that truly matters now: are we even playing on a sane, level field anymore — one in which common sense is still allowed to cast a vote?
Mark, for his part, hasn’t abandoned that belief despite an ugly year for his fund in 2025. He continues to lay out the case for an overvalued market with the kind of clarity and intellectual discipline that feels almost old-fashioned in today’s price-chasing environment.
His latest investor letter, released last week, is one of the cleanest articulations of that case I’ve seen in some time and I thought it was worth sharing with you to hear the “other side”. The letter has been edited slightly for brevity, content and images:
Mark’s Take On Markets
Trump’s surprising pick of “balance sheet hawk” Kevin Warsh as the next Fed Chair should be bad for any asset for which the “investment case” was “Fed money-printing” and good for stock-picking long short value investors such as this fund.
This is a bold choice by Trump and exactly what the Fed (and “real economy”) need; now let’s see if Warsh can actually reduce the Fed’s bloated balance sheet. My fingers are crossed. Meanwhile…
We continue to be on-and-off very net short this biggest asset bubble in modern history, via various ETFs and individual companies. (I temporarily reduced our short exposure in late December but expect to soon increase it again substantially.)
Consumers in this consumer-driven economy are fading fast, with the latest (government shutdown delayed) data (for November, released in January) showing “real” retail sales comps (after adjusting for inflation) up just 0.6% from a year ago, while AI capex and the stock bubble may be the only things keeping the economy afloat:
…and AI capex is likely a giant bubble, filled with unexperienced speculative players, while a number of 2000-style incestuous deals and much closer investor scrutiny of their terrible ROI may mean that party is on its last legs:
Meanwhile, stocks are extremely over-owned…
…as are bonds:
…while “the cart” is now leading “the horse,” in that the stock bubble is supporting an economy that’s supposed to determine financial asset prices, not be driven by them. This is similar to how the housing bubble supported that stock bubble, and we all know how things ended when “a bubble” supported “a bubble”:
Meanwhile the Fed has made it clear that it‘s tolerant of inflation running well over its supposed 2% target, which means PE multiples will likely come down significantly from the S&P 500’s current run rate ratio of nearly 25. Between the inflationary years of 1971 and 1975, nominal S&P 500 earnings were up around 68% (!) yet the S&P 500 declined by around 26% (and massively more adjusted for inflation). Why? Because inflation drove the market-wide PE ratio from around 18 in 1971 to around 8 in 1974. While I’m not looking for that PE for this market (after all, 2.7% inflation isn’t the mid-to-high single-digit average of the early ‘70s), 17.3x is a logical target (as I explain below) and that would mean a drop of over 30% in the S&P 500 assuming the “E” doesn’t decline; if it does (as happened when the 2000 bubble burst), the decline will be much worse.
According to Standard & Poor’s latest estimate dated January 22nd, the Q4 2025 S&P 500 operating earnings estimate is $70.06, which is $280.24 annualized. The S&P currently sells for almost 25x those annualized earnings, yet the traditional “rule of 20” (which says that its PE ratio should be 20 minus the current 2.7% rate of inflation) would put a 17.3x multiple on them, thus bringing that index down to just 4848 vs. the current 6939, a drop of over 30%. Meanwhile, Trump’s tariffs are forcing almost every U.S. company into a more expensive supply chain, thus pressuring profit margins for those already expensive stocks. And if the courts invalidate the “broad” (non-sector-specific) tariffs Trump instituted under IEEPA, he’ll just re-institute most of them via other means(albeit, perhaps after a brief pop higher in the stock market).
That covers the shorts. Now for the longs…