Rickards Warning: Avalanche Alarm for Market Crash & Nvidia Bubble

Rickards Sounds Avalanche Alarm James Rickards, through DailyReckoning.com, has issued a warning about a potential market crash. He recalls the mini-crash on Aug. 5, which seems to have been forgotten by investors due to the prevailing 'buy the dip' mentality. Rickards predicts that investors may receive a harsh reminder of market volatility on Wednesday, Aug. 28, and that this time, the impact could be far worse.

Why are Stocks Rising?

Rickards explains that the current market surge is due to a bubble. He points out that the S&P 500 is heavily influenced by the top 10 stocks, which account for about 30% of the index. These stocks, including Apple, Microsoft, Nvidia, and Google (Alphabet), are responsible for most of the market's gains this year. However, the overall picture is distorted as more stocks in the S&P 500 are down this year than up.

The Nvidia Bubble

Nvidia, a market leader, has benefitted from the recent hype around artificial intelligence (AI) and generative pre-trained transformers (GPT). This has led to a surge in demand for Nvidia's chips. However, Rickards questions whether investors truly understand what GPT is, or if they are simply buying into the hype to avoid missing out on potential gains. This buying frenzy creates a positive feedback loop, further driving up the stock price. Institutional investors, including large index funds like Vanguard, State Street, and Fidelity, have also heavily invested in Nvidia. As they buy more Nvidia stock, the price increases, encouraging further purchases. This self-perpetuating process is how bubbles form.

The End of All Bubbles

Rickards warns that all bubbles inevitably end in a crash. While it can be difficult to predict when a bubble will burst, he points to several indicators suggesting that Nvidia's valuation is exceedingly high. Its P/E ratio is 75, meaning investors are willing to pay $75 for each dollar of earnings. Furthermore, Nvidia's CEO and CFO have been selling hundreds of millions of dollars worth of shares. While this could be part of a regular selling schedule, Rickards has found other coincidences that suggest these insiders may be selling for a reason. He identifies five major reasons why he believes Nvidia stock is about to take a hit.

Peak Nvidia?

Despite the high demand for Nvidia chips, Rickards believes that demand has peaked and is shifting to other chipmakers. He points to evidence that companies like Google and Amazon are increasingly designing their own AI chips in-house. This allows them to train AI models more cheaply and become independent of Nvidia. Moreover, Nvidia's chips are often more powerful than necessary for these companies' AI needs, making them an expensive and energy-consuming overkill. With Nvidia's stock priced for perfection, any less-than-perfect news could negatively impact its value.

The Potential Avalanche

Rickards warns that a significant drop in Nvidia's stock could trigger a chain reaction in the market, leading to losses of 30%, 50%, and even 80% among some of the biggest tech stocks. This could significantly impact major stock market indexes and take a long time to recover. He likens the causes of market crashes to snowflakes that can trigger an avalanche. A large amount of snow can accumulate before one final snowflake causes a chain reaction. In this scenario, Nvidia could be the snowflake that triggers a market avalanche.

Bottom Line

While Rickards is not advising panic, he is encouraging preparedness for a potential market avalanche. If it doesn't occur, investors can continue to enjoy the market ride. However, if an avalanche does happen, those who heeded the warning will be glad they did. What are your thoughts on this analysis? Do you agree with Rickards' predictions? Share this article with your friends and discuss. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6pm.