So what do skyscrapers have to do with equities?

Lots as it turns out. There has long been anecdotal evidence of a relationship between the construction of skyscrapers and equity market crashes. The argument centres around the easy availability of capital during boom times; many unrealistic projects are able to acquire funding, due to the overall recklessness of investors, looking for even larger returns. We’ve long seen examples of such behaviour during asset bubbles.

Here are few examples:

There are many more examples but lets turn our attention to The Shard. Under construction at Lonodn Bridge Station in Southwark, London, The Shard will be the tallest skyscraper in Europe after completion next year. The chart above shows the FTSE 100 stock index, with a horizontal line drawn from January 2010, effectively when construction started in earnest (before then they were clearing the site).

It will be interesting to see what 2012 brings UK investors, but if the skyscraper indicator is consistent, an equity market crash or sharp correction is in the cards.

If you’re unconvinced and are looking for more evidence, Löffler (2011) presents an interesting academic paper.

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