GMO: We live in the age of the super bubble

The current superbubble is unprecedented: a mix of overvalued assets, a commodity shock, and an aggressive Fed…

The super bubble that surrounds the markets is referred to with his analysis by its legendary head GMO Jeremy Grantham.
More specifically, according to the 83-year-old Grantham“Only a few events in an investor’s career really matter, and among the most important are superbubbles.
These are events like no other:
There are examples that investors can study, they have clear common characteristics.
One of them is the bear market rally after a decline, with many investors trapped.
“This summer’s rally so far fits the pattern perfectlysays Jeremy Grantham
The US stock market remains very expensive, and a rise in inflation like this year’s always hits multiples (in terms of PE) – albeit more slowly than normal this time.
However, fundamentals have started to deteriorate dramatically…
The outlook is much bleaker than could have been predicted in January.
Long term, there is a widespread and permanent shortage of food and resources…
The current superbubble is unprecedented: a mix of overvalued assets, a commodity shock and an aggressive Fed… – every historical parallel suggests the worst is yet to come.

The times that really matter to investors

Most of the time (85% or so) the markets behave quite normally.
During these periods, investors (directors, clients and individuals) are quite happy, but unfortunately these periods do not really matter.
Only 15% of the time it matters, so investors get carried away and become irrational.
In 12% of cases, this absurdity is driven by over-optimism, i.e. meme stocks, frenzy of IPOs, like the last couple of years.
And, of course, panic follows…
This 15% is very different from the usual bull and bear markets.
Averaging the usual bull and bear markets with this handful of outliers dilutes the data and produces misleading signals.
“That’s why I strongly recommend that you treat superbubbles – with a sigma of 2.5 to 3 (ie standard deviation in the statistic) – as special, collectively unique circumstances.
It’s like there’s a phase shift in investor behavior.”
The results from this unique group of superbubbles (only three in the modern era in the US) are special indeed:

  • the much-discussed divergence between conservative and speculative stocks, bear market rallies;
  • the rapid onset of recession
  • the greatly increased chances of further unexpected financial and economic accidents.

We are going through such a period, we are experiencing a real superbubble.
“And the first thing to remember is this: The higher stocks go, the further they have to go.

Stages…

Grantham went on to explain the typical stages that super-bubbles go through when they collapse, noting that today’s economic environment closely resembles the historical pattern.
Firstlythe bubble is formed Secondlya reversal occurs, as it just did in the first half of this year, when some difficulty in the economic or political environment makes investors realize that perfection won’t last forever, after all, and valuations take a half-step back.
Subsequentlythere is what we just saw – the rally of a bear market.
Fourth and finally, fundamentals are deteriorating and the market is falling low,” he wrote.

Prepare for an epic ending…

The previous ones were overblowns had much worse subsequent economic prospects as they combined multiple asset classes: housing and equities, as in Japan in 1989 or globally in 2006.
Or they combined skyrocketing inflation and stock bubbles, as in 1973 in the US and elsewhere.
The current superbubble features the most dangerous combination of these factors in modern times:
all three major asset classes – housing, stocks and bonds – are historically overvalued.
Now we are seeing a burst of inflation and an interest rate shock, just like in the early 1970s.
At the same time, things are expected to get worse as we have a wave of revaluations in Commodities and Energy (as painfully seen in 1972 and 2007).
These shocks always cast a long shadow that suppresses growth.
“Given all these negative factors, it is not surprising that consumer confidence and business indicators will test new record lows.
And in tech, the backbone of the US (and global) economy, hiring is slowing, layoffs are rising and CEOs are increasingly preparing for a recession.
“Recently, we saw a bear market rally.
Every cycle is different and every government response is unpredictable.
But these few events seem to act according to their own rules, in their own play, which has apparently just stopped between the third and last act.
If history repeats itself, the project will once again be a tragedy,” concludes the 83-year-old Wall Street veteran.

He predicted a fall of -50%

It is recalled that Jeremy Grantham in another informative note had predicted a crash on the Wall with a 50% drop in shares…
While traditionally bullish and bullish on the markets since early 2021 a year ago it has turned highly pessimistic.
In early 2021 Grantham’s warnings of an impending crash turned especially harsh… and spectacularly wrong.
Remember, in January 2021, Grantham wrote that the bursting of this “great, epic bubble” would be “the most important investment event of your life”, followed by warnings of a “spectacular” crash in the next few months” which however he did not come…
But with stocks falling again on fears that Fed support will gradually wane, it didn’t take long for the 83-year-old Grantham to publish his revealing report, ‘Let The Wild Rumpus Begin’
He insists that we are experiencing a super bubble in the markets and believes that he is almost certain that this bubble will burst.
The stock barometer S&P 500 will collapse nearly 50% to 2,500 from an all-time high of 4,818, he said at the time (-40% from current levels).
It should be noted that the S&P 500 index is trading at 3,910 points.

www.bankingnews.gr


The article is in Greek

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