Bubble Spotting

23 Jul

Bubble Spotting

Three Financial Bubbles at Once is Playing with Fire!

Jeremy Grantham has appeared in these comments several times over the years.  He is a co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based investment firm with some $62 billion under management.

Much of Grantham’s reputation and success rests on his track record of identifying speculative financial bubbles, among them Japan’s stock market bubble of the 1980s, the dot com bubble, and the housing bubble.

In letters to GMO clients, Grantham has often wondered how such bubbles are missed. “I described it as being like watching a train wreck in very slow motion…. It’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored…”

We wrote about Grantham’s latest bubble-spotting just last week.  Featured on the PBS Frontline documentary “The Power of the Fed,” Grantham said, “They [the Fed] have the housing market, the stock market and the bond market all overpriced at the same time, and they will not be able to prevent, sooner or later, the asset prices coming back down. So, we are playing with fire because we have the three great asset classes moving into bubble territory simultaneously.” 

Now, thanks to a Reuters interview this month, we can share more of his insights about today’s precarious stock market bubble.  This, he says, “could well be the most important event of your investing lives.”

When Do They Pop?:

“Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier. You see it when the markets are on the front pages instead of the financial pages when the news is full of stories of people getting cheated when new coins are being created every month. The scale of these things is so much bigger than in 1929 or in 2000.”

Today’s Stock Market Valuations:

“Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it.

“My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.”

What Pops the Bubble?

“Markets peak when you are as happy as you can get, and a near-perfect economy is extrapolated into the indefinite future. But around the corner are lurking serious issues like interest rates, inflation, labor and commodity prices. All of those are beginning to look less optimistic than they did just a week or two ago….

“What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven’t even thought of will come out of the woodwork, and you had no idea it was even there.”

What Will It Look Like When the Bubble Pops?

“There will be an enormous negative wealth effect, broader than it has ever been, compared to any other previous bubble breaking. It’s the first time we have bubbled in so many different areas – interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all a positive wealth effect, and on the way down it will retract, painfully….

“But this bubble is the real thing, and everyone can see it. It’s as obvious as the nose on your face.”

Isn’t it time to get some of your wealth off the bubble grid?  When the bubble pops there will be a stampede to the safe-havens of gold and silver.  We recommend you take advantage of today’s prices and beat the rush.