Jeremy Grantham, long-term investment strategist and co-founder of GMO, believes the market is entering the final act of the superbubble. According to him, only a few market events in an investor’s career really matter, and among the most important of all are super bubbles.
And, how are ordinary bubbles different from super bubbles? Here is what they are – Ordinary bubbles are, for us, those that reach a deviation of 2 sigma from the trend. Superbubbles reach 2.5 sigma or more. The real US superbubbles – 2.5+ sigma events – are 1929, 2000 and 2021. This is what Jeremy Grantham writes in his article, “Entering the Superbubble’s Final Act”.
Bear market rally from June lows: One such feature is the bear market rallying after the initial downgrade phase, but before the economy has clearly started to deteriorate, as is always the case when super bubbles burst.
In the previous three cases, this recouped more than half of the market’s initial losses, luring in unwary investors just in time for the market to fall again, but more sharply, and the economy to weaken. This summer’s rally has so far flowed perfectly into the pattern.
Inflation and economy: The US stock market remains very expensive and a rise in inflation like this year’s has always hurt multiples, albeit slower than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: between COVID in China, war in Europe, food and energy crises, record fiscal tightening, etc., the outlook is much bleaker than one might have expected. expect in January. In the longer term, a widespread and permanent shortage of food and resources threatens, all compounded by accelerating climate damage.
Also Read: Is the U.S. Economy Heading for a Major Economic Slowdown?
My theory is that breaking up these superbubbles takes multiple steps. First, the bubble forms; second, a setback occurs, as happened in the first half of this year, when some rift in the economic or political environment makes investors realize that perfection will, after all, not last forever, and that valuations down half a step. Then there’s what we just saw – the bear market rally. Fourth and finally, the fundamentals deteriorate and the market falls to a low.
Also Read: The Best Performing FAANG Stock and Biggest Loser of the Plot in 2022 So Far
The current superbubble features an unprecedented mix of cross-asset overvaluations (with bonds, housing and equities all critically overvalued and rapidly losing momentum), a commodity shock and Fed aggressiveness. Each cycle is different and unique, but each historical parallel suggests that the worst is yet to come. If history repeats itself, the play will again be a tragedy. Hopefully a minor this time around – 2000 was minor, 1972 major and 1929, of course, awful.
