(Spy) – Market is in great shape, says Perma Bear Jeremy Grantham: ‘Get ready for an epic finale’
In almost Shakespearean fashion, a perma bear and a known pessimist Jeremy Grantham He said markets are in a big bubble in a note on Wednesday, and warned of significant turbulence ahead.
What is a super bubble? Well, let’s get into it.
A typical bubble occurs when prices are growing rapidly while investors are ignoring serious risks, which eventually causes the bubble to burst and thus prices fall. In those typical cases, the indicators increase to 2 standard deviations from the most recent average price.
Grantham says the number rises to 2.5 or more in a super bubble. When stocks recovered from early pandemic lows, the market was at that point in 2021.
“There are only a few market events in the investor profession that really matter, and one of the most important are the cool bubbles,” Grantham said. “These wonderful bubbles are events like no other: while there are only a few in history that investors can study, they have clear common features.”
One such characteristic is the bear market bounce that occurs during the initial crash phase of a crash but before the economy clearly begins to deteriorate, as it typically does when superb bubbles deflate.
“Get ready for an epic finale – if history repeats, the play will be a tragedy again. We must hope this time in a secondary period,” the GMO CEO said.
History of Superbubbles: Of course, the life pessimist refers to the great financial downturn of 1929, 1973 and 2000. In each downturn, the market recovered about half of its losses before falling to new lows.
In each of the three previous cases, a price rally helped recover more than half of the market’s initial losses, sending naive investors back just as the market started to fall again.
This summer’s gathering was just right for this style.
- From the November low of 1929 to the high of April 1930, the market is up 46% – a 55% rebound from the loss from the peak.
- In 1973, the summer recovery rebounded after the initial decline of 59% of Standard & Poor’s 500 spy Total loss from the top.
- In the 2000 tech bubble, the Nasdaq regained 60% of its initial losses in just two months.
- In 2022, at its intraday peak on August 16, the S&P index recovered 58% of its losses since its lowest level in June.
“So we can say that the current event, so far, looks eerily similar to these other wonderful historical bubbles,” Grantham said.
The last word: The three major asset classes – housing, stocks and bonds – were historically significantly overvalued at the end of last year, according to Grantham, making the current super-bubble the most dangerous combination of elements that caused past brilliant bubbles.
“Given all of these negative factors, it is not surprising that metrics of consumer and business confidence are testing historic lows,” he wrote. “And in the technology sector, which is the leading center of the US (and global) economy, hiring is slowing, layoffs are on the rise and CEOs are increasingly preparing for a recession.”