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ACCORDING TO GMO investment strategist Jeremy Grantham, we’re in the midst of a rare “superbubble,” which he defines as a three-sigma event. Three sigma is a statistical term in probability, referring to an event which should occur less than 0.3% of the time or about once every 333 years.
Calling a bubble, let alone a superbubble, can be hazardous both to one’s reputation and one’s wallet. Even if Grantham’s call is correct, using that information to make money—or avoid losses—is easier said than done. Anyone who tried shorting the Nasdaq in the late 1990s can attest to that. Trying to time the market by selling out of stocks is a fool’s errand.
Grantham contends that this is the mother of all bubbles—a bubble in stocks, bonds, real estate and commodities. I’m not sure I agree with him about commodities. Still, it seems bonds, real estate and stocks—particularly U.S. growth stocks—are priced for perfection.
What follows is a condensed story of how we got here. To be clear, this is my view, not Grantham’s.
Day 1: In the beginning—circa 2008—the Fed said, “Let there be zero interest rates.” It came to pass and the Fed saw that it was good.
Day 2: The Fed embarked on quantitative easing (QE) and forward guidance, promising to keep rates low for as far as the eye could see. The potent triad of zero short-term rates, QE and forward guidance gave birth to the first bubble—the bubble in bonds. As Treasury yields cratered, income-seeking investors were pushed further out on the risk spectrum—first investment-grade corporate bonds, then junk bonds and ultimately into stocks.
Day 3: As credit spreads narrowed, the yield on U.S. junk bonds reached a nadir of 4%. Outside the U.S., government bond yields turned negative. Yield-starved investors held their noses and bought stocks. As share prices began their long ascent, the wealth effect was reborn. The Fed looked upon what was happening and saw that it was good.
Day 4: With the price of money near zero, investors succumbed to the original sin—the misallocation of capital. Companies with no profits raised record amounts of cash through public stock offerings. SPACs—special purpose acquisition companies with no profits and no business plan—were warmly embraced by investors. Corporate officers resorted to financial engineering, borrowing hordes of cash to buy back stock rather than invest in their business. The Fed looked the other way.
Day 5: Easy money, in the form of low interest rates, made its way to Main Street. Thirty-year mortgage rates fell to once unthinkable levels. This fueled another bubble in housing prices, the second in under two decades. The S&P/Case-Shiller U.S. National Home Price Index recently reached a level 50% higher than in 2006, the peak of the last housing bubble. Household net worth soared. The Fed saw that it was good.
Day 6: A pandemic appeared out of nowhere. In a frantic attempt to save lives, the economy was shuttered. The stock market cratered and an economic depression loomed. Emboldened by its recent successes, the Fed leapt into action with the aplomb of a superhero. In conjunction with aggressive fiscal measures, money supply ballooned. Plunging share prices were stopped in their track, marking the shortest bear market in history. The Fed, once again, had saved the day.
Day 7: Seeing all the good it had created, the Fed rested on the seventh day. The serpent of inflation, meanwhile, began to scheme.
With bond rates so low and expectations that rates would rise, I don’t understand why anyone would be in bond funds. You cannot time the stock market, but sometimes timing the bond market seems reasonable.
I would also include the huge deficits run by Obama, Trump and Biden. The cash raised contributed to the inflation in assets and commodities that we see today.
I’m tolerant of all views, from bear to bull and everything in between, but:
1) Let’s acknowledge that Grantham had been calling for a bull market since…forever? Sure, he’ll be right one day, but it’s not like him calling this a “superbuibble” really means anything.
2) What does this passage mean: “Grantham contends that this is the mother of all bubbles—a bubble in stocks, bonds, real estate and commodities. I’m not sure I agree with him about commodities. Still, it seems bonds, real estate and stocks—particularly U.S. growth stocks—are priced for perfection.” The context is that John agrees that bonds, real estate, and stocks (but not commodities) are in a bubble, but the words (“perfection”) suggest that the pricing is fair…I don’t understand.
3) Most of the articles here on HD return to principles of staying the course, using index funds, diversifying the portfolio. But what is John’s recommendation to invest in this bubble or superbubble market? It doens’t have to align with other contributors, because like I said, I’m interested in all views, but this article seems to present a challenge but not suggest a few strategies to meet the challenge, which is unlike HD posts.
Not trying to speak for the author, but for #2, I believe when he says stocks/bonds/real estate are “priced for perfection,” he is not implying they are “perfectly” or “fairly” valued, but that conditions would have to be perfect going forward to maintain the current prices. As for commodities, I also believe the author advocates investing in gold based on previous HD posts. Not sure if that plays into his assessment, consciously or unconsciously, but just thought I’d mention.
I agree with your point about #3, though it may have been the author’s intention for the reader to draw their own conclusion. If I had to guess, I would bet his intended conclusion is, “we’re screwed, but keep investing anyway.”
Raising interest rates to fight inflation is appalling. It just throws people out of work who did nothing to cause it.
The Fed should raise tax rates on the top 0.1% instead. Overpaid CEOs who are actually responsible for raising prices will quickly stop that and end inflation.
Wow….. Find a high school student who has taken the Intro to Business course to break things down for you. You are just regurgitating MSNBC talking points…….
And what is the inflation solution, pray tell? Without regard to its political popularity, what is the solution that will gradually turn things to the mean?