The most notable quote from this interview with Jeremy Grantham at Reuters is this one:
Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier.
There aren’t any elevator operators these days so that strategy for deciding when to get out is shot. His bottom line is this:
But this bubble is the real thing, and everyone can see it. It’s as obvious as the nose on your face.
If he’s right it may not be a particularly merry Christmas.
But are we any more than spectators?
40% of U.S. equities are now owned by foreign investors.
30% by retirement accounts such as IRA s, and the rest by the nosebleed rich.
Of concern is the amount of equity now purchased on margin, that could evaporate very quickly.
https://www.taxpolicycenter.org/taxvox/who-owns-us-stock-foreigners-and-rich-americans
Reversion to the mean is not like a law of physics, but empirically asset values do tend to revert. As far as timing, who knows? In my business I call them musical chairs deals.
What is interesting, and scary, is not just the laundry list of perceived goldilocks-status factors driving valuations, but that supply and demand is involved. eg demand for equities vs fixed income instruments is being driven in part by artificial constraints on the price of debt: yield chase eg pension and endowment portfolio managers increasing their allocations to alternatives: yield chase
For those with an interest in the academic thinking. An age old debate is whether supply and demand do (or should) affect valuations. S&D is an irrational approach. DCF’s and the like are coldly analytical and, supposedly, shouldn’t be affected by S&D. But they are. And its scary. There may not be elevator operators, but there are hairdressers…………….
This comment comes with this caveat — with markets the most painful lesson is saying “its different this time” one can look pretty foolish soon after.
But, the current situation does look different then 1929 or 2000, market tops that were followed by a deflationary busts. In American history the situation looks more akin to 1919 or 1944-1946; where the defining factors are large increases in money supply, government deficit spending, and shocks from a semi-“command” economy due to a national emergency. It wasn’t a pleasant period for equities during those periods in inflation adjusted terms, but they weren’t bubbles that people read from textbooks either.
The analogy to 1919 or 1944-1946 has one big difference, back then, this country ran large trade surpluses (meaning it had excess production capacity) and equities were not wildly overvalued. The mix of large increases in money supply, government deficit spending, large trade deficits, and overvalued equities is rare in American history — its more something seen in Latin America…
“…the current situation does look different then 1929 or 2000, market tops that were followed by a deflationary busts…”
In 1929 the money supply was dramatically contracted. See: Friedman and Schwartz – A Monetary History of the United States.
In 2000 there was a narrower issue: dot coms were wildly overvalued, driven by mountains of (early stage venture) capital, media hype and a trading vs investing mentality. That sounds a lot like today.
The analogy to…..1944-1946 has one big difference, back then, this country ran large trade surpluses..”
And another, lasting well into the 50’s. Europe and Japan’s productive capacity was decimated, so robust GDP growth in the US and associated equity appreciation were linked. It was real.
“The mix of large increases in money supply, government deficit spending, large trade deficits, and overvalued equities is rare in American history — its more something seen in Latin America…”
Truer words have never been spoken.