Investor Jeremy Grantham of GMO is warning about the Superbubble that is comprised of four Bubbles where an epic crash in markets might already be underway in 2022! I explain this Vampire Phase of the Bubble you won’t want to miss!
-Jeremy: Superbubbles Everywhere!
-Bubble Signs And Market Indicators
-Old Fogeys’ Bearish Advice
-The Destruction Of Wealth Is Coming
-Opportunity To Build Generational Wealth
-2 Sigma Bubble & 3 Sigma Superbubble Definition
-Real Estate Bubble 1
-Stock Market Bubble 2
-Bond Market Bubble 3
-Commodity Oil Food Bubble 4
-The Fed Doesn’t Get Asset Bubbles
-Vampire Bull Market Bubble Phase
-What Should We Do As Investors?
On January 20, 2022, Jeremy Grantham released his latest GMO letter entitled “Let The Wild Rumpus Begin!” He predicts that assets cannot sustain current valuations and will revert to the mean, because all previous bubbles and superbubbles have before.
The four bubbles that have eclipsed normal 2 sigma bubble status and have become 3 sigma superbubbles are in 1) stocks, 2) real estate, 3) bonds, and 4) commodities. This is foreboding an epic crash in markets worldwide.
There have been 5 superbubbles: 3 stock market in 1929 and 2000 in the US, and 1989 in Japan, and 2 real estate market in 2006 in the US, and 1989 in Japan as well.
One of the bubble indicators that support this superbubble thesis include the Shiller Price To Earnings (PE) ratio that had recently hit 40 and now is around 36.
The Buffett Indicator is the Wilshire 5000 to US GDP suggests the overall expensiveness of the market, and that came in at 253% in Q3 2021 per the St. Louis Fed. Buffett believes a fully priced market is between 100-120%, so it’s more than double that level today. Another Buffett Indicator version suggests markets had hit 75% above the long-term trend line, which is 7% more than what the Dotcom Bubble had been at. That was only one bubble back then, and now we have compounded the effects of multiple bubbles happening simultaneously.
Jeremy is predicting that the S&P 500 could drop to as low as 2500 after having peaked at around 4800. This is a 48% decline! But he said that market declines don’t usually stop at the long term trend line but often overshoot further down before going up again. Others believe the markets could decline by 80% as the Fed tightens its monetary policy to fight inflation.
I found it down to earth how Jeremy said that during a bubble, nobody wants to hear a bear case, because it’s the worst kind of party-pooping. The especially don’t want to hear bearish advice from “old fogeys who just don’t get it.” Jeremy sympathizes with current bubble speculators because when he was young, he also didn’t listen. Now that Jeremy Grantham is 83 years old, he believes it’s his responsibility and job to warn people because he no longer has career risk.
This is unlike a lot of experienced professionals who probably know about the dangers of investing in an overpriced market, but they seem to prefer to dance off the cliff in safer stocks than risk their careers and jobs being taken away.
I think Jeremy’s warning is in line with what 98 year old Charlie Munger said, which is he believes the current era is even “crazier than the dotcom era.”
So even though Jeremy and Charlie might be a bunch of old fogeys, I think their wisdom is worth listening to and heeding if we want to make it out of whatever recession or depression might come along soon.
Jeremy laments the far-reaching implications of bubbles and asset prices because more and more people are getting less and less income and assets, while the rich get richer. Jeremy asserts that the rich spend little to none of their increased wealth and income whereas the poorer half spends almost all of it on things like housing and food.
We have the most income inequality we have ever had, and this is one of three major recession signs that I talk about in my video.
Even though bubble pricing makes us feel richer, like our perceived wealth goes up where Americans had a net worth of $142 trillion as of September 2021, the problem is that this is sort of artificial since it’s not sustainable. When the market corrects back to the mean, there could be total wealth losses of $35 trillion in the US alone, Jeremy suggests.
High prices in assets cause resentment in society because our wealth is not able to compound as much at bubble pricing and our income also falls behind. Since 1965, average home values have increased by 118% while median household income went up by just 15%.
So it’s like a death spiral of decreasing wealth and income the more that bubbles drag on and the higher prices go. When asset prices tumble down, the pain will be magnified that much more from elevated levels. We should brace ourselves for the potential reality that our wealth could be reduced by a third or half or more during the next major market reset.
As a millennial, I appreciate how Jeremy relates to us young people. If we’ve been trying to buy our first house or build our investment portfolio, it’s been too expensive to even get started. So we feel let down and we know it.
I believe there is hope because we might be coming upon an opportunity to build generational wealth if wonderful companies’ stocks go on sale. And if we have the cash to buy these stocks on sale, then this could be building our wealth that will last our future generations.
So I think it’s time if you have any student loans or other debts, to get them under control, and bulk up on your cash and learn how to invest. I have many videos and playlists on how to invest like Warren Buffett and Charlie Munger. Check out my video on how I analyze and pick stocks like these GOAT investors.
Jeremy and GMO define a bubble as a 2 sigma deviation from trend, and a superbubble as a 3 sigma deviation from trend. In a normal distribution using fair coin tosses, a 2 sigma event would happen in 1 out of 44 events, and a 3 sigma event would happen in 1 out of 100 events. But it turns out that we as humans are way more economically inefficient and irrational. 2 sigma events actually happen every 35 years rather than 44 years. And 3 sigma events happen 2-3 times as frequently as 1 in every 100. So that could suggest a 3 superbubble every 33 or 50 years!
The 3 sigma superbubble could be on the magnitude of what happened leading up to the Great Depression or what happened to Japan, where their stock and real estate markets still have never recovered from their 1989 peaks.
According to Jeremy, we are “participating in the broadest and most extreme global real estate bubble in history” as the first bubble he dives into.
Jeremy said that some countries’ real estate bubbles are worse than in the US, such as Australia, Canada, the UK, and China. The depressed real estate market in China could have worldwide implications with the potential to have a domino effect.
In the US, house prices have been at the “highest multiple of family income ever, after a record 20% gain last year, ahead even of the disastrous housing bubble of 2006.” Jeremy has deduced that the house price to income ratio could be as high as 5.5 now. This is pretty bad.
Even if the ratio were to go down to 4, that would still mean a 27% loss across home values or over $11 trillion.
For bubble #2 in stocks, Jeremy believes “we have the most exuberant, ecstatic, even crazy investor behavior in the history of the U.S. stock market,” and that we have had “the greatest buy-in ever to the idea that stocks only go up.” All of this is a sure sign of a bubble if we believe Jeremy.
The penultimate phase of major bubbles is characterized by a blow-off, where we see an acceleration of stock prices until they start blowing over. This has happened in historical superbubbles and might be happening again now.
The biggest and highest quality stocks carried the markets in 2021 in a sign of narrowing market breadth, which I also discussed in one of my videos where big tech had been carrying the market to all time new highs (just as insiders were selling record levels of stock!).
First, speculative stocks and cryptos decline since they are the “riskiest,” following by “safer” blue chip stocks holding up the markets until they can’t anymore when investor sentiment turns sour.
I won’t bore you with tales of the speculative madness of fantastical anecdotes in meme stocks (Gamestop, AMC), the crypto craze and dogecoin, and Hertz and Avis rental car companies since you probably already know about these epic stories. We will have a lot of meme stories that will probably be the basis of The Big Short II or The Wolf of Wall Street Bets movies in the future.
The third bubble is the highest price bond markets in the US and most other countries with the lowest rates we’ve ever seen in human history. These rates might even be negative with how much inflation we have going on.
If US treasury rates rise enough to a real 1.3%, and corporate debt spreads rise 0.5% on top of that, then that could potentially lead to $6 trillion in losses on debt securities (another domino effect IMHO).
It’s good news that German bond (bund) yields reached positive territory, but the bad news is if you own any bond securities or funds, then the prices of those will decline as yields rise. This is not a good situation for people who may own bonds, especially for those who may be retired.
The fourth bubble is in overpriced commodities, including most important metals, oil/gas, and food. While gasoline is not as bad as it was in July 2008 at $4.11/gal compared to now at $3.40/gal, it’s still getting worse.
The UN’s Food Price Index shows that food prices are at the highest they have ever been. In the US food supply chain, we’re feeling the pinch if you like things like eggs, meats, sports drinks, and refrigerated dough. So as food becomes more spare, we’re paying higher prices for food.
Jeremy concluded: “The combination, which we saw in 2008, of still-rising commodity prices with a deflating asset price bubble is the ultimate pincer attack on the economy and is all but guaranteed to lead to major economic pain.”
Finally, you might ask the question of how did we get to the point of allowing superbubbles to happen? Jeremy would respond, “Will The Fed Never Learn?” because he said that The Fed doesn’t seem to get asset bubbles. They seem to encourage and facilitate them with dovish economic policy dating back to Alan Greenspan and Ben Bernanke, and Jay Powell has been continuing the quantitative easing monetary spigot pumping tons of money into the economy.
Per Jeremy, “In fact the only “lesson” that the economic establishment appears to have learned from the rubble of 2009 is that we didn’t address it with enough stimulus” as The Fed’s balance sheets are at the highest they have ever been.
But as Jeremy laments, The Fed seems to settle for lifeboats rather than avoiding financial icebergs. It is such a coincidence that Jeremy mentioned an iceberg/titanic reference just like I did in my 3 recession signs video. Great minds think alike?!
One of Jeremy’s best metaphors is in how he described the “vampire phase of the bull market, where you throw everything you have at it: you stab it with Covid, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation – which has always killed P/E ratios before, but quite uniquely, not this time yet.”
And just when we’re beginning to think that the vampire bull market is “completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies.”
So what should we do as investors? Jeremy suggests avoiding US equities and emphasizing value stocks from emerging markets and from Japan, and he also likes cash, gold, and silver. He also shared a GMO table of how they are managing their money and reducing risk in the current 2022 equity superbubble as well as what they did in prior superbubbles.
I also suggest you check out my playlists of videos about how to invest like the best investors invest.
I think we should keep studying history and preparing ourselves for what could be coming. I wish you well on your journey to surviving whatever market crash happens so you come out on top and have more wealth than ever in the future when the economy and markets recover.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki