“I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions. My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.”
Grantham is really on point here says Cullen Roche (pragcap.com) in the edited excerpts he has taken from GMO Quarterly Letter (November 2013) in a post* on his site entitled Jeremy Grantham – the Market Bubble isn’t here yet, but it’s Coming….
[The following is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here – register here). The excerpts may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Cullen goes on to say:
I’ve added a few of the highlights in case you don’t feel like reading the entire thing (you can read the entire note here).
There isn’t a bubble in equities – yet:
“In equities there are few signs yet of a traditional bubble. In the U.S. individuals are not yet consistent buyers of mutual funds….There are no wonderful and inﬂuential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or in the U.S. in 2000, with Greenspan’s theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es.”
It’s not currently a bubble, but the bubble is coming:
“I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions. My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world, including emerging market equities, covering even more ground in at least a partial catch-up.”
Who’s to blame? QE and the Fed Chief, of course:
“And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience and, we the people, of course, will get what we deserve…”
When it blows up we’ll all get a chance to praise Janet Yellen for “fixing” it all:
“At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary ﬁnancial and asset class failure….”
The prudent investor should realize that stocks are badly overpriced now:
“In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so.
In our view, prudent investors should already be reducing their equity bets and their risk level in general. One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets. This market is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life, and with a Fed like ours it’s probably what we deserve. “
A dose of economic reality and an unhappy historical point:
“What can go wrong for the market? There is…for me a rather sinister slowing down of economic growth, most obviously in Europe but also globally, that could at worst overwhelm even the Fed. The general lack of ﬁscal stimulus globally and the almost precipitous decline in the U.S. Federal deﬁcit in particular do not help. What are the odds in the next two years? Perhaps one in four.”
Great thoughts. Always very thought provoking.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
* http://pragcap.com/jeremy-grantham-the-market-bubble-isnt-here-yet-but-its-coming (Copyright © 2013 All Rights Reserved))
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