Jeremy Grantham co-founded the investment firm GMO in 1977. He’s been around basically forever.
Grantham defines ordinary bubbles as those that reach a 2 sigma deviation from trend. Superbubbles reach 2.5 sigma or greater. The true U.S. superbubbles – 2.5+ sigma events – are 1929, 2000, and 2021. Surprisingly, he didn’t mention the 2008 financial crisis as a superbubble, maybe because it was a real-estate bubble debt crisis rather than a stock market bubble crisis.
Grantham has written a paper called “ENTERING THE SUPERBUBBLE’S FINAL ACT,” August 31, 2022.
**Only a few market events in an investor’s career really matter, and among the most important of all are superbubbles. 1 These superbubbles are events unlike any others: while there are only a few in history for investors to study, they have clear features in common.**
**One of those features is the bear market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst. This in all three previous cases recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken. This summer’s rally has so far perfectly fit the pattern....**
**The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing, and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness. Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come....** [end quote]
Anyone who is heavily invested in stocks should read this article, along with Mike Shedlock’s blog post.
The markets have finally absorbed the message of the Fed’s determination to fight inflation by raising the short-term fed funds rate and continuing Quantitative Tightening (which raises longer-term interest rates).
The recovery trend of the past few weeks has reversed. The bear market stock rally has fizzled out. VIX is rising. The Percent of S&P 100 stocks above their 200-day moving average is collapsing again.
The Fear & Greed Index has dropped into Fear. The trade is risk-off as stocks and junk bonds are dropping faster than Treasury prices. The USD is rising.
Gold, silver and copper are falling. Oil and natgas are in rising trends but gasoline prices are falling. Lumber prices are falling as rising mortgage rates are causing home construction to fall. Corn, which is part of many food products, is rising.
The Treasury yield curve has been rising for weeks. The bond market still believes that the Fed will be able to control inflation to around 2.5% over the long term, as the TIPS yield is rising in parallel with the Treasury yield.
The 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity is hovering above zero but will go negative if the Fed raises the fed funds rate to 3.5% as predicted by year end. The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity has been negative for a couple of months, which reliably correlates with recession in a few months. The Sahm Rule indicates that the U.S. is not in a recession at this time.
The strong employment report gives the Fed confidence that they can continue to tighten as planned without plunging the economy into recession.
The METAR for next week is rainy. All asset prices (stocks, bonds, real estate, etc.) will continue to decline. There’s no reason to expect the declining trend to pause or reverse. But there’s no sign of an imminent crisis.