Stretched Asset Prices... Everywhere. When Will It Bust?

Jeremy Grantham has lived through (and called) several modern booms and busts such as the dot-com crash in 2000, the market peak in 2008 and the subsequent low of 2009.

In January, he wrote an investor letter named "Waiting For the Last Dance" in which he warned about stretched prices across multiple asset classes.

"The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000." Jeremy Grantham

According to Grantham, bubbles are easy to see; it's knowing when the bust comes that is trickier. Markets peak when investor optimism is at its highest and any cause for downside is ignored.

Right now, Grantham believes that the stimulus, vaccine optimism and the ongoing economic recovery have enabled investors to buy some time. Yet, serious issues such as rising interest rates, sustained inflation, labor shortages and exploding commodity prices could trigger the next fall.

"What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven't even thought of will come out of the woodwork, and you had no idea it was even there." Jeremy Grantham for Reuters by Chris Taylor

Compared to any other previous bubble bursting, Grantham believes there will be an enormous negative wealth effect this time.

"It's the first time we have bubbled in so many different areas – interest rates, stocks, housing, non-energy commodities. On the way up, it gave us all a positive wealth effect, and on the way down it will retract, painfully." Jeremy Grantham for Reuters by Chris Taylor

The famed investor now believes the best place to invest your money is in value stocks and emerging markets as these are cheaply priced.


BENCHMARK'S TAKE

  • Rising home prices and a stock market at record highs on stretched valuations have partially been enabled by an extremely dovish FED and supportive governments
  • Elements contributing to rising prices may not vanish any time soon as U.S. states that stopped distributing federal unemployment benefits saw no clear jump in employment versus states that did

    "We find only a marginal effect [...] As such, benefits discontinuation may end up doing more bad on the personal income ledger than good on the employment ledger of the economy." Gregory Daco, chief U.S. economist at Oxford Economics
  • We are therefor still cautious with technology stocks that are trading at above-average multiples and we closely watch inflationary signals. We also watch the FED's moves as a minor reduction in liquidity could wreak havoc on markets and affect richly priced assets the most
  • For the moment, we are focussing on cheaply valued Chinese stocks, European tech and gambling stocks and reasonably valued U.S.-listed technology companies. We also have a large stake in a banking and a DOW Jones index fund

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We have invested in over 45 stocks throughout North America, Latin America, Europe and Asia. Typically, we target fast-growing companies (U.S. and global) with a market cap between $ 1B and $ 100B.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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Photo by Pawel Czerwinski on Unsplash.