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#1 05-10-2021 18:30:30

johnedward
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Jeremy Graham: Stock market bubble will burst in a few weeks or months

Jeremy Grantham: The stock market bubble is going to burst in a few weeks or months


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Jeremy Grantham has made the study of asset bubbles a science, correctly predicting the evolution of Japanese, dot-com and real estate overvaluations. According to him, the current bubble in US stocks is unlike any other, but it will burst in a few months, if not weeks.

Grantham is co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. He was interviewed via a webinar on 20 October by Alex Shahidi, Managing Partner and Co-Chief Investment Officer at Evoke Wealth and ARIS Consulting, a Los Angeles-based asset manager, as part of his lecture series.

"We're in a bubble," Grantham said, "but it's unlike any other." The excessive bubbles in history have taken a great economic situation and extrapolated it into the future, based on the assumption that today's perfect conditions will continue.

But doing so today is the opposite of a bubble, Mr Grantham said, given that P/E ratios are at a high of 15% of their historical values ​​despite the sluggish economy.

Everything is overvalued, he said, but there is no way to tell when they will peak. To call this peak, it helps to look for signs of "crazy" behavior.

This is not what was lacking in the rally that followed the virus trough, he said. It was a late rally with a rapid rise in prices. Another sign of madness is the surge of interest in Special Purpose Acquisition Companies (SPACs), which he says are based on the following proposition: "Give me your money and trust me so that I 'do something useful with it."

"It's a real testament to the speculative nature of the market." He adds that the same is true of the valuations of Hertz and Tesla, the latter which he describes as big business but an unjustified stock at the current price.

"Stories are everywhere and are what we need for a bubble to burst." But, he said, it is an indicator but does not offer the certainty that we are close to breaking.

It could take weeks or months, he said.

You can't be as certain as in previous bubbles, Mr Grantham said. These bubbles must almost certainly collapse.

"I bet reality will catch up with the high P/E."

According to Grantham, a high P/E is an inherently dangerous and risky situation that relies on investor confidence. "If you break confidence and are grossly overvalued, you are opening yourself up to substantial declines."

Grantham runs a family foundation that focuses on investing in green energy, where much of his time, energy and passion is focused. But he studies the market intensely. The interview focused on climate change and capital markets, as well as the intersection of the two.

Overcoming the existential threat of climate change

Rising sea levels pose an existential threat to a large percentage of the world's population.

Over the next century, Grantham predicts that countries in Africa will be destabilized and that "big chunks" of the Indian subcontinent will be devastated. We will go from 1.5% of the planet that is uninhabitable to 16%, mainly near the equator. Two billion people, mainly in Bangladesh, Pakistan and India, will lose their homes. In total, five of Earth's eight billion people will be at risk, he said.

This will lead to immigration and pressure on Europe, which will become a big geopolitical risk and a "real threat to the well-being of society", he added.

But humans are quite capable of handling this "easily", Mr Grantham said. Yet in real life we ​​do not "behave". Those who understand and accept the threat of climate change must do everything in their power to use their influence, through political and media advocacy, for example. "You can never do too much," Grantham adds.

In 2008, he wrote an article on climate change. Since then, it was clear to him that oil stocks were going to struggle. Oil fell from 24% of the S&P 500 market cap in 1983 to 2.6%, which he said was the biggest loss in value in the history of the major groups in the index. Still, he admitted that he could never predict when this collapse would occur.

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