Jeremy Grantham of GMO: “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.”

by essentialinvitation

A very thought-provoking piece by Jeremy Grantham that I thought was worth of discussion on this subreddit:

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.

Grantham still finds it very difficult to time a bubble, even when he feels certain he’s looking at one right now, because it’s so tough to call the top. But he sees some interesting characteristics:

Either way, the market is now checking off all the touchy-feely characteristics of a major bubble. The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears. In 1929, to be a bear was to risk physical attack and guarantee character assassination. For us, 1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. But in the last few months the hostile tone has been rapidly ratcheting up. The irony for bears though is that it’s exactly what we want to hear. It’s a classic precursor of the ultimate break; together with stocks rising, not for their fundamentals, but simply because they are rising.

Another more measurable feature of a late-stage bull, from the South Sea bubble to the Tech bubble of 1999, has been an acceleration3 of the final leg, which in recent cases has been over 60% in the last 21 months to the peak, a rate well over twice the normal rate of bull market ascents. This time, the U.S. indices have advanced from +69% for the S&P 500 to +100% for the Russell 2000 in just 9 months. Not bad! And there may still be more climbing to come. But it has already met this necessary test of a late-stage bubble.

And then his recommendation at the end:

Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.

I don’t understand everything that goes into Grantham’s piece, but he takes such a historical and experienced approach to giving context to the current stock market that I think this is worth a read for anyone who’s relatively new to investing and wants to experience some battle-hardened weariness when looking at Dow 30k.