Investment legend Jeremy Grantham sees a gloomy outlook for financial markets at the moment. Grantham speaks of a “super bubble” that is working on its “last trick,” referring to the short rally in recent weeks that has lured investors back in.
On the way to a super bubble
Jeremy Grantham is at least convinced that the past rally was a so-called bear market rally. A brief rebound during the bear market that wrongly gives people the idea that the misery is over.
In a NEW PAPER dated Wednesday, August 31, Grantham writes that the super-bubble about to burst is an event that cannot be compared to anything. Yet Grantham attempts to compare the current scenario with previous superbubbles.
“One of the characteristics of a superbubble is a bear market rally after the initial phase of declines, which occurs before the economy appears to be in trouble.
In all three previous cases of a superbubble, the market recovered a bit from the losses, lured investors back in, only to begin another sharp decline. Last summer’s rally fits that pattern perfectly,” said the investment legend.
All markets feel the pain
It is not only bitcoin and the crypto market, which have lost more than 50 percent as of the start of 2022, that are suffering. Equity markets also have to write down mostly red figures for this year. After the provisional bottom in mid-June, optimism seemed to be creeping back into the market. All financial assets were beginning to recover and there was optimism about falling inflation.
The reality, however, is that U.S. inflation is still at 8.5 percent and the Federal Reserve wants to do everything it can to bring it back to the 2 percent target. That intention was reiterated last weekend at the Jackson Hole Symposium. Shortly after the speech by Federal Reserve Chairman Jerome Powell, all markets began a new plunge.
It seems likely that we will have to deal with interest rate hikes for at least the next few months. A policy choice by the Federal Reserve needed to bring inflation back to more manageable levels. The strong job market in the United States makes it relatively easy for the Federal Reserve to sustain that in the coming months without killing the economy.
Grantham takes us into the past
In his new paper, Grantham also dives into history to show that a bear market rally is more common during superbubbles.
During the stock market crash of 1929, with the market hitting a provisional low in November of that year, things also rebounded by 46 to 55 percent heading into April 1930. Then the next declines began.
Exactly the same thing seems to be playing out now with bitcoin. After all, from June’s provisional bottom of $17,600, bitcoin also posted a price gain of over 40 percent with the price reaching $25,000.
Also in 1973, the S&P 500 posted a 59 percent price gain from the bottom, only to begin another decline.
Grantham’s message, above all, is that we should not rejoice too soon at every upturn and look at things realistically. Macroeconomically, the situation still looks shaky and there are few arguments for a sustained rebound in the market.
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