The Three American Super Bubbles of 2022 - Svendsen Tech
Date of publishing: 2022-01-26. Last update: 2022-01-26.

Grantham's Three Super Bubbles of 2022

Yesterday, I read that the first 16 trading days in the US represented the worst start to the year ever in American history, based on the S&P500 index development.

A man with 83 years of experience, the investor veteran Jeremy Grantham, has made some gloomy predictions. He says there are currently three financial super bubbles in the American economy.

A bubble is defined as a deviation from a trend that is equivalent to double the normal variation, while a super bubble is when there is a difference of three times the normal variation. Variation is defined against the statistical concept of standard deviation.

The Bubbles

Chinese High Yield Graph

China High Yield

Graph from January 15, 2022.

In other words, this fountain of wisdom, that has been filling for 83 years, sees big problems. I remind myself that problems have solutions, so we should not despair. We will find solutions. But Grantham's conclusion is: Property super bubble, stock market super bubble and bonds/interest super bubble. Ominous to observe.

In addition to that, he talks of a bubble within raw goods. Food prices are high globally, for instance, but he does not see this as a bubble yet. He calls it a "half bubble".

One year ago, Grantham warned that the USA was entering the final stages of a stock market bubble. From the time that was published - on January 5, 2021 - the S&P500 index rose 20 % (22 % with dividends). People who listened to Grantham back then missed out on 20 % profits before the recent development.

Grantham has an interesting definition of what is known as a "successful bear market call". One that shows acumen: "Plainly and simply, it's that an investor will, sooner or later, be happy to have stayed outside the stock market. He will have saved money on not being invested and reducing risk or volatility by going in and out. This definition of success does not include a precise timing." (This was translated from English to another language and back; apologies for any inaccuracies.)

The broader stock market is not a bear market at this point, meaning down 20 % or more, but for the riskier stocks, such as the riskier tech stocks (down 39 %) and expensive software companies (down 23 %), the prediction already rings true. The popular "Ark" fund is down well over over 40 % since Grantham's warning in January 2021 at the time of writing.

This is the nature of stock bubbles. The riskiest stocks soar the most, but are also first to fall when the bubble bursts. Risk/reward is a well-known concept, but a lot of newcomers are just now learning about this - many the hard way.

Federal Reserve leader Alan Greenspan

Grantham gives the US Federal Reserve a large part of the blame. He calls former Fed boss Alan Greenspan "dangerously incompetent", because he in the 90's created the notion, in investors, that the Fed would rescue them if the markets collapsed.

Now the Fed has three simultaneous bubbles to handle. Grantham says "If this negative wealth and income effect is amplified by inflation from energy, food and other supply chain problems, we will be in serious economic problems."

Flower

Let's hope for the best. I am. I will just do my small part while life keeps unfolding, to the best of my abilities. One thing I take comfort in, is that (at least short- and mid-term) the sum of people and goods on the planet is exactly the same as it was before the financial crisis. The resources are the same. It's a systemic problem. The day before stock markets crash 20 % - and the day after - not much changed except numbers in a "game". There's a point here that I have problems stating clearly. Maybe you understand what I mean.

Of course, circumstances are peculiar in the midst of a pandemic and fiscal houses of cards. The pandemic affects supply chains in ways not seen before in modern times. If we enter a recession, somehow the numbers game that is our economy plays a great role in making life potentially suck for a lot of people, but we are still alive and most of us with roughly the same health, generally speaking, as the day before, or the month before.

US Federal Reserve Logo

To the US Federal Reserve, I can only advise to not panic (not that my opinion is of great significance). And, please, do not over-spend. Accept that it will happen, to some degree. We will recover - and eventually soar again. Human wisdom is growing. If only motivation and (moral) direction match the increase in knowledge, we can make a great society together. The heart of life is good. We must fight chaos. We know the difference between good and evil, and it is our duty before God/humankind/the biosphere to do good.

The upside, for us who mostly have stayed out of the markets, is that we can invest in stocks at more reasonable prices. But the overall well-being of humankind (and animals!) concerns me much more than the personal financial numbers on the screen that don't directly change my life, given my situation. Unfortunately, if you are somewhat egalitarian-minded, the differences in society increase during the "uprising" of the stock markets. With property, differences are less prevalent.

Be good so you deserve to be well.

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