A ‘Superbubble’ in U.S. Markets?

The global economy is teetering on the edge of recession, but markets need to brace for more pain, says Jeremy Grantham. This ominous warning comes as equity markets are reportedly diving and credit markets tightening alongside a severe crypto winter. 

Global Economy in Cross Paths?

Jeremy Grantham, a renowned investor, and co-founder of GMO has indicated that current signs point towards a worse economic situation than in 2007. In a statement to Reuters he said: 

“This is a more dangerous looking moment in global economics than even the madness of the housing bubble of 2007.” 

According to the legendary investor, the global markets are now entering the final phase of the collapse of the “Super bubble” in share, bond, and house prices. True to his earlier warnings, the U.S. market has slumped to its lowest since August. 

Its shares are down 18.5% so far this year. Financial market data indicates that World stocks dropped by 20% since the beginning of the year. The growth-heavy Nasdaq Composite also sank by 24%. 

These developments in the stock markets compare with the crypto market. It has been dumping since last November with top crypto assets like BTC and ETH trading at over 50% lower than their record high prices. This crypto winter is also expected to continue for a while longer as many people are battling financial pullbacks which are making them direct less money to the crypto space.

The Superbubble in Stock Markets

In a typical bubble, prices increase while investors ignore serious hazards. As a result, this causes the bubble to burst and prices to fall. The index usually exceeds two standard deviations over the most recent price average. 

In the case of a Superbubble, the number is increased to 2.5 or more. Essentially, a bubble is when the prices are high, and a super bubble is when the prices of assets are way off from historical values. Contrary to what has been experienced, the current superbubble features a spread in remarkably high prices across all asset classes. This scenario beckons an economic decline if past data is to be assumed.  

Jeremy Grantham wrote on August 31:

“The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation. With bonds, housing, and stocks all critically overpriced and now rapidly losing momentum, commodity shock, and Fed hawkishness . The worst is yet to come.”

Multiple Pain Points

When the superbubble spreads to more assets, such as housing, the result is marked by the recession. This scenario was demonstrated in Japan in 1989, the dot-com bubble of the late ’90” s and the U.S. blow-up in 2006.

Preceding the economic crash in 1991, Japan experienced inflated real estate and stock prices. The economic growth plummeted and bore the Lost Decade. Similarly, in 2006, the ever-skyrocketing housing prices resulted in the 2008 Global Financial Crisis (GFC).

An Economic splurge coupled with an inflation surge bears more harm than good. The high cost of food and energy could send the globe into civil unrest in the most vulnerable countries. With Europe sinking into recession and the renewal of antitrust action, long-term problems include and are not limited to a decline in global population, scarcity of resources, and climate change which could weigh on the Gross Domestic Product. 

No Need for Pessimism 

JP Morgan Strategist Meera Pandit has watered down Jeremy’s predictions in a new twist of events. According to her, the ‘froth’ has declined in several areas; hence investors shouldn’t rush into executing defensive strategies. She said in an interview with Bloomberg TV:

“There are still areas of froth in the market that we need to see come down, but a lot of that has taken place already. So I think we don’t want to be overly defensive or cautious.”

Consequently, all that can be done now is the adoption of healthy investing strategies. Calculate the risks of the assets you are willing to invest in and do not commit more than you can handle to lose. Also, limit your liabilities and learn to DYOR to minimize the losses that may occur from the current financial troubles.