“US inflation hotter than expected”, “Cold winter is coming in Europe”, “the R word”, and more…
Fear and concern are looming even more in markets. In the time of writing this article, the US CPI (Consumer Price Index) increased by 0.1% from July (up by 8.3% from this time last year), and given that ‘Black Wednesday’ in British Pound has been announced, following the drop to $1.14 for the first time since 1985. With these indices crippling behind, we must turn our attention to the research by Jeremy Grantham on “Superbubble’s Final Act”.
The article published on 31st August, by the CEO of a multi-billion dollar hedge fund, GMO, as well as an accurate prophet of the past 3 bubbles, argues that we are now entering the final stage of a superbubble. Historical examples of superbubbles include but aren’t limited to the markets prior to 1929 Great Depression, 1989 Japanese Bubble, and 2000 Tech Bubble. A superbubble is when there is a sudden rise of around 50% in stock prices despite a worsening economic condition. After which, there is a substantial downturn waiting.
The 4 stages of a superbubble is as follows:
- 1) bubble forms,
- 2) an initial setback in stock prices,
- 3) bear market rally – a slight increase in prices,
- 4) deterioration of fundamentals.
With inflation getting worse, Grantham’s argument seems even more compelling and lines up with stage 3 of a superbubble and leads us on to stage 4, with the current tightening of monetary policy witnessed across the globe. Tightening monetary policy is when central banks raise interest rates to reduce inflation. In previous and upcoming central bank meetings, CB’s have raised interest rates or are planning to hike rates soon. The current situation is as follows: prices have increased and interest rates are increasing, meaning there is a higher incentive to save and higher cost to borrow, and consumer confidence in the market is alarmingly low. This is a recipe that results in a decline in earnings reports by companies due to the aforementioned reasons, which will eventually cause a fall in stock prices.
Will Grantham be correct this time? Could this be the start of the R word, the recession? And if so, who will be the winners and losers of this epic finale. “Bubble, double toil and trouble; Fire burn and caldron bubble…”
Link to the article: https://www.gmo.com/americas/research-library/entering-the-superbubbles-final-act/
Analyst: Joonmin Choe
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