The Bubble of All Bubbles Has Not Seen Anything Yet
To set the stage that we are in a bubble of ridiculous proportion, look no further than the commonly shown Buffet indicator.
This chart reminds me of what Jeremy Grantham said in a recent podcast (found here).
But then, the equity market, we have probably the highest priced US equity market ever. And if not, the highest or very close rival to 2000. And then, if that wasn’t enough, we have coming up on the rails at incredible speed, the US housing market. It’s up over 20% in 12 months. It’s the biggest move in history. It’s bigger than ’07. And it’s taken the median house price to a higher multiple of family income than even 2007.
- Jeremy Grantham
Many people look at the chart and think we are set for a massive crash. “Sell now!”. “Go to cash”.
The issue here is that it ignores how far this market can go and when peaks generally occur in the market.
And the bubbles tend to peak at absolute optimism when the economy looks perfect and you’re extrapolating it forever. And that’s the definition of a bubble. And they have to be facilitated by friendly monetary conditions. And when you’ve had a wonderful economy and friendly monetary conditions, you pretty well always had a bubble. They’re not that common. And here we are, again, we feel the economy looks wonderful. If we extrapolate it forever, it means it’s worth a huge price. Of course, it never does last forever, but if it did it, it would be worth a huge prize.
- Jeremy Grantham
But we don’t see any optimism in the market at all!
And if CNBC sees a crash coming? Come on. No way.
And the S&P 500 is at key support on the 50 day moving average, while the Put/Call Ratio is very high on average (stronger bid for downside protection).
And lets not forget that the Federal Reserve is still doing $120 billion of quantitative easing per month. Anyone see a long term correlation?
From my perspective, this bubble has not seen anything yet. Below is a good chart of what I generally expect. The bubble is just getting started.
When the market blow off occurs, my view is it will likely be caused by the Federal Reserve trying to taper driving pessimism into the market (see the Fed Balance Sheet vs S&P500 above).
And this drop will be one of the largest of all time.
And I would expect that the fair value of this market would require the market to approximately half. And I wouldn’t be surprised if it did much less than that. And if it goes up another 20%, it will have to get rid of that as well, as a bonus.
- Jeremy Grantham
But the market crash isn’t today or tomorrow. The current monetary policy has and will continue to drive asset prices to insane prices.
The second half of the year is just starting and I am excited to see how crazy this market will get. The opportunity for huge gains is real and it is likely found in assets the old guard speaks down upon (Bitcoin, crypto, NFTs, ARKK, unprofitable tech, etc).
Authored by Derman Capital (Twitter)