Leading investor: Entire World in a Stock Market Bubble, Waiting to Burst

[JeffWartman]

We need to be careful and remember our fundamental economics...

Jeremy Grantham: All the Worlds a Bubble

By Brett Arends
Mutual Funds Columnist
4/27/2007 10:07 AM EDT

How high will the Dow go? 15,000? 20,000?

How about 36,000?

While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.

One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

Everything is in bubble territory, he says.

Everything.



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'The bursting of this bubble will be across all countries and all assets.' -- Jeremy Grantham
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"From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"

"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "

As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.

http://www.thestreet.com/_breitbart...at=Free&cm_pla=Feed&cm_ite=Feed&puc=breitbart

 

[JeffWartman]

Still no acknowledgment of the honest truth: This Dow growth is completely and utterly unsustainable.

 

[actsnoblemartin]

I thought we should be more concerned with the dollar dropping faster then paris hiltons panties.

 

[JeffWartman]

I thought we should be more concerned with the dollar dropping faster then paris hiltons panties.

In a time where we have a record trade deficit, that's not necessarily a terrible thing.

 

[actsnoblemartin]

really, why is that?.

How come we cant do anything about our record trade deficit?.

 

[JeffWartman]

really, why is that?.

How come we cant do anything about our record trade deficit?.

If you read international economics, the first solution to a trade deficit is always to devalue your currency. It makes your exports cheaper to the rest of the world to purchase, bringing the U.S. BOP closer to equal.

It isn't a be-all-end-all, and it doesn't always work. I didn't say it was a good thing, I said it wasn't necessarily a terrible thing.

 

[Diuretic]

What can I say but great post and I totally agree.

Okay I've got the sucky bit out of the way

Seriously, not that I have a clue about economics, but it's right. I mean, I'm not taking a cheap shot at RSR here (I save my cheap shots for RSR and use them elsewhere) but the Dow has got nothing to do with how the economy works. The Dow going through the roof is not a measure of the strength of the US economy. You may as well compare a tape measure with the quality of the piece of wood that's being measured. The Dow is simply a measure of stock market activity and I would think the stock market right now is hot as a rocket because panic is about to set in about the real state, not the imagined state, not the party-line state, of the US economy. Could it be that frenetic trading is happening because investors are getting in while they can?

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Public service announcement:
This post should not cause a run on any financial institution simply because the poster probably hasn't got a clue.

 

[JeffWartman]

What can I say but great post and I totally agree.

Okay I've got the sucky bit out of the way

Seriously, not that I have a clue about economics, but it's right. I mean, I'm not taking a cheap shot at RSR here (I save my cheap shots for RSR and use them elsewhere) but the Dow has got nothing to do with how the economy works. The Dow going through the roof is not a measure of the strength of the US economy. You may as well compare a tape measure with the quality of the piece of wood that's being measured. The Dow is simply a measure of stock market activity and I would think the stock market right now is hot as a rocket because panic is about to set in about the real state, not the imagined state, not the party-line state, of the US economy. Could it be that frenetic trading is happening because investors are getting in while they can?

You're absolutely right; the Dow has no bearing whatsoever on economic strength.

Secondly, it's even misleading to say the Dow is gaining ground, considering it's really only doing that because of the devaluing American dollar. When measured in any other real asset, the Dow is actually way down and continues to slide. RSR has NOTHING to be happy about right now, but he just isn't smart enough to realize it. They've got him programmed well.

 

[loosecannon]

We need to be careful and remember our fundamental economics...

Jeff I posted this on another board as well. Great article, good lesson.

I was just reading that the Chinese gummit is becoming a first tier partner in Blackstone corp, a hedge fund that is developing Asian asset funds.

With 1.2 trillion in foreign exchange reserves to diversify it is already expected that China's emergence in the financial markets will increase the world asset bubble.

 

[loosecannon]

Still no acknowledgment of the honest truth: This Dow growth is completely and utterly unsustainable.

The Dow has performed pretty poorly for the last 6 years. It may be one of the few classes of assets that isn't in an extremely inflated condition.

The flight from what were once the staple of every portfolio (stocks and bonds) does make me a little queasy about the stability of todays markets.

There is no there, there.

 

[loosecannon]

Could it be that frenetic trading is happening because investors are getting in while they can?

generally bubbles super heat weeks or months before they burst. So maybe. But these are NOT normal times.

Over the last 6 years vast new oceans of 'assets" have been created and sold essentially out of thin air, backed only by fancy ideas and the brokering banks. Derivatives and hedge funds primarily.

The volumes of these new asset types dwarf the previous investment assets that even existed in the last century. LOTS of cheap money lent to prop up bubbles and flimsy assets with no underlying value at all.

At the same time all this money has been pumped into the economy by Japanese and American and european banks real investment opportunities have become scarce.

And lotsa creepy things have happened with new advents like gold leasing and leveraging that also undermine the credibility of the worlds financial superstructure.

This is all new terrain. Beyond the pale. It almost makes gummits running deficits and unfunded liability deficits and massive trade deficits seem like sound policy.

It is the crazy new world of zero equity investment empires.

Nobody knows what will happen.

And apparently the only way to keep the engine running is to pour more, and more cheap money into the tank.

If that sounds crazy, simply consider the inherent value of fiat money.

 

[Diuretic]

Here (Australia) we're getting ready for a federal election (we don't have fixed terms, the PM calls one when he thinks it's the best time for his government). But neither of the two major parties is mentioning a big, hidden problem in our little economy - foreign debt, not government debt but private debt. It might not be of interest to non-Australians but this bloke is belling the cat -

Foreign debt a cause for concern

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May 21, 2007
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ONE of the paradoxes of the Howard Government has been its obsession with reducing government debt (the debt that as taxpayers we owe to ourselves as superannuants) and its benign neglect of foreign debt (the debt that we owe to foreigners).

The reason is the policy implications of dealing with the two forms of debt. Creating a sense of crisis about Australia's domestic debt after the 1996 election suited the Government's political agenda. Portraying that as a crisis provided the rationale for the sell-off of most the Commonwealth's assets (apart from Parliament House and the War Memorial) in order to pay off net government debt of just over $90 billion.

More at the link I didn't want to reproduce all of it -

http://www.theage.com.au/news/busin.../2007/05/20/1179601239331.html?page=fullpage#

 

[RetiredGySgt]

The potential crash is going to be worse than the 1929 one. But it won't happen quickly. The Stock markets took heavy precautions to slow or blunt rapid falls. They WILL shut down if it starts to happen.

The reason it will happen is exactly the same as from 1929. Speculation with no substance.

 

[loosecannon]

Here (Australia) we're getting ready for a federal election (we don't have fixed terms, the PM calls one when he thinks it's the best time for his government). But neither of the two major parties is mentioning a big, hidden problem in our little economy - foreign debt, not government debt but private debt. It might not be of interest to non-Australians but this bloke is belling the cat -



More at the link I didn't want to reproduce all of it -

Wow, so Australia sold off most of it's assets to pay down it's debt?

Globalization is an ODD phenom as it is shaping up. It basically facilitates robbing every nation of it's public assets while loading up the citizens with enough debt to be virtual slaves.

Nations become destitute and powerless and a few individuals (and banks) reap all the rewards.

It is like an institutionalized poverty development program.

 

[Diuretic]

Wow, so Australia sold off most of it's assets to pay down it's debt?

Globalization is an ODD phenom as it is shaping up. It basically facilitates robbing every nation of it's public assets while loading up the citizens with enough debt to be virtual slaves.

Nations become destitute and powerless and a few individuals (and banks) reap all the rewards.

It is like an institutionalized poverty development program.

It's disguised here because of China. We're exporting (digging up and shipping out, not processing) raw materials to China like you wouldn't believe. Our national economy is burbling along because of it. But in our populous eastern states which previously had a manufacturing base, the local economies are stagnant. For the past 11 years we've had an incompetent government that has fed off the resources boom. We're going to be in big trouble when China has had its fill and cries "enough!".

 

[loosecannon]

It's disguised here because of China. We're exporting (digging up and shipping out, not processing) raw materials to China like you wouldn't believe. Our national economy is burbling along because of it. But in our populous eastern states which previously had a manufacturing base, the local economies are stagnant. For the past 11 years we've had an incompetent government that has fed off the resources boom. We're going to be in big trouble when China has had its fill and cries "enough!".

well everybody is trying to figure out China.

One of the very few certainties is that they will be resource dependent/desperate from now on. So your raw materials markets won't fold.

Are Chinese buying resource assets like iron mining firms in Aussistralia?

BTW, I almost forgot to ask, do ya'll have any oil?

 

[onedomino]

well everybody is trying to figure out China.

One of the very few certainties is that they will be resource dependent/desperate from now on. So your raw materials markets won't fold.

Are Chinese buying resource assets like iron mining firms in Aussistralia?

BTW, I almost forgot to ask, do ya'll have any oil?

Among other things, they are buying lots of uranium from Australia for their nuclear weapons program. See the links in this post: http://usmessageboard.com/showthread.php?p=556914#post556914

 

[Toro]

Wow, so Australia sold off most of it's assets to pay down it's debt?

Globalization is an ODD phenom as it is shaping up. It basically facilitates robbing every nation of it's public assets while loading up the citizens with enough debt to be virtual slaves.

Nations become destitute and powerless and a few individuals (and banks) reap all the rewards.

It is like an institutionalized poverty development program.

You're being silly.

At the risk of being narcissistic, I'm posting this from my blog because its probably too much to post elsewhere and it is more condensed than the World Bank information.

Link

Globalization is improving the lot of the world.

 

[Toro]

I don't disagree with Grantham necessarily. However, the market is trading at 16x forward earnings. That is not expensive. To be a bubble, stocks would have to be trading at much higher valuations. Grantham has said that profit margins are mean reverting, and with margins at or near all-time highs, margins will trend down over time. However, they won't collapse overnight either. Instead, what is most likely to happen is as margins come under pressure, the market grinds through substandard returns for several years. Of course, the market could collapse, since markets can do anything, but it is unlikely.

The China stock market will collapse though. It is only a matter of time.

 

[Truthmatters]

What is with the new stock market created for just the ultra wealthy?

have you heard of that Toro?