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Goldman Sachs Asked Two Of The World's Best-Known Economists If U.S. Stocks Are In A Bubble
At first I thought the title was the opening line to a joke but I must have missed the punchline in the body of the story. Anyway, paraphrasing Warren Buffett, "What do you have when you employ an economist in your company? One too many employees.
To read GMO's 1Q 2015 Letter, which contains Ben Inker's "Breaking Out of Bondage," and Jeremy Grantham's "Are We the Stranded Asset? A brief update on the U.S. market: still not bubbling yet, but I think it will ■ The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls. In the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet. ■ To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250 on our traditional assumption that a two-sigma event, based on historical price data only We could easily, of course, have a normal, modest bear market, down 10-20%, given all of the global troubles we have. If we do, then the odds of this super-cycle bull market lasting until the election would go from pretty good to even better. So, “2250, here we come” is still my view of the most likely track, but foreign markets are of course to be preferred if you believe our numbers. Stay tuned. https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=8
Comments
A brief update on the U.S. market: still not bubbling yet, but I think it will
■
The key point here is that in our strange, manipulated world, as long as the Fed is on
the side of a strong market there is considerable hope for the bulls. In the Greenspan/
Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully-
fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing
in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity
bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has
bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect.
Thus far, she seems to also share their view on feeling no responsibility to interfere with
any asset bubble that may form. For me, recognizing the power of the Fed to move assets
(although desperately limited power to boost the economy), it seems logical to assume that
absent a major international economic accident, the current Fed is bound and determined
to continue stimulating asset prices until we once again have a fully-fledged bubble. And
we are not there yet.
■
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250
on our traditional assumption that a two-sigma event,
based on historical price data only
We could easily, of course, have a normal, modest bear market, down 10-20%, given all of
the global troubles we have. If we do, then the odds of this super-cycle bull market lasting
until the election would go from pretty good to even better. So, “2250, here we come” is
still my view of the most likely track, but foreign markets are of course to be preferred if
you believe our numbers. Stay tuned.
https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=8