First truly global bubble poses serious risks to investors

Here is money manager Jeremy Grantham with more details on the risks investors face:

“From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips – it’s bubble time,” he writes in his latest quarterly letter entitled “The First Truly Global Bubble.”

“Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,” Grantham continues.

“Sustained strong fundamentals and sustained easy credit…allow for continued reinforcement. The more leverage you take, the better you do. The better you do the more leverage you take.”

The Dow goes up, up, up – it’s been up in 20 of the last 22 sessions, something that hasn’t happened since just before the Great Crash of ’29. But the gains in the Dow are peanuts compared to what you could get overseas.

In China, the major indices have gone up almost three times in the last two years. So far this year, the CSI 300 Index, which tracks yuan-denominated A shares listed on the Shanghai and Shenzhen stock exchanges, rose 75%.

And in Europe, Germany is also booming…though at a much more modest pace.

“This time, everyone, everywhere is reinforcing one another,” Grantham argues. “Wherever you travel, you hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets can keep rising,’ and ‘private equity will continue to drive the markets.’ To say the least, there has never been anything like the uniformity of this reinforcement.”

And when it pops, says Grantham, it “will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.”

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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