Market Bubbles And Why The Fed Is Erring On Highest Inflation Since 1990 | Jeremy Grantham

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01. the thing about the great bubbles 1929 japan no no one knows after all these years exactly why the bubble peaked you can say with hindsight it peaked at the point of course of maximum euphoria so there was no hint of of darkness at the end of the tunnel uh everything looked absolutely splendid as the market peaked and of course as long as it looks absolutely splendid everybody is happy so speaking more broadly you've said that we're in something i think you call it an epic bubble right now i think you've been very careful i'm not going to predict when it ends i'm just going to say that it does end what's going to bring it to an end the thing about the great bubbles 1929 japan no no one knows after all these years exactly why the bubble peaked you can say with hindsight it peaked at the point of course of maximum euphoria so there was no hint of of darkness at the end of the tunnel uh everything looked absolutely splendid as the market peaked and of course as long as it looks absolutely splendid everybody is happy the the thing about the great bubbles is how intensely do people buy into the idea that it can never break the prices will never decline the housing bubble of 2005 2006 in america was a brilliant bubble in that description you had people going out and buying a second house to rent because house prices never declined indeed ben bernanke said u.s house prices have never declined of course then they promptly did but that is par for the course of the federal reserve in 1929 there was a terrific buy-in and you could read articles in the ladies home journal saying all you had to do to get rich was to buy stocks and hold on to them and the same thing occurred in in 2000 in the tech bubble and the same thing occurred in the biggest bubble of all which was japan in 1989 when the japanese market went to 65 times earnings but in u.s history i would say there's a bigger buy-in this time to the idea that prices never decline and that all you have to do is buy them um then there has ever been which suggests that when the decline comes it will be perhaps bigger and better than anything previously in u.s history you've talked about the tech bubble in 2000 that you famously really did anticipate but you paid a price for getting out of the market that place because other people continued to make money people who were were a value investor switched over you stuck with it at the same time the longer that bubble goes the bigger it gets does that represent the possibility for you to make more money when it does burst if if you can handle going short getting out of the way yes you can make a lot of money this bubble in part if it is in bubble as you describe it must in part be because of the amazing liquidity pumped into the the world market frankly but certainly the fed participate in that fully we now just this week have some pretty staggering numbers on consumer prices up over six percent annualized right now in the united states to what extent will the pricking this bubble come if the fed needs to respond and really step on the on the break and maybe do it even a little abruptly markets peak when inflation is low and profit margins are high it's not about growth they like gdp to be very stable they hate it bouncing around it makes portfolio managers nervous and our model that goes back to 1925 explains almost all the ebbing and flowing of market bull markets and bear markets and until until june of last year starting in june of last year uh is the first time that inflation the number one predictor since 1925 is ignored if you want to explain today's market level yes you have handsome profit margins every bull market it has a wonderful economy every bull market has a plentiful supply of liquidity but every bull market before this one had low inflation in order to explain today's market you have to assume a hundred percent ignoring of the rising inflation which is quite remarkable we've never seen anything like this we've just hit six percent today that would have been enough in any market since 1925 and for all i know long before that it would have been enough to have crashed the market but this time the faith in the fed is so complete that when they say it's temporary we believe it the fed in my opinion hasn't done a thing right since paul volcker who was brilliant all of the others have encouraged a chain series of really dangerous uh asset bubbles they they rattle the economy they're incredibly disruptive the decline in 2000 82 in the nasdaq was the decline from 2000 the decline of the housing market all the way back to trend and below dragging the world with it and all of the problems from bad mortgages and and a 50 decline in the s p these have a terrible wealth effect they make people feel poor and they make people spend less it's the last thing you want and yet they have not learned they overstimulated to get to 2000 they overstimulated in the housing market they got three or four percent more people to own houses in 2007 than had ever owned houses before and the consequence consequences were dire and have they learned absolutely not so in this time they step into covid and of course you needed to stimulate but did you need to throw this much money all over the world so that it flows into the stock market and creates creates these meme stocks this craziness that had avis triple in one day in the in the last week and um why did it triple because in response to tesla and herds and tom brady et cetera um avis said hey dudes we're going to buy some electric cars too wham it triples you know this is more extreme in scale and size um of of market cap than anything that occurred in 1929 even adjusted for the size of the economy you