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if the super bubble bursts as you predict it will what happens what happens to the economy what does history tell us some bubbles are very specialized to u.s growth stocks like 2000 and they and they hurt there is a wealth effect people lose money they they pull back on their spending but they don't hurt anywhere near as much as when you combine that with a housing bubble so in 2008 where we had the only housing bubble in american history that burst and the stock market came down 50 percent in sympathy what if i'm a long-term investor say running a pension fund or managing my own 401k which i should add i don't but what if i'm one of those people and i look at history and history tells me that over time independent or including crashes stocks deliver a handsome return and if i just stay in the market i'll get that return whether it's seven percent or eight percent or nine percent or ten percent over time you know if you could set your dial for fifty years and throw the key away that might make some sense but let me remind you that in 1929 you didn't get back in real terms until about 1954.
that's a long wait in 2000 you didn't get back for 13 years by modern standards that's a pretty long wait and in japan which is really the granddaddy of both bubbles land and stocks they are not back to their 1989 peak today that is a very very long wait so if you think you can stand it for 10 or 20 or even 30 years be my guest but history says a lot of you will not stand it a lot of you will become more conservative uh deep into this kind of correction and what about the real sour grapes critics the ones who say you're just a broken clock that's only right twice a day we have a relatively humble measure of success and that is at some future date if you got out when i said get out you will be glad it doesn't mean you won't suffer in the meantime but at some future date you will be glad that worked in japan we were very early but if you'd gotten out when we got out and you'd suffered as the japanese market went up you would still have made and saved a lot of money on the round trip the same in 2000 we would basically recommending that you ease up on on u.s equities by mid 98 and that was a hell of a rally and that was brutally painful but it was still a level where you made tons of money by 2002 the market was much lower than that why doesn't getting out mean for gmo included mean liquidating going to cash i think commercially it's too extreme to be brutally honest and secondly if you can execute the strategy that i described there is a really respectable chance that you will make money you say that the bubble you described back in january of 2021 has further inflated into a super bubble and i'm curious to know i think others would be too what's the difference between a standard bubble and a super bubble a standard bubble we defined over 20 years perhaps 25 years ago as a two sigma statistical event it's just a measure of of how much of an outlier you are so you have a historical deviation from trend yeah you have you have a price series of the s p you can calculate a trend uh statistics 101 is not difficult and you can work out how far away from trend you are and a two sigma is the kind of deviation that should occur every 44 years and because we're a little wilder and less efficient than we should be it occurs every 35 years it's not bad we meaning human beings we basically species that's a huge awesome species every 35 years it was a little closer than i expected uh back then but every 35 years feels about right won a career twice a lifetime that feels like a pretty decent definition of a bubble and a three sigma should occur every hundred years now we as i like to say we do crazy pretty well as a species so they occur much more two or three times more often than they should uh they they they're out of kilter much more than than two sigma so two sigma you can have some fairly standard bubbles they they they give you a certain amount of pain thirty forty fifty percent pain super bubbles can really wipe you out like 1929 did and that's where we are now we we entered a few months ago into three sigma territory super bubble territory and the other great risk is last year we also entered bubbles in real estate so this is a very dangerous year that we've just had if the super bubble bursts as you predict it will what happens what happens to the economy what does history tell us some bubbles are very specialized to u.s growth stocks like 2000 and they and they hurt there is a wealth effect people lose money they they pull back on their spending but they don't hurt anywhere near as much as when you combine that with a housing bubble so in 2008 where we had the only housing bubble in american history that burst and the stock market came down 50 percent in sympathy then you're talking serious damage to the economy through the income effect because this time we have as a multiple of family income us housing suddenly is more overpriced than it was ever in the housing bubble of 2006 to 2008 it's and and they got there this last year since we last spoke the biggest increase 20 percent that the u.s housing market index has ever had has taken it to a new high and they are in the us still much cheaper than canada australia and new zealand london paris etc so that is a global event that could cause enormous pain so we have a housing problem we have a stock market bubble like 2000 we have overpriced commodities oil is 88 and and we have of course the lowest real rates in the history of map if bonds are overpriced and stocks are overpriced does that make the traditional 60 40 balanced portfolio useless absolutely useless you
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