3 Signs A Market Crash Is Coming (Jeremy Grantham's Super Bubble)

In this video, we discuss 3 reasons why a market crash is likely coming in 2022 as predicted by Jeremy Grantham when he talks about a super bubble.

WHAT IS AN ASSET BUBBLE?

A bubble is essentially a rapid rise in an assets price without underlying fundamentals such as equally fast rising demand.

We heard this term a lot in 2020 and 2021, and in hindsight those were obvious bubbles.

With nearly every single asset now down big this year, the narrative isn’t really so popular anymore as news outlets no longer have that clickbait title to use.

According to the co-founder of an asset management firm, we’re likely still to see more price declines due to still overvalued stocks, bonds, and housing, a commodity shock, and a hawkish fed.

1. OVERVALUED ASSETS

Stocks were way overvalued over the past 2 years. Some people thought that it was the new norm due to large amounts of liquidity flowing around.

Obviously, we all can’t just become richer based off no fundamental gains so stocks have retraced by a bunch since then.

But is there still room to fall?.

At the peak of things in Dec 2020, the P/E ratio of the S&P500 was at 38 which is about 2x the historical norm.

I don’t know how I didn't think that was abnormal but its given back a lot of its gains since then.

With the big declines in prices, the P/E ratio now sits at a more reasonable level of around 20-21.

This is about average over the past 5 years, but it still sits pretty high compared to a 10 year average.

While we might think that the levels are pretty average now, most bear markets usually overshoot to the low side meaning stocks look a bit too undervalued just like how it looked too overvalued in the last bull market
With this logic, we could see further price declines before we find a true bottom.

In terms of housing, there’s no lack of news out there about how a housing crash in the US is coming.

The thing is because liquidity was so high and interest rates were so low over the past 2 years, everyone and their mums were buying houses like it was nothing.

Now that the fed is raising interest rates, mortgages have gone up and could go higher which will lead to defaults.

When borrowers default, the banks will have to offload the houses to recover the loan which will lead to lower home prices.

Include the fact that buyers aren’t so willing to buy anymore due to high interest rates and a recession, and we see a classic case of supply outstripping demand.

This is already playing out, as home prices fell for the first time in 3 years and showed the biggest decline since 2011.

2. COMMODITY SHOCK

We all know that inflation has caused a big rise in commodity prices, with commodity stocks like O&G and agriculture being the biggest winners in recent times.

Food prices have dropped for 5 months in a row, while oil prices has also gone lower.

However with the Russia invasion still ongoing and tense political events in Europe, there’s a big risk of an energy crisis there.

A major natural gas supplies from Russia has recently suspended the Nord Stream 1 pipeline to countries in Western Europe, which increases the chances of blackouts and economic turmoil.

A Michellin star restaurant in the UK saw their electricity cost for the month increase by 600% and warned that many businesses may shut down until its resolved.

On top of slower consumer demand due to quantitative tightening, this impact to businesses could spiral.

3. HAWKISH FED

To top it all of, the fed is still extremely hawkish and is vowing to fight inflation no matter what it takes.

In the last Jackson hole at the end of August, Powell declared that the fed must keep at it until the job is done which is basically lower inflation levels.

They’ve also acknowledged that for this to come true, some pain must be expected in the form of a slowdown in the economy.

Any hopes of a fed pivot thanks to improved economic data was also quashed.

Honestly, this is probably the best approach as there’s no point trying to keep things going in the short term only for greater pain to come later
Its like a rip off the band-aid approach.

IS JEREMY GRANTHAM RIGHT?

Hey! Thanks for reading the description. We can't fit everything in here, so make sure to watch the whole video to find out more :)

⌚ Timecodes:

00:00 - 3 Signs A Market Crash Is Coming (Jeremy Grantham's Super Bubble)
2:02 - Overvalued assets
5:42 - Commodity shock
7:05 - Hawkish Fed
8:10 - Is Jeremy Grantham right?

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#TheMillennialFinance

[mr.financial]

This bubble has been foretold to pop for 4 years or more now. Some stocks and RE markets are in a bubble. But not everything. Unfortunately, this was caused by gov policy and loose monetary policy in my opinion ...