The discussion of bubble forming is explored in the latest paper from GMO’s Jeremy Grantham, he begins with the history of bubbles, the formation of bubbles and the current stage of the current one. It’s quite the read and he’s arguments are logically formed however I like to say, its hard enough trying to figure out how a company is going to perform, to figure out how a stock market or asset class is going to perform is mind boggling.

Summary of my guesses (absolutely my personal views)
■ A melt-up or end-phase of a bubble within the next 6 months to 2 years is likely, i.e.,
over 50%.
■ If there is a melt-up, then the odds of a subsequent bubble break or melt-down are
very, very high, i.e., over 90%.
■ If there is a market decline following a melt-up, it is quite likely to be a decline of some
50% (see Appendix).
■ If such a decline takes place, I believe the market is very likely (over 2:1) to bounce
back up way over the pre 1998 level of 15x, but likely a bit below the average trend of
the last 20 years, as the trend slowly works its way back toward the old normal on my
“Not with a Bang but a Whimper” flight path.

Source: GMO

 

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