Bubbles: Jeremy Grantham, Fingers of Instability and the Medium Term View

I was reading a summary of Jeremy Grantham’s remarks in GMO’s recent quarterly analysis. And it occurred to me that a lot of what we see there is predicated on some embedded longer-term assumptions that I want to make clear. Grantham is talking about the potential, even likelihood, of a bubble in equities by 2016. This has to worrying because it would usher in another period of deleveraging. But it also assumes that the real economy gets us through 2016 via expansion. Some thoughts below
The Grantham piece and another one by Edward Chancellor, an expert bubble watcher, are labelled: Looking for Bubbles, Part One: A Statistical Approach and Part Two: A Sentimental Approach. Here’s the thesis. The US equity market is 1.4 standard deviations above norm and has a greater than 50% chance of go...


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