Where is the next bubble?

Reports Mark Hoskin, 23rd April 2010

Jeremy Grantham, founder and chief strategist at GMO talked to the Financial Times this week about bubbles. In this interview he defines a bubble as a 40 year event over which time asset prices move back to the trend line which had occurred before the bubble started forming. He identifies the US housing bubble as the perfect example of this, as well as the internet bubble and Japanese stock market bubble.

Jeremy identifies the UK and Australian Housing market as two bubbles which still exist and which have been protected by mortgage rates having come down so fast as to protect the bubble. If, as interest rates rise, these do not go back to the old family income trend line it will be the first time in history that such a bubble has not broken. He goes onto say, " this is not something I would like to bet on if I was buying a house right now."

His favourite potential bubbles are commmodities and emerging market equities. He says the emerging story is very compelling because they are growing twice as fast as developed economies and he is confident that they will go to a PE premium, perhaps as high as 50%, which is still low compared to the premium which was paid in the NASDAQ and Japanese stock market bubbles of the past. However, he feels that nothing will stop the enthusiasm for the emerging bubble partly because of the slow growth in the rest of the world, "they have become the only game in town." Normally you don't get three bubbles following each other back to back (Tech bubble, US property bubble and now emerging market bubble?), but under Greenspan's and now Bernanke's leadership by keeping money so cheap "we are all tempted into speculating" and we have just had one of the "great speculative rallies, second only to 1932 to 33." "You should be prudent and cautious and recognise the the US and European markets have moved from very cheap to decently expensive again."

However the US market has "one interesting sub-set, the boring super quality franchise companies - the Coca Colas, Microsofts, Johnson and Johnsons. No one wants them in speculative times. When they are bribed to speculate with low interest rates it is not Coca Cola you think of buying and so they are boring and they are selling at a discount, despite the fact that they are beautifully positioned to survive what I have described as the seven lean years. We have a lot of overhead problems. We are not as wealthy as we thought. We have got debt to repay. We have got trade imbalances with China. These are not all going to go away and we have a rising distrust in paper currency. These are going to make life a little trickier than we are use to, a little bumpier and what companies would you better own in that environment than the coca colas of the world?"

See Jeremy's full interview at the FT web site - Jeremy Gratham on bubbles

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