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Share bubble may begin crashing in weeks or months - Jeremy Grantham

I strongly recommend that you watch at least part of this interview with Jeremy Grantham. Jeremy is one of the wisest and best investors I know of. He starts talking about the market just after 5 minutes into the interview.

Jeremy is one of the world's leading experts on speculative market bubbles - possibly he is THE leading expert in that field.

Jeremy is saying, for the first time in the last 10-years, that we "finally" have been witnessing the type of crazy behaviour, that has always characterised the final phase before a speculative share price bubble begins to crash - an event that he feels might start within weeks or months.

One very useful thing that Jeremy characterises, is the uniqueness of this current speculative market bubble, compared to all other speculative bubbles since and including the South Sea Bubble and the Dutch Tulip Bubble - and as Jeremy says, it is this uniqueness, that creates a huge additional amount of investment uncertainty at this time.

Jeremy has some great one-liners, that captures some very important market wisdom. In a related article Jeremy notes his acute awareness that at the moment with interest rates very low, many investors are cannot earn enough income off their low-to-moderate-risk investments to cover their cost of living. As a result of this, many investors feel "compelled" to go much further up the risk curve, chasing yield. Grantham's response to that in the article whose link is below is:

  • 'Grantham said he is sympathetic to the lack of opportunity in this low-yield environment, “but the market doesn’t care about that.”'

  • I know that another part of Grantham's answer to this is "Be patient and focus on the long-term. Wait for the good cards." 27/2/2012

  • One of the tragedies about this market is that many of the investors who "feel 'compelled' to go much further up the risk curve, chasing yield", will end up losing a lot of capital when the market crashes - thus creating an even worse outcome for themselves.

  • There is one other thing that seriously concerns me, and that is that the government is pressuring banks to lend to companies and households that are already well-over-leveraged. This will end in tragedy. The potential borrowers, who are most vulnerable to these government measures are the young twenty-something first home buyers, some of whom will end up taking out huge mortgages to buy a house.

  • Consider a 25-year old couple, who might borrow $1million now, to buy a $1.1million house. If over the next 5 years, the house falls in value to $550thousand. So this young couple may end up having negative net assets for decades to come, and may never recover financially from that. Is the government going to accept any responsibility for highly incentivising this young couple to massively over-gear near the peak of the market? To me, this government behaviour is unethical. Jeremy is now a very fit looking now 82

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