It's Bubble Everywhere

My Dearest Moo Moo Cow,

Did you read the article posted by Show Me The Money, columnist, Ms. Teh Hooi Ling on Singapore Business Times? ( Saw a copy of the article posted here It's bubble everywhere )

• 'The necessary conditions for a bubble to form are quite simple, and number only two,' he said in his letter. 'First, the fundamental economic conditions must look at least excellent - and near perfect is better. Second, liquidity must be generous in quantity and price: it must be easy and cheap to leverage. If these two conditions have ever been present without causing a bubble, it has escaped our attention.'

Liquidity is everywhere, yes?

• The 'bubble' today, said Mr Grantham, is different from earlier bubbles - namely the South Sea Bubble, the Japanese land and stock bubble, and the Internet bubble. The earlier bubbles were mostly confined to a certain geography or certain sector.
  
  But this time, everyone, everywhere is reinforcing one another. 'Wherever you travel, you will hear it confirmed that 'they don't make any more land', and that 'with these growth rates and low interest rates, equity markets must keep rising', and 'private equity will continue to drive the markets'.
  
  'To say the least, there has never ever been anything like the uniformity of this reinforcement,' Mr Grantham wrote.

Is this what we call a globalized bubble?

• The results are predictable and consistent. All three major asset classes - real estate, stocks and bonds - are expensive compared with their histories and compared with replacement cost, according to Mr Grantham.
• Meanwhile, global credit is more extended and more complicated than ever before. So no one is sure where all the increased risk has ended up.

Here's an interesting issue. The issue of uncertainty caused by 'no one is sure where all the increased risk has ended' versus known risk.

• Mr Grantham's most important message is: Every bubble bursts.

Yes, they all do.

• The big question is, of course, when will the bubble burst? Here's where those who are long on assets will take heart.
  
  'Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time but dramatic in extent,' Mr Grantham wrote.
  
  'My colleagues suggest that this global bubble has not yet had this phase and perhaps they are right. (A surge in money flowing into private equity might cause just such a hyperbolic phase.) In which case, pessimists or conservatives will take considerably more pain. Again.'
  
  What will be the catalyst that bursts the bubble?
  
  According to Mr Grantham, up until today we haven't quite agreed on the catalyst for the 1929, 1987, or 2000, or even the South Sea bubble bursts. Still, there are a couple of vulnerabilities in today's near-perfect market conditions. One is rising inflation; the other is declining profit margins.

The full commentary from Mr. Jeremy Grantham can be read here: It's Everywhere, In Everything: The First Truly Global Bubble . ( registration is free but required)