Parts of the US stock market are in a bubble, but being too late is the “easiest place to die” for an investor, according to Bridgewater Associates LP Chief Investment Officer Greg Jensen.
Jenson joined the Bloomberg podcast “What Goes Up” to discuss this week’s Federal Reserve meeting and how the central bank’s abundant liquidity, combined with a booming economic leap, created conditions for markets to mature to become more bubbly.
Below are slightly edited highlights from the conversation. Click here to listen to the full podcast or subscribe Apple podcasts, Spotify or wherever you listen.
C. Bubbles are a very strange phenomenon because the risk-reward relationship is so interesting. It almost seems that as an investor you have to participate in bubbles. Because if you think it̵
A: Throughout the history of Bridgewater, we have been systematic. So we took this kind of discussion that we’re having now – a very qualitative view of the world – but translated into ways to measure it. So you’re taking something like a balloon, aren’t you? Classic quality thing. What do you mean by balloon? How do you measure that this is a bubble? Suffice it to say that prices are high compared to history or what is the actual measure? And then how reliable is he?
And we have six balloon devices that we use all over the world. You can then apply it to a cryptocurrency. You can apply it to anything you want in the world, to stocks, to bonds to anything. Our main board is: Are the prices high compared to the traditional measures? Are discount prices unstable conditions? So, as an example today, there is something like 10% of stocks that value more than 20% revenue growth and margin expansion. If you look at history, 2% of stocks have actually achieved this. This is extremely difficult to do.
Q: That doesn’t count the base effects from last year, does it?
Oh no. I’m talking about current growth rates without the base effect. This is not happening. This is very, very unlikely to happen. Potentially with inflation or something like that, but in a normal perspective picture, you don’t understand that. This is an example of a discount for unstable conditions. They cannot, as a group, actually achieve this condition.
The third thing is the entry of new buyers into the market. How many new buyers are there? How much of the market are they? There are wide mood measures. There are leverage-financed purchases, and buyers and businesses make something like extended front purchases. This is all part of our bubble checklist. And you see today a fair amount of the US stock market on a bubble, but not the aggregate.
There are definitely pockets that meet these standards and this is dangerous. And then, as you said, what do you want to do, buy or sell? Well, that’s a whole other dangerous thing.
And that’s where, when in 2000-2001 we had bubble uptake – both the dollar and the stock market and how it was evolving at the time – it really forced us to go into streams, which is actually how we measure bubbles today. Where does the money come from? Who are the buyers and sellers? What are their balances? How much more money can they invest in this bubble compared to how much revenue they receive and when does it start to turn around? So for us, this process is to be able to look at the balances of buyers and sellers and think about when they were stretched to the extreme – where they will have no money, where there is more supply than possible demand. “
So you look at the IPO pipeline, you look at the creation of new tools, how fast these balances grow. And in this way we try to measure this cross. And it’s still a very, very dangerous game, as you say. So the third part is to be careful and be conservative in your thinking about the ability to determine the timing of these things, because this is the easiest place to die in asset prices, trying to be a bubble too early.
To listen to the entire podcast, Press here.