(Bloomberg) – Parts of the U.S. stock market are in a bubble, but a premature short circuit is the “easiest place to die” for an investor, according to Bridgewater Associates LP investment interlocutor Greg Jensen.
Jensen joined Bloomberg’s podcast “What Goes Up” to discuss this week’s Federal Reserve meeting and how abundant liquidity from the central bank, combined with booming economic growth, makes conditions mature for markets to become bubbles.
Q. Bubbles are a very strange phenomenon because the relationship between risk and reward is so interesting. It almost seems that as an investor you have to participate in bubbles. Because if you think the balloon is too early, you’re really going to miss the best return of them. How do you know when it’s time to get out of an overpriced market?
A: Throughout the history of Bridgewater we have been systematic. So we’ve taken the kind of debate we’re having now – a very qualitative view of the world – but translated into ways to measure it. So you take something like a balloon, right? A classic qualitative thing. What do you mean by bubble? How do you measure it’s a balloon? Is it enough to say that prices are high compared to history or what is the real measure? And then how reliable is it?
And we have six bubble meters that we use all over the world. Then you could apply it to cryptocurrency. You can apply it to anything you want in the world to stocks, to bonds to anything. Our basic overview of the results is: Are prices high compared to traditional measures? Do prices give way to unsustainable conditions? As an example today, there is something like 10% of stocks that value more than 20% of revenue growth and margin expansion. If you look at history, 2% of stocks have actually achieved that. This is extremely difficult to do.
Q: That doesn’t count with the basic effects from last year, does it?
A: No. I’m talking about current growth rates with no underlying effect. That is not happening. That is very, very unlikely to happen. Potentially with inflation or something similar, but in the normal kind of perspective picture you don’t realize it. So, this is an example of discounting unsustainable conditions. They as a group cannot really achieve that condition.
The third thing is new customers entering the market. How many new customers? What is their market share? There are broad measures of mood. There are leverage-financed purchases, and customers and businesses in some way make extended purchases in advance. It’s all part of our bubble checklist. Even today, you see a fair amount of the U.S. stock market in a bubble, but not the total.
There are definitely pockets that meet those standards and that’s dangerous. And then, like you said, what do you want to do, buy or sell? Well, that’s a whole other dangerous thing.
And that’s where, when we had a bubble-related withdrawal from 2000 to 2001 – both the dollar and the stock market and how it was played at the time – it really made us get into the flow, which is basically how we measure bubbles today. Where does the money come from? Who are the buyers and sellers? What are their balance sheets? How much more money can I invest in this bubble compared to the revenue they generate and when does it start to spin? And so for us, the process of being able to look at the balance sheets of buyers and sellers and think about when they have stretched to their limits – 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 instruments, how fast those balance sheets grow. And so we try to measure that cross. And it’s still a very, very dangerous game, as you say. So the third part be careful and be conservative in thinking about the possibility of timing these things, because it’s kind of the easiest place to die in property prices, trying to create a short bubble too soon.