The US stock market bubble will eventually burst

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A further surge in the stock markets would further worsen wealth inequalities as stocks are disproportionately owned by the rich. In contrast, by and large, small savers hold their money in deposits whose value is eroded by inflation. They would be crushed again. In addition, the more stocks are pushed higher over the next few years, the more adjustment will follow.

I guess governments and central banks would try to take other steps to contain inflation first in the hope of avoiding raising interest rates. But in the end, it won’t succeed. At some point in the future, there will not only be an upsurge in inflation, but also a rise in real interest rates, which will trickle down to bond yields. As this happens, it would hurt the valuation of stocks.

In an ideal world, central banks would tighten policy only gradually, allowing bond yields to rise only gradually, perhaps accompanied by a decline in real stock values ​​only gradually, without a stock market crash or financial upheaval. major. But getting there will be a superhuman task. Overall, when there is an economic transformation or a radical change in policy, the markets do not react gradually.

In recent years, global stock markets have enjoyed a boon. Prices have soared far beyond what you might reasonably consider justified by actual economic performance. This may not yet be the case, but I suspect that at some point this trend will reverse, with global equity markets underperforming the real economy.

In short, I suspect that in the immediate future Grantham will be wrong. But looking further, I have the unpleasant feeling that he will be right.

Roger Bootle is President of Capital Economics.

[email protected]

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