(Bloomberg) – Parts of the US stock market are in a bubble, but selling too soon is the “easiest place to die” for an investor, according to Greg Jensen, co-chief investment officer of Bridgewater Associates LP.
Jensen took part in Bloomberg’s What Goes Up podcast to discuss this week’s Federal Reserve meeting and how abundant liquidity from the central bank, coupled with a booming economic recovery, is what makes the conditions ripe for markets to bubble.
Below are slightly edited highlights of the conversation. Click here to listen to the full podcast, or subscribe to Apple Podcasts, Spotify, or wherever you listen.
Q. Bubbles are a very strange phenomenon because the risk-reward relationship is so interesting. It almost seems like an investor has to participate in bubbles. Because if you think it’s a bubble too soon, you are really missing out on the best returns from them. How do you know when it’s time to get out of an overvalued market?
A: We have been systematic throughout Bridgewater’s history. So we’ve had the kind of discussion we’re having now – a very qualitative view of the world – but translated into methods of measuring it. So you’re using something like a bubble, right? A classic qualitative thing. What do you mean by bubble How do you measure that it is a bubble? Suffice it to say that the prices are high in relation to history, or what is the real level? And how reliable is it then?
And we have six gauges of a bubble that we use all over the world. Then you could apply it to cryptocurrency. You can apply it to anything you wanted in the world, stocks, bonds, anything. Our basic scoreboard is: Are the prices high compared to traditional measures? Are the prices discounting unsustainable terms? For example, today there are around 10% of stocks pricing in sales growth of more than 20% and margin expansion. If you look at history, 2% of stocks actually did this. It is an extremely difficult thing.
Q: These are not the base effects from last year, are they?
On a. I’m talking about sustained growth rates with no base effect. It doesn’t happen. It’s very, very unlikely. Maybe inflation or something you maybe could, but in a normal forward-looking picture, you don’t get that. So this is an example of discounting unsustainable terms. As a group, you cannot meet this requirement.
The third is that new buyers are entering the market. How many new buyers are there? How big is the market share? There are the general mood measures. There are leveraged purchases and buyers and businesses make advanced forward purchases. That’s all part of our checklist for a bubble. And you see quite a lot of the US stock market in a bubble today, but not the aggregate.
There are definitely bags that meet these standards and that is dangerous. And then, as you said, what would you like to do, buy or sell? Well, that’s another dangerous thing altogether.
And right there, when we had a drawdown related to the bubble in 2000-2001 – both the dollar and the stock market and how that was going back then – we really forced ourselves to get poured, which basically taken so is 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 you put into this bubble than how much income you get and when does it start to tip over? And so for us this process of being able to look at the balance sheets of buyers and sellers and think about when they have been stretched to the limit – where they don’t have the money, where more supply comes than possible demand. “
So you look at the IPO pipeline, you look at the creation of new instruments, how fast those balance sheets are growing. And so we try to measure this cross. And it’s still a very, very dangerous game as you say. So the third part is careful and conservative in considering the possibility of timing these things as this is the easiest place to die in asset prices if you try to close a bubble too soon.