In his recent interview with CNBC, Jeremy Grantham discusses the first sign that a bubble is about to pop. Here’s an excerpt from the interview:
Grantham: I only specialize in what I call the really great bubbles. If you go back to 1929, to 2000, to Japan and the housing… the housing part of the housing bubble, and you ask how did conditions look?
Profit margins look great. The forecast was great. There was no chance of a recession. A few months ago smart people were saying there was a 20% chance of a recession in three years.
It’s quite amazing, and what happens after the bubbles break, there’s always a recession pretty quickly, and people never get it, people never forecast it, and along with the recession comes the drop in profit margins.
Going into the bubble’s breaking profit margins are always at a peak. Bubbles don’t peak for no reason, they peak because economic conditions are nearly perfect and that includes low inflation and high profit margins.
The first thing to go in a recession of course is the profit margin, and that’s very likely to happen this time.
We should be in a recession, mild or severe is the question, but we should be in some sort of recession fairly quickly and profit margins from a real peak have a long way that they can decline.
You can watch the entire discussion here:
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