By Egon von Greyerz

If president Biden wants to save the US economy, his first measure should not be to print $trillions of worthless new money but instead tell his secretary of the treasury Janet Yellen to withdraw all debased currency from circulation just as Aristophanes suggested in 405BC, Copernicus in 1517 and Gresham in 1560.

There is only one problem with withdrawing the debased dollars… THERE WOULD BE NO MONEY IN CIRCULATION AT ALL since all dollars are totally debased.


But this didn’t worry Queen Elisabeth I (daughter of Henry VIII) in 1560 in England. 

She ordered her adviser Sir Thomas Gresham to withdraw all debased currency from circulation and replace it with silver and gold coins with the highest fineness.

Queen Elisabeth’s father Henry VIII did not only got rid of many of his wives but also of good money. 

Gresham counselled her to get rid of the bad money that Henry had introduced. Henry had a lavish lifestyle and also conducted expensive wars against France and Scotland. 

Thus he did what virtually every nation has done in history and debased the currency.

Gresham noticed that bad money drives out good money. The consequences were that people saved the good money and only traded in bad money. 

Also, merchants in the Low Countries (Belgium, Netherlands) insisted to have bigger quantities of the new money since the purity was much lower.


The problem with paper or fiat money is that you can’t evaluate the fineness. The fact that $100 in 1971 has been debased by 98% is impossible to tell since it is still called $100 although the purchasing power in 2021 is only $2!

And this is how governments and central banks continually swindle their people by debasing their money without the people’s understanding or knowledge.

Imagine if Biden instructs Yellen to take all dollars (bad money) out of circulation and to replace it by good money – gold.

Good money could naturally not be another fiat currency or digital money but would have to be gold backed money. There are many ways to calculate what the gold price would need to be, depending on which measure for money supply is used.

But if we take US M3 which is a broad measure of money supply, and 100% gold backing, that would value gold at over $70,000.

This is obviously not a forecast but just a theoretical calculation. And as we know, gold is an international currency so China and Russia would have a major say in this issue.

Also, it is very questionable if the US has the 8,000 tonnes that it officially declares. There has been no full physical audit since the 1950s when Eisenhower was president.

China and Russia declares holdings of around 2,000 tonnes each. But China’s real holdings could be well in excess of 20,000t and Russia’s also well above the official 2,300t.


Gresham was clearly right that bad money pushes out good money. This is why most people in the world spend bad money today since it is continually debased and worthless tomorrow.

Instead assets that maintain purchasing power better are held and not spent such as gold and silver. But other investment assets such as stocks, bonds and property are also hoarded as they have appreciated considerably more than worthless fiat money.

Just for clarity the phrase Gresham’s law was coined 300 years after his death. But it wasn’t actually Gresham who came up with this concept but Copernicus (picture) in 1517 already.

Copernicus described this phenomenon as QTM (not MMT!) or Quantity Theory of Money. In simple terms this meant that if money quantity doubles, price also doubles. Thus the value of the money halves.

This is exactly what happens in the economy today. The chronic disease of budget deficits, debt expansion and money printing can never end well.

And nor will it this time, just as it didn’t in Roman times (180-280AD), for John Law in France around 1720 and hundreds of other times in history.

This is why Voltaire coined the phrase: “Paper Money Eventually Returns To Its Intrinsic value – ZERO.”


History gives us the same lesson over and over again and still mankind seems incapable of learning from history.

Arrogance and greed are clearly much more dominant traits than humility and contemplation.

Why would we otherwise make the same mistakes without fail when history so lucidly teaches us that we need not?

But since we are in a very ugly era when history is often eradicated with government’s or parliament’s tacit approval, we can see how history is not just ignored but also repudiated.


A final point on Copernicus’ or Gresham’s law about bad money and good money. We can even go back 2 1/2 millennia to find the same phenomenon.

In 405 BC, the Greek playwright Aristophanes wrote a play called the Frogs. This play was about Old Ways – Good and New Ways – Bad and that Athens should turn back to men of integrity as well as GOOD money:

“Gold or silver, each well minted, tested each and ringing clear.

Yet, we never use them! Others always pass from hand to hand.

Sorry brass just struck last week and branded with a wretched brand.”

Plus ça change, plus c’est la même chose (The more it changes, the more it stays the same).

So the world has seen money destroyed regularly for 2,400 years at least and still we haven’t learnt.

Reminds me of Pete Seeger’s song from 1962 – “Where have all the flowers gone” with the lines: “When will you ever learn, when will you ever learn”

I do realise that there might be too much history and nostalgia in this article for the younger generation. My point with this is obviously to stress the utmost importance of history and the past in order to understand the present and the future.


I would expect the new Dream Team of Biden and Yellen (BY) to set all records when it comes to money printing. They are already out of the starting blocks with $2 trillion of new fake money before they have even begun.

Trump increased the debt by almost $8 trillion but once BY have got going with all the multiple programmes they have laid out, no one can predict where it will all lead to. It is likely to be a minimum of $3.5 trillion per year as we have just seen. But to increase that to $5-7t is more likely. So a total of $20-28t for 4 years doesn’t seem implausible.

This sum doesn’t include higher interest rates which is very likely or saving a failing financial system which is even more likely. All this could easily amount to $100s of trillions or more.

And once the $1.5 trillion derivative bubble bursts, BY will set the record as the biggest money printers in history and the ones that extinguished the dollar.

We must remember that the current problems started in September 2019 with the ECB and Fed panicking due to problems in the financial system.

The Covid-19 outbreak couldn’t have started at a better time for the EU and the US.

Normally governments start a war or a major terrorist attack in order to justify massive increases in debt and money printing. No one knows how the coronavirus started but it certainly came at a very opportune moment for governments and central banks under pressure.


So far the $10s of trillions of printed money has not translated into inflation in official consumer prices.

But we are now seeing major inflation in commodity prices.

If we just look at food commodity prices, they are up 54% since July 2020.

And if we look at general commodity prices – up 89% since April 2020 – they are telling us that hyperinflation is not far away.


The 50 year chart below of the Dow looks frightening with its bright red colour. 

That is obviously intentional because the Dow is now finishing an incredible move which started in the low 800s 50 years ago.

This quarterly chart shows four higher tops since 2017. But the warning signal is the blue RSI indicator at the bottom. Every new top in the Dow has been unconfirmed by the RSI momentum indicator as all the blue tops are lower in spite of higher Dow tops.

Normally this is a very bearish sign.

In addition our proprietary cycle indicators are telling us that the Dow could be topping now.

But whether the Dow tops here or we will see a final hurrah is irrelevant. What is important is that once the Dow turns, we are going to see the most vicious bear market in history. A fall of 90% or more in real terms is very likely.

That will be the start of a hyperinflationary depression of a magnitude that few can imagine.

After the hyperinflationary period, a deflationary depression is likely. So very difficult times ahead.

The catalyst could be anything from the sheer size of the bubble, to debt or banking problems, or that the Covid vaccine is not effective or even dangerous.


Gold is finishing its correction now before a very strong move to new highs.

It serves no purpose to give targets for gold. Over 10 years ago I indicated that gold should reach $10,000 in today’s money.

Many gold experts are now giving higher and higher targets. In my view these forecasts serve no purpose if at the same time the forecaster doesn’t indicate what happened to the purchasing power of the currency.

Gold $20,000 or $75,000 sounds sensational. But what is a dollar worth at that point.

When the dollar reaches almost Zero gold will reach almost Infinity

As I have indicated above, the dollar and most currencies are likely to reach “almost” zero. At that point gold will not be $50,000 or $100,000 but should reach “almost” infinity.

Infinity sounds unreal and it is of course. But the point I am making is that all these bullish price forecasts for gold serve very little purpose if the forecaster doesn’t indicate how much the currency has depreciated at the same moment.

Suffice it to say gold is likely to at least reflect the debasement of the currency it is measured in but probably a lot more.

The reason for that is again Gresham’s law.

Remember that bad money drives out good money. Also remember that gold is the only money that has survived intact in history.

The gold market is definitely the best example of Gresham’s law.

Not only does bad fiat money drive physical gold out of circulation. So why spend your gold when it throughout history has always appreciated against paper money, or to express it more correctly, when paper money is repeatedly debased against gold.

For example, the dollar is down 98% against gold since 1971 and down 85% since 2000.

But what has really driven out real or physical gold is paper gold.

With paper gold currency determining the gold price, it serves absolutely no purpose to spend your physical gold.

The diagram below show why:

Daily gold trading, virtually entirely paper gold, is 850x daily mine production!

There can’t be a clearer sign that price discovery is impossible in this totally fake paper gold market.

Whilst fake paper gold is traded at $70 trillion a year, annual mine production is a mere $213 billion. 

It is a travesty that the real price of gold is set in a casino with worthless electronic entries that have nothing to do with gold. 

This fake gold market will one day discover that there is no physical gold to settle the fake contracts. 

 I said that gold will reach infinity. 

How high can infinity go……… 

 Get your physical gold now before infinity comes.

Doug Casey on Whether the US Dollar is Headed for an Inflationary or Deflationary Collapse

by Doug Casey


International Man: In the past decade, the Fed’s money printing has created bubbles in stocks, bonds, real estate, and other many areas. It’s likely that the stimulus and money printing will not only continue but accelerate at breathtaking speeds in 2021.

What do you think the prospects are for what the great Austrian economist Ludwig von Mises called a "crack-up boom?"

Doug Casey: First of all, we have to define what Mises meant by a "crack-up boom." It can occur when the public realizes that money is being printed at a great rate, and it's likely to continue being printed at a great rate. 

The public then starts moving out of money to buy anything of real value. All that money is passed around faster and faster, like an old maid card, causing a "crack-up boom." It's not a real boom. 

It’s caused by fear, not prosperity. The desperation of trying to get into real goods and get out of the US dollar creates what you might call uneconomic economic activity.

They won’t try to put the money into productive enterprises, rather just tangible assets that will defend them from inflation. 

The most famous crack-up boom in modern history, of course, was in Weimar Germany during the early 1920s.

Are we heading in that direction in the US? Well, there are differences. For one, the US isn’t just coming out of a devastating war. That was an element why it got as bad as it did in Germany. 

On the other hand, the US government is much more profligate with many more programs than the German government after World War I. 

Of course, the US is losing it’s Forever Wars in an undisclosed—but large—number of countries.

Despite being so much bigger and with so much more real wealth, the US government’s current spending habits may make things even worse than for Germany after World War I and subsequent reparations in the 1920s. 

A chaotic crack-up boom is possible, and a significantly lower standard of living for the average American is a sure thing. Now is the time, the last minute as it were, to start planning for it. A few years ago would have been better.

International Man: On the other hand, what are the prospects for a deflationary collapse, at least initially, as one or more of these historical bubbles in the financial markets inevitably burst?

Doug Casey: This is an argument that students of Austrian economics have debated since at least the mid-1960s.

Is all this money printing going to result in runaway inflation, or will all the debt result in catastrophic deflation and collapse—or both in sequence? 

So far, the inflationists have been right because the Federal Reserve has always come to the rescue, printing enough money to prop up the house of cards built by previous inflation, but there's no guarantee that they'll succeed in the future.

Their failure to bail out Bear Stearns and Lehman Brothers during the collapse of 2008 almost brought the system down. 

This time they’ll be forced to bail out almost everybody. 

Ultimately, we'll wind up with a worthless dollar, but along the way, there will be some serious deflation scares. 

If the Fed doesn’t bail out a major corporation or industry quickly enough, or to a great enough degree, things could get out of control.

They're walking a tight rope above the Grand Canyon, but they’re economic stumblebums.

The economy is being run by a bunch of suits in the Eccles Building in Washington DC. 

They’re academics with no practical experience in the real economy.

International Man: The gap between GDP growth and the Fed’s balance sheet is widening to previously unthinkable levels. It’s an indication of just how much currency is being created relative to the underlying economy. What do you make of this, and where are things headed?

Doug Casey: Trends in motion tend to stay in motion until they reach a crisis—at which point, anything can happen. That’s where we are right now.

If the Fed were a poker player, I’d say it was on tilt—making desperate but foolish bets hoping to get out even. It’s hard to recover from that. 

They can’t stop printing money, or the whole rotten structure will come down. 

But if they keep printing money, there’s no telling where the next explosion of inflation will erupt. So far, it has been in the stock, bond, and real estate markets. I suspect that commodities will be the next area.

The more that government tries to fine-tune the economy—which, incidentally, is a phrase that they don't use anymore, in recognition of the fact things are actually out of control—the more it will gyrate like an elevator with a lunatic at the controls. 

To get $1 of actual economic growth, they know that they have to print four, five, or six dollars of funny money.

We’re way beyond the silly notion of "fine-tuning" the economy at this point. Fine-tuning has given way to hitting the economy with a monkey wrench or a sledgehammer.

International Man: What do you think will happen with the US dollar over the next four years?

Doug Casey: The fact that they’re trying to go to a digital dollar is guaranteed to make it worse and to make the US dollar more of a hot potato than it has ever been.

It’s going to have huge international, as well as domestic, consequences. The dollar—not wheat, Boeings, or IBMs—has been the major US export for decades now. 

No one knows how many are held outside the US, but at some point, it will be replaced as the world’s currency. 

When that happens, they’ll start flooding back home, and domestic prices will explode. 

At the same time, real US wealth will be exported in exchange for those dollars. The domestic standard of living will fall dramatically.

The government’s response will likely be foreign exchange controls, which will just aggravate things. The US is looking more and more like Argentina.

International Man: Given everything we’ve just talked about, what can the average person do?

Doug Casey: Other than buying a lot of gold, silver, and the stocks of companies that mine them, now might be an excellent time to buy a house you like if you can do it with a 3% fixed-rate long-term mortgage.

Whether the house in question goes up in value or not, you can be pretty sure your mortgage is going to be inflated into insignificance. 

It's an excellent financial bet, a great way to get short the dollar.

In fact, a friend just recently bought a hundred-thousand-dollar car, which costs more than some houses. 

He could have paid cash, but since they offered financing at 1.9% over six years, it was like a gift. 

Of course, he bought the car—the way many will buy things if the crack-up boom arrives. The depreciation on the loan will offset the depreciation on the car.

As a result of all this currency printing, you're going to see more people becoming preppers as well—stocking up on food, shelter, and ammunition because of the government's inflation as well as increasing regulations.

Assuming that Biden, or Harris, will be president, this administration is likely to stretch the actual fabric of society to the breaking point. Being a prepper is smart. 

And that would include transferring any significant cash holdings that you have into gold and/or silver. That's what the average person can do.

If the average person wants to speculate, he can buy gold stocks, which are very cheap. I think they're going to go into a bubble in the next few years. 

Gold stocks and small oil stocks are the two things that I like best.

A China Strategy to Reunite America’s Allies

China’s autocratic ways and its strategic ambition are prompting the world’s democracies to band together against it. But, as the European Union’s recent decision to sign an investment accord with China makes clear, China’s geopolitical heft and the allure of Chinese trade and investment are tempting many to curry favor with it.

Charles A. Kupchan, Peter Trubowitz

WASHINGTON, DC/LONDON – America’s relationships with its core democratic partners are set to rebound dramatically after President-elect Joe Biden takes office. 

Allies in Europe and Asia relish the prospect of an American president committed to adhere to democratic traditions at home, honor strategic commitments abroad, and be a team player.

Broadly defined, intervention refers to actions that influence the domestic affairs of another sovereign state, and they can range from broadcasts, economic aid, and support for opposition parties to blockades, cyber attacks, drone strikes, and military invasion. Which ones will the US president-elect favor? 

Solidarity among the world’s democracies is especially important when it comes to standing up to China. But the European Union’s decision last week to sign an investment accord with that country underscores the potential for serious discord. 

Even though the Biden camp cautioned the EU against moving ahead with the agreement, it nonetheless sealed the deal (pending ratification).

To be sure, China’s headstrong ways motivate the world’s democracies to band together against it. Yet its growing geopolitical heft and the allure of Chinese trade and investment also tempt many countries, democracies included, to curry favor with its government. 

Accordingly, Biden should launch early in his presidency a concerted effort to forge a united democratic front on China, guided by the following three principles.

First, the United States should dial down the rhetoric and treat China as a formidable competitor, not an implacable foe. 

A US strategy of rigid containment or aggressive rollback would find few adherents in either Europe or Asia, implying that it would backfire strategically.

Democrats and Republicans may be seeking to outdo each other when it comes to calls for getting tough with China. But if foreign partners see Biden as spoiling for a fight, the US will do more to divide than unite the world’s major democracies. 

China already has significant geopolitical and economic clout in Asia and beyond – especially through the Belt and Road Initiative, its massive investment program in global infrastructure and commercial development. The genie cannot be put back in the bottle.

Pragmatic realism, not bombast, should guide US strategy toward China. Of course, the US should make clear its red lines, especially when it comes to Taiwan’s autonomy and freedom of navigation in the Asia-Pacific. But the US and China should aim for shared leadership in the region – a strategic objective that would enjoy ample support among US allies already fearful of the escalating Sino-American rivalry.

Second, the US and its key allies need to link arms to confront China on trade and investment. Economic decoupling is not in the offing; China is far too integrated into the global economy. 

Nonetheless, import competition from China and its unfair trade practices have cost the developed democracies millions of jobs over the past two decades. Pressing China to level the playing field can work to their economic advantage.

America and its allies need to team up to maximize effectiveness. Acting unilaterally, as President Donald Trump did – and as the EU is now doing – only plays to China’s strength by diluting the collective bargaining power of the world’s democracies. Trump’s tariffs have done little to liberalize China’s market or bring down the US trade deficit.

Instead, global pressure will be required to push back against China’s harmful trade practices, including state subsidies and intellectual property theft. 

Though full-scale decoupling is not in the cards, the US should join with its democratic allies to pull back from China when it comes to sensitive technologies, such as semiconductors and artificial intelligence. 

The same holds for imposing new export controls, scrutinizing and regulating Chinese investment abroad, steering clear of Huawei when it comes to building 5G networks, and repatriating high-end production.

These steps would align well with the domestic measures that the Biden administration and the governments of many other democracies are poised to take to generate more jobs and better pay for blue-collar workers. 

The goal must be to ensure that economic growth and gains from trade are more inclusive. Spending on infrastructure, education and retraining, research and development, and renewable energy can help the major democracies maintain their competitive edge over China.

Finally, the US and its democratic partners should speak with a single voice when it comes to standing up for human rights. Resolute condemnation of China’s unwillingness to grant basic freedoms to its citizens will put China’s leadership on the defensive in the court of international opinion. And it will help repair the erosion of America’s moral authority under Trump.

Democratic leaders can further raise the costs to China’s rulers by imposing sanctions on those responsible for oppressing the Uighur minority in Xinjiang and cracking down on Hong Kong. 

When China resorts to economic coercion to punish countries for criticizing its human rights record, as it is doing with Australia, the world’s democracies should respond in kind.

Working to build a consensus around these three principles would not only signal the depth of the Biden administration’s commitment to work with its partners. It would also play to America’s strongest suit when it comes to handling China: its alliances.

China has only one ally – North Korea – while the US has loyal partners worldwide. China’s economy will be the world’s largest by the end of the decade, but its GDP will remain roughly one-third the collective size of the world’s major democracies. 

As long as they stand together and aggregate their geopolitical and economic heft, the main democracies will outclass China for the foreseeable future.

Biden will need to summon all of his persuasive skills to forge a coordinated approach toward China. But his task is made easier by the fact that even as they eye the benefits of more commerce with China, democracies in Europe and Asia are anxious about China’s intentions. 

They will welcome a US president who respects allies and appreciates the need for teamwork to deal with China.

US President-elect Joe Biden may have promised a “return to normalcy,” but the truth is that there is no going back. The world is changing in fundamental ways, and the actions the world takes in the next few years will be critical to lay the groundwork for a sustainable, secure, and prosperous future.

Charles Kupchan, a member of the National Security Council under President Bill Clinton and President Barack Obama, is Professor of International Affairs at Georgetown University, Senior Fellow at the Council on Foreign Relations, and the author of Isolationism: A History of America’s Efforts to Shield Itself from the World.

Peter Trubowitz, Professor of International Relations and Director of the US Centre at the London School of Economics, is Associate Fellow at Chatham House and the author of Politics and Strategy: Partisan Ambition and American Statecraft.

Europe has handed China a strategic victory

This is the wrong time for the EU to agree an investment treaty with Beijing

Gideon Rachman 

© James Ferguson/FT

Ursula von der Leyen, the president of the European Commission, says she wants to lead a “geopolitical commission”. 

But Ms Von der Leyen concluded 2020 by sending a truly awful geopolitical message — as her commission signed off on an investment treaty between the EU and China.

Over the past year, China has crushed the freedom of Hong Kong, intensified oppression in Xinjiang, killed Indian troops, threatened Taiwan and sanctioned Australia. 

By signing a deal with China nonetheless, the EU has signalled that it doesn’t care about all that. 

As Janka Oertel, director of the Asia programme at the European Council on Foreign Relations think-tank, puts it: “This is a massive diplomatic win for China.”

It is also a considerable kick in the teeth for Joe Biden. The US president-elect has stressed that, after Donald Trump, he wants to make a fresh start with Europe. 

In particular, the Biden administration wants to work on China issues together with fellow democracies. 

Jake Sullivan, Mr Biden’s national security adviser, issued a last-minute plea for the Europeans to hold off on signing the deal — at least until they had a chance to discuss it with the new administration. He was ignored. 

EU officials offer several justifications for their decision. They say that many of the concessions the EU has got from China have already been granted to the US, as part of America’s own “phase-one” trade deal. (These include sectoral openings in several industries, as well as changes to joint-venture requirements.) 

Brussels officials point out that the US did not ask for European permission before concluding its own deal with China. They justify the EU’s decision as a demonstration of “strategic autonomy”. 

These EU arguments sound tough-minded. But, in fact, they are naive. It is naive to believe that China will respect the agreement it has signed. It is naive to ignore the geopolitical implications of doing a deal with China right now. 

And it is naive to think that the darkening political climate in Beijing will never affect life in Brussels or Berlin.

The EU says that this deal will “discipline the behaviour” of China’s state-owned enterprises, which will now be required “to act in accordance with commercial considerations”. 

But China made very similar commitments when it joined the World Trade Organization in 2001. 

Pledges to rein in state subsidies made 20 years ago are now being offered up again as fresh concessions. Beijing’s promise to “work towards” enforcing international conventions on labour standards are also laughably weak. 

As Shi Yinhong, a prominent Chinese academic, pointed out: “On labour, it’s impossible for China to agree. Can you imagine China with free trade unions?” 

Over the past year, China has repeatedly demonstrated its willingness to ignore treaty commitments. Its new national security law violates an agreement with Britain that guaranteed the autonomy of Hong Kong. 

China has also imposed tariffs on Australian goods in violation of the China-Australia free trade agreement. 

The timing of this deal is exquisite for Beijing, since it presents the Biden team with a fait accompli. Reinhard Bütikofer, chairman of the European parliament’s delegation on China, says: “We’ve allowed China to drive a huge wedge between the US and Europe.”

The EU-China deal was pushed hard by Angela Merkel, the German chancellor, and concluded right at the end of her country’s presidency of the EU. Ms Merkel is seen as a champion of liberal values. 

But her approach to China is largely driven by commerce. She knows that the German car industry has had a rough few years, and China is its largest market. 

Ms Merkel’s determination to press ahead may also reflect her own scepticism about the future of the US. In a speech in 2017, she said that Europe could no longer rely on America. The election of Mr Biden has probably not changed that view. 

Many Europeans also believe that the US is on the brink of a new cold war with China — and want little part of that. 

Some of these arguments are reasonable enough. It is hard to look at current events in Washington and feel totally confident about the stability of the US or the Atlantic alliance. A European desire to avoid military confrontation in the Pacific is also rational. 

But relying on an American security guarantee in Europe, while undermining American security policy in the Pacific, does not look like a wise or sustainable policy over the long run.

The Europeans are also kidding themselves if they think they can be blind to the increasingly authoritarian and aggressive nature of Xi Jinping’s China. 

For the past 70 years, Europeans have benefited from the fact that the world’s most powerful nation is a liberal democracy. 

If an authoritarian nation, such as China, displaces America as the dominant global power, then democracies all over the world will feel the consequences. 

Even in the current geopolitical order, China has repeatedly demonstrated its willingness to use its economic power as a strategic weapon. 

By deepening their economic reliance on China — without co-ordinating their policy with fellow democracies — European nations are increasing their vulnerability to pressure from Beijing. 

That is a remarkably shortsighted decision to make, for a “geopolitical commission”.

Waiting For The Last Dance

Jeremy Grantham


- Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another.

- The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value.

- I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble.

- This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely.

Executive Summary

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. 

Make no mistake - for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

"The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can't have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both - and the price we pay for having this market go higher and higher is a lower 10-year return from the peak."1

Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. 

With reasonable skill at evaluating assets the valuation-based allocator can expect to survive these phases intact with some small outperformance. "Small" because the opportunities themselves are small. If you wanted to be unfriendly you could say that asset allocation in this phase is unlikely to be very important. 

It would certainly help in these periods if the manager could also add value in the implementation, from the effective selection of countries, sectors, industries, and individual securities as well as major asset classes.

The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value. This is not so bad in bear markets because important bear markets tend to be short and brutal. 

The initial response of clients is usually to be shocked into inaction during which phase the manager has time to reposition both portfolio and arguments to retain the business. 

The real problem is in major bull markets that last for years. Long, slow-burning bull markets can spend many years above fair value and even two, three, or four years far above. 

These events can easily outlast the patience of most clients. And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy. As I like to say, there is nothing more supremely irritating than watching your neighbors get rich.

How are clients to tell the difference between extreme market behavior and a manager who has lost his way? 

The usual evidence of talent is past success, but the long cycles of the market are few and far between. Winning two out of two events or three out of three is not as convincing as a larger sample size would be. 

Even worse the earlier major market breaks are already long gone: 2008, 2000, or 1989 in Japan are practically in the history books. Most of the players will have changed. Certainly, the satisfaction felt by others who eventually won long ago is no solace for current pain experienced by you personally. 

A simpler way of saying this may be that if Keynes really had said, "The market can stay irrational longer than the investor can stay solvent," he would have been right.

I am long retired from the job of portfolio management but I am happy to give my opinion here: it is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. 

I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. 

This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible.

I came fairly close to calling one bull market peak in 2008 and nailed a bear market low in early 2009 when I wrote "Reinvesting When Terrified." That's far more luck than I could hope for even over a 50-year career. 

Far more typically, I was three years too early in the Japan bubble. We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. 

It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! 

But we also stayed completely out for three years after the top and ultimately made good money on the round trip.

Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. 

We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses.

Believe me, I know these are old stories. 

But they are directly relevant. For this current market event is indeed the same old story. This summer, I said it was likely that we were in the later stages of a bubble, with some doubt created by the unique features of the COVID crash. 

The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals. 

For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation. But now we have it. In record amounts.

My colleagues Ben Inker and John Pease have written about some of these examples of mania in the most recent GMO Quarterly Letter, including Hertz, Kodak, Nikola, and, especially, Tesla. 

As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. 

What has 1929 got to equal that? Any of these tidbits could perhaps be dismissed as isolated cases (trust me: they are not), but big-picture metrics look even worse.

The "Buffett indicator," total stock market capitalization to GDP, broke through its all-time-high 2000 record. In 2020, there were 480 IPOs (including an incredible 248 SPACs2) - more new listings than the 406 IPOs in 2000. 

There are 150 non-micro-cap companies (that is, with market capitalization of over $250 million) that have more than tripled in the year, which is over 3 times as many as any year in the previous decade. 

The volume of small retail purchases, of less than 10 contracts, of call options on U.S. equities has increased 8-fold compared to 2019, and 2019 was already well above long-run average.

Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller - who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect - is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my!

So, I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses. 

It is precisely what you should expect from a late-stage bubble: an accelerating, nearly vertical stage of unknowable length - but typically short. 

Even if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears.

I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble. 

A bubble that is beginning to look like a real humdinger.

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. 

Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. 

The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book.

But today's wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. 

Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. 

Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there's the rub.

All bubbles end with near universal acceptance that the current one will not end yet... because. 

Because in 1929 the economy had clicked into "a permanently high plateau"; because Greenspan's Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that "U.S. house prices merely reflect a strong U.S. economy" as he perpetuated the moral hazard: if you win you're on your own, but if you lose you can count on our support.

Yellen, and now Powell, maintained this approach. All three of Powell's predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect. 

Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.

Now once again the high prices this time will hold because... interest rates will be kept around nil forever, in the ultimate statement of moral hazard - the asymmetrical market risk we have come to know and depend on. 

The mantra of late 2020 was that engineered low rates can prevent a decline in asset prices. Forever! 

But of course, it was a fallacy in 2000 and it is a fallacy now. In the end, moral hazard did not stop the Tech bubble decline, with the NASDAQ falling 82%. Yes, 82%!

Nor, in 2008, did it stop U.S. housing prices declining all the way back to trend and below - which in turn guaranteed first, a shocking loss of over eight trillion dollars of perceived value in housing; second, an ensuing weakness in the economy; and third, a broad rise in risk premia and a broad decline in global asset prices (see Exhibit 1). 

All the promises were in the end worth nothing, except for one; the Fed did what it could to pick up the pieces and help the markets get into stride for the next round of enhanced prices and ensuing decline. And here we are again, waiting for the last dance and, eventually, for the music to stop.


Nothing in investing perfectly repeats. Certainly not investment bubbles. Each form of irrational exuberance is different; we are just looking for what you might call spiritual similarities. 

Even now, I know that this market can soar upwards for a few more weeks or even months - it feels like we could be anywhere between July 1999 and February 2000. Which is to say it is entitled to break any day, having checked all the boxes, but could keep roaring upwards for a few months longer.

My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment, the most pressing issue facing the world economy will have been solved. 

Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. "Buy the rumor, sell the news." But remember that timing the bursting of bubbles has a long history of disappointment.

Even with hindsight, it is seldom easy to point to the pin that burst the bubble. The main reason for this lack of clarity is that the great bull markets did not break when they were presented with a major unexpected negative. 

Those events, like the portfolio insurance fiasco of 1987, tend to give sharp down legs and quick recoveries. They are in the larger scheme of things unique and technical and are not part of the ebb and flow of the great bubbles. 

The great bull markets typically turn down when the market conditions are very favorable, just subtly less favorable than they were yesterday. And that is why they are always missed.

Either way, the market is now checking off all the touchy-feely characteristics of a major bubble. 

The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears. 

In 1929, to be a bear was to risk physical attack and guarantee character assassination. 

For us, 1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. 

But in the last few months the hostile tone has been rapidly ratcheting up. 

The irony for bears though is that it's exactly what we want to hear. It's a classic precursor of the ultimate break; together with stocks rising, not for their fundamentals, but simply because they are rising.

Another more measurable feature of a late-stage bull, from the South Sea bubble to the Tech bubble of 1999, has been an acceleration3 of the final leg, which in recent cases has been over 60% in the last 21 months to the peak, a rate well over twice the normal rate of bull market ascents. 

This time, the U.S. indices have advanced from +69% for the S&P 500 to +100% for the Russell 2000 in just 9 months. Not bad! And there may still be more climbing to come. But it has already met this necessary test of a late-stage bubble.

It is a privilege as a market historian to experience a major stock bubble once again. 

Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage crisis, and now the current bubble - these are the four most significant and gripping investment events of my life. 

Most of the time in more normal markets you show up for work and do your job. Ho-hum. And then, once in a long while, the market spirals away from fair value and reality. 

Fortunes are made and lost in a hurry and investment advisors have a rare chance to really justify their existence. But, as usual, there is no free lunch. 

These opportunities to be useful come loaded with career risk.

So, here we are again. I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. 

But few professional or individual investors will have been able to have ducked. 

The combination of timing uncertainty and rapidly accelerating regret on the part of clients means that the career and business risk of fighting the bubble is too great for large commercial enterprises. 

They can never put their full weight behind bearish advice even if the P/E goes to 65x as it did in Japan.

The nearest any of these giant institutions have ever come to offering fully bearish advice in a bubble was UBS in 1999, whose position was nearly identical to ours at GMO. That is to say, somewhere between brave and foolhardy. 

Luckily for us though, they changed their tack and converted to a fully invested growth stock recommendation at UBS Brinson and its subsidiary, Phillips & Drew, in February 2000, just before the market peak. 

This took out the 800-pound gorilla that would otherwise have taken most of the rewards for stubborn contrariness. 

So, don't wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. 

For them it is a horribly non-commercial bet. Perhaps it is for anyone.

Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. 

It is good for business and intellectually undemanding. 

It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. 

This is why you have always had bullish advice in a bubble and always will.

However, for any manager willing to take on that career risk - or more likely for the individual investor - requiring that you get the timing right is overreach. 

If the hurdle for calling a bubble is set too high, so that you must call the top precisely, you will never try. And that condemns you to ride over the cliff every cycle, along with the great majority of investors and managers.

What to Do?

As often happens at bubbly peaks like 1929, 2000, and the Nifty Fifty of 1972 (a second-tier bubble in the company of champions), today's market features extreme disparities in value by asset class, sector, and company. 

Those at the very cheap end include traditional value stocks all over the world, relative to growth stocks. 

Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year!

Similarly, Emerging Market equities are at 1 of their 3, more or less co-equal, relative lows against the U.S. of the last 50 years. 

Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow. 

Good luck!

1 Jeremy Grantham, CNBC, November 12, 2020.

2 A SPAC is a Special Purpose Acquisition Company, a shell that is created for the specific purpose of merging with some private company to take that company public more quickly than could have been the case with a normal initial public offering (NYSEARCA:IPO) process.

3 My paper of January 2018, "Bracing Yourself for a Possible Near-term Melt-up," has substantially more data and exhibits on this topic.