|Source: GMO Capital Q3 2011 Letter|
Grantham's explanation of the chart:
"Historians would notice that all major equity bubbles (like those in the U.S. in 1929 and 1965 and in Japan in 1989) broke way below trend line values and stayed there for years. Greenspan, neurotic about slight economic declines while at the same time coasting on Volcker’s good work, introduced an era of effective overstimulation of markets that resulted in 20 years of overpriced markets and abnormally high proﬁt margins. In this, Greenspan has been aided by Bernanke, his acolyte, who has continued his dangerous policy. The ﬁrst of the two great bubbles that broke on their watch did not reach trend at all in 2002, and the second, in 2009 – known by us as the ﬁrst truly global bubble – took only three months to recover to trend. This pattern is unique. Now, with wounded balance sheets, perhaps the arsenal is empty and the next bust may well be like the old days. GMO has looked at the 10 biggest bubbles of the pre-2000 era and has calculated that it typically takes 14 years to recover to the old trend. An important point here is that almost no current investors have experienced this more typical 1970’s-type market setback. When one of these old fashioned but typical declines occurs, professional investors, conditioned by our more recent ephemeral bear markets, will have a permanent built-in expectation of an imminent recovery that will not come. For the record, Exhibit 1 shows what the S&P 500 might look like from today if it followed the average ﬂ ight path of the 10 burst bubbles described above. Not very pretty"
Grantham is the co-founder of GMO Capital, which manages $93 billion in client assets (hnw, institutional). Read his views on commodities as well: Jeremy Grantham: "Days of Abundant Resources and Falling Prices Are Over Forever".
Hat tip Zero Hedge