Jeremy Grantham, co-founder of GMO mutual funds book, makes the case that we are in a stock market and housing superbubble. He talks about the stock and other markets as being multiple standard deviations from trendlines. He refers to a two standard deviation differential as a 2-sigma event, and the rare occurrence of a three standard deviation differential as a 3-sigma event and therefore a “superbubble,” what we are in now. He says we are in the fourth superbubble of the last 100 years.
“All 2-sigma equity bubbles in developed countries have broken back to trend. But before they did, a handful went on to become superbubbles of 3-sigma or greater: in the U.S. in 1929 and 2000 and in Japan in 1989. There were also superbubbles in housing in the U.S. in 2006 and Japan in 1989. All five of these superbubbles corrected all the way back to trend with much greater and longer pain than average.”
He believes that the 2008 crisis was mainly a housing bubble but stocks were just “normally” overvalued and had a “normal” bear market. What he sees now is quite different for stocks. The closest historical comparison is Japan in the late 1980s, when stocks and real estate both climbed to bubble values at the same time.
“The Japanese case, in particular, made one thing pretty clear: while it is dangerous to have a bubble in equities—for the loss of value can cause a shock through the wealth effect that can get out of control, which was a part of the problem in 1929 and the ensuing slump—it is much more dangerous to have a bubble in housing, and it is very much more dangerous to have both together. The economic consequences of the double bubble in Japan are arguably still playing out.”
Neither the equity market nor land in Japan have yet recovered their 1989 peaks. He believes that we may be facing a similar situation in the U.S.
“First, we are indeed participating in the broadest and most extreme global real estate bubble in history. Today houses in the U.S. are at the highest multiple of family income ever, after a record 20% gain last year, ahead even of the disastrous housing bubble of 2006. But although the U.S. housing market is selling at a high multiple of family income, it is less, sometimes far less, than many other countries, e.g., Canada, Australia, the U.K., and especially China. (In China, real estate has played an unusually important and unique role in the extended boom and thereby poses an equally unique risk to the economy and hence the rest of the world if its real estate market loses air exactly as it appears to be doing as we sit.)”
https://www.gmo.com/americas/research-library/let-the-wild-rumpus-begin/