One fact you can never change is that high asset prices must bring lower returns than low asset prices. You can't have cake and eat it at the same time. Eat it now or someday in the future, but you can't have both. We pay higher prices for the market, which must correspond to a decline in implied returns over the next decade.

Most of the time, maybe 3/4 of the time, the relationship between asset prices is basically reasonable. We can get a little bit of excess return during this period by buying cheaper assets. The reason for saying "a little bit" is that these opportunities are already relatively small. These opportunities can be obtained through the comparison and allocation of large categories of assets.

The biggest problem for asset allocation is the remaining time, when asset prices are far away from reasonable prices. Bear markets are actually less damaging to everyone, because big bear markets generally last for a short time. What is really damaging is the long-term bull market, which could cause asset prices to deviate sharply from real value for several years. The vast majority of customers will lose patience during this period.

Especially at the peak of the bull market, when asset prices experience the final frenzy, investors not only lose patience, but also generate anxiety and envy. I once said that the most disturbing thing for a person is to watch your neighbor get rich.

How can clients tell whether the market is too crazy or the fund manager is incompetent? It is usually distinguished by looking at historical performance, but sometimes the market cycle lasts much longer than you think. Keynes was right when he said that "markets stay irrational for longer than you stay solvent."

I retired from my position as a fund manager a long time ago, but I'd like to give you my opinion: we are likely to be in a huge US stock bubble that occurred every decade or so in the late 1990s. Even if nothing is certain, the bubble could end badly. It is only a matter of time before investors will be happy to leave the market. This means that he saved cash by leaving the scene, reducing the risk and volatility of his illness.

High valuation is not a necessary condition for predicting the bursting of a bubble, but a sufficient condition. It is completely impossible to predict the top of the market in weekly, monthly and quarterly time periods.

I basically predicted the top of the bull market in 2008 and caught the bottom of the market in early 2009. There is more than 50% luck in this, and I also predict that the top of the Japanese stock market bubble is three years ahead of schedule. Our GMO left the Japanese market in 1987, when the Nikkei index was trading at a price-to-earnings ratio of 40 times. We lost a lot over the next three years, and the Japanese stock market rose to 65 times earnings, but we didn't enter the market for three years after the real bubble burst, and we finally got a good return.

Similarly, we saw in late 1997 that the S & P 500 had exceeded its 1929 high price-to-earnings ratio of 21 times, and we immediately sold all US stocks and watched helplessly as US stocks rose to 35 times. At this stage, we lost half of our asset allocation clients, but were eventually compensated by the market crash.

Believe me, the same story will be repeated over and over again. The final madness of each bubble comes from the crazy behavior of investors, especially the behavior of individual investors. We did not see this sign in the first decade of this long bull market. But recently, my colleagues Ben Inker and John Pease have mentioned in their quarterly reports, including Hertz, Kodak, especially Tesla, there have been a large number of crazy behavior of individual investors.

We also see that the Buffett Index, the ratio of the stock market to GDP, has broken through the all-time high of 2000. We have 480 IPO listings in 2020, including an astonishing 248 SPAC listings, and the number of listed companies has exceeded the 406 IPO in 2000. We have also seen 150 companies with a market capitalization of more than $250 million that have more than tripled their share prices this year, more than three times what they have been in any year in the past decade.

Even we can see that after a long bear market, Nobel laureate Robert Schiller (Robert Shiller), successfully predicted two bubbles in 2000 and 2007, and one of the few economists I respect has begun to hedge his short positions. He thinks his CAPE index, which predicts asset prices, shows that asset prices are not so overvalued relative to bonds, which have bigger bubbles than stocks. Oh, my God!

Of course, I'm not that surprised. The stock market has accelerated over the past summer, which is the hallmark of the last wave of a bull market bubble: an almost straight-line generally accelerated rally. Even if this stage is short, but because the speed is too fast, missing the bubble can bring great pain and career risk.

I continued to be bearish on the market, and after I saw the market accelerate, I became more confident that the market was in the late stage of the bubble, and the bursting of the bubble was just around the corner.

The difference between this bubble and history is that the economy has not recovered as strongly as previous bubbles and may even face a double-dip in growth. Today, when there is great uncertainty in the economy, the price in the market is too high. Today, market valuations are at an all-time high, while the economy is the worst quantile in history.

Today, everyone believes that zero interest rate is the new normal, zero interest rate implies perfect economic and financial conditions, and can last for a long time, but this is impossible.

At the top of every bubble, it is generally believed that this bubble did not end so quickly. People always put their faith in the Federal Reserve and the Treasury, Greenspan in 2000, Bernanke in 2006, Yellen and Powell today. But every bear market in history is inevitable. If you put your faith in the central bank, you are making a deal with the devil.

This is still the case this time, and everyone thinks that high valuations will continue because interest rates will always remain at zero, because the central bank has moral hazard and does not want the bubble to burst. It is agreed that keeping interest rates low will prevent asset prices from falling. Forever! But it fell back in 2000, and the Nasdaq fell 82%. It also fell back in 2008, triggering the global financial crisis. All promises are worthless at the end. This time is no different, we are all waiting for the last dance song, and finally the concert stops!

No investment can be perfectly repeated, especially a bubble. Each time the irrationality is different, we can only find some similarities. I think the current market may continue to rise for a few months, similar to the period from July 1999 to February 2000. It means it may continue to rise for some time. My best guess is that it may end in late spring or early summer, which coincides with the popularity of COVID-19 vaccine.

At that stage, the biggest problem of the global economy is solved, and then people will find that the economy is still bad, stimulus will be reduced, and valuations are high. "buy the rumor, sell the news". But remember, trying to accurately grasp the bursting of a bubble will disappoint you. The bursting of bubbles is rarely triggered by an event, and when many bubbles burst, the market is in a good state, which is why it is difficult for bubbles to accurately grasp the highest point.

In any case, today's market meets all the conditions for a big bubble. At the top of the bull market frenzy, being bearish on the market can be attacked. For example, the top of the market in 1929 and the top of the market in 1999. Another measure is the last wave of acceleration in the market. We count the bull markets from the South China Sea bubble to the 1999 dotcom bubble. This time, the s & p and Russell 2000 have risen 69 per cent and 100 per cent respectively in the past nine months, reaching the last frenzied gains of the bull market.

It is an honor for me to experience another huge bubble, like Japan in 1989, dotcom stocks in 2000, the subprime crisis in 2008, and this bubble. These four bubbles are the four worst bubbles in my investment career. Usually, we clock in at work. But investment advisers can make money doing nothing in a bubble, and there is no free lunch in the world.

The time has come again, and I think the market has met my definition of a bubble, and one day you will be rewarded for leaving the market in the summer of 2020. For the career risk of missing out on the bubble, it also means that the bursting of the bubble will do more harm to customers and careers. For large institutions, even if there is a bubble with a price-to-earnings ratio of 65 times earnings, as in Japan, they are in no position to be bearish.

The last time a large institution like ours was bearish on the market was UBS in 1999, when their positions were almost exactly the same as those of our GMO today. Don't wait until the day when Goldman Sachs or Morgan Stanley is bearish, and that day will never come. Even if this is good for customers to reduce risk, there is no achievable business environment at all. The views of these institutions are always simple and straightforward: always be bullish in the long run.

But don't think you can escape the top, and never try to pick the top of the market.

What should we do? Like every bubble in 1929, 2000, 50, and so on, this time there has been a huge valuation divergence among asset classes, industries and companies. By the end of 2019, the performance of value stocks relative to growth stocks was the worst decade in history, followed by the worst year in 2020, with the average variance increasing by 20-30%! Similarly, emerging markets have performed one of the worst three times in the past 50 years compared with the US.

There is no doubt that we think you should bet on value and emerging markets to avoid a huge bubble in US growth stocks, if your career risk allows. Finally, good luck!