There is an ominous warning for the economy this morning after a Wall Street veteran warned this summer’s recovery in share markets is “eerily similar” to the ruinous sucker rally of 1929-30.
Jeremy Grantham, co-founder of GMO, the American fund group that manages $60billion, told The Times that the recovery since mid-June was probably a temporary reprieve ahead of an epic bursting of the bubble.
The rally in share prices after the bear phase of the previous eight months perfectly fitted the historic pattern of a short up-phase within a more prolonged and vicious crash, he argued.
Wall Street began its notorious dive in October 1929, but there was a period between November that year and April 1930 when American share prices staged a 46% rally.
It proved a temporary reprieve. US shares then fell by 80%, bottoming out in July 1932 and producing a total peak-to-trough fall of 89% — one of the great value-destroying episodes in western capitalism.
The rally, Grantham said, “lured unwary investors back just in time for the market to turn down again, only more viciously”. US shares took more than 25 years to recover to their 1929 high.
Grantham said the same shape was evident in the bear markets that followed two other superbubbles — the slumps of 1972-74 and of 2000-03.
“This summer’s rally has so far perfectly fit the pattern,” he said.
House prices grow nonetheless
Meanwhile, UK house prices rose by 10% in the year to August, the Nationwide has said, despite pressure on buyers' budgets.
The market still has greater demand from buyers than homes for sale, leading to a double-digit annual rise for the 10th consecutive month.
The mortgage lender said the typical property price had risen by £50,000 in the past two years to £273,751.
However, the Nationwide said there were signs the market was cooling, as both energy costs and mortgage rates rise.
Myron Jobson, senior personal finance analyst at Interactive Investor, said: "Even though the housing market is slowing, it is nowhere near a crash. Strong demand for homes far outstripping available housing inventory means the housing market remains a difficult one for wannabe homeowners and those looking to climb up the property ladder."
FTSE 100
The UK's FTSE 100 index started the day up 28-points at 7,177, following yesterday's 135-point drop.
Companies reporting today
- Ashmore Group - full year results