Markets have been shaky recently, with bubble talk increasing among nervy investors. On the one hand, you have investors like Jeremy Grantham, who warned earlier this year of an "epic" market bubble. Others, like Ray Dalio of Bridgewater, the world's biggest hedge fund, say stocks are expensive but not in bubble territory.
Dalio measures a bubble by looking at six different indicators, including valuation, sentiment and leverage. His bubble gauge is currently around the 77th percentile for the US stock market. That’s high, but well below 2000 and 1929, when the gauge had a 100th percentile reading.
About 5 per cent of America’s biggest stocks are in extreme bubbles, says Dalio, about half of levels registered at the peak of the technology bubble in 2000.
Jim Rogers, George Soros's one-time investing partner, is closer to Dalio than Grantham, recently saying bubbles are forming but that he doesn't see "full-fledged" stock market bubbles yet. But while Dalio's approach is systematic, Rogers – one of the investment world's more colourful characters – keeps a close eye on anecdotal indicators.
“If the receptionist wants to talk to you about stocks, that’s a very bad sign,” says Rogers. “I went to my chiropractor the other day and the lady beside me wanted to talk about stocks. It wasn’t the receptionist yet, but it’s starting to happen.”
