Category Archives: Jeremy Grantham

Seriously?

Jeremy Grantham made the headlines with a pronouncement that was labelled “Apocalyptic” in the financial press. Grantham warned of a 50% fail in the stock market and the largest wealth destruction in US history. Assuming that he meant the S&P, that means an apocalypse is simply a return to the lows set in early 2020. Yes, the Fed has managed to double the stock market since then. But in 2020 it was already in bubble territory, even by Grantham’s measurement at the time.

No, this puppy is looking at an 80-90% fall – and a depression – before this is over. Think the 1930s were bad? Just wait for the 2020s. Years of money-printing and deficit spending (go together like a horse and carriage) have created an unrepayable and unserviceable mountain of debt.

The Top Of The Cycle

Jeremy Grantham is the expert on bubbles. This interview was a month ago, but is still extremely relevant. I recommend reading the whole transcript.

Jeremy Grantham (02:15):
I wouldn’t say necessarily, that we’re at the peak, I think it’s clear that we’re deep into bubble territory. Bubbles are characterized typically at the end of a long bull market by a period where they accelerate, and they start to rise at two or three times the average speed of the bull market, which they did last year, of course. And the Russell 2000 actually went up an amazing 50% in three months, ending in early February this year, which compares very favorably to the 50% rally in ’99 of the super tech bubble. And the NASDAQ went up 50% in six months. So, this was bigger and better.

Jeremy Grantham (03:01):
And, of course, they’re always extremely overpriced by average historical standards. And this one, there are a few people who would still argue that 2000 was higher, but most of the data suggest that this is the new American record or highest-priced stocks in history. And then, there’s the most important thing of all, which is crazy behavior, the kind of meme stock, high participation by individuals, which has kind of tripled in 18 months to an abnormally high level, enormous trading volume in penny stocks, enormous trading volume in options, and huge margin levels, peak borrowing of all kinds.

Jeremy Grantham (35:21):
No, I am not. I am leaving currency worries to other people. I have enough to worry about. With every real asset category, badly overpriced, that is quite enough for me to worry about. And history is quite complicated enough anyway without attempting to think about every aspect of the system. So, I will leave that to that. What is slightly unusual about this bubble on a global basis is that, yes, real estate has bubbled everywhere and often worse than in the US. Yes, commodities are everywhere. Yes, bonds are everywhere overpriced and interest rates are negligible everywhere.

In Hoc Signo Vinces

I’m seeing two things that could be the sign of the bubble – and when they are over, it is time for the bears to win. Like me.

The first is the Russell 2000. The RUT has no P/E, mostly on account of no E. But it has out-performed the monster Nasdaq 100 since the March lows. The other is, of course, Tesla.

The S&P 500 is down about 0.5% and the Nasdaq 100 futures are down nearly 2%,, the Dow futures are about flat. But the RUTs are up 1.5% and Tesla is up 2.1% while the other 9 top momentum stocks are all down around 2%.

So I’m thinking these two need to break to show the bubble is over. In his signis vincam. Jeremy Grantham says:

“But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.”

Amen. This bubble will make the 2000 and 2008 declines look like mere hiccups.

The title refers to the vision of the Christian cross that led future emperor Constantine to victory over his rival Maxentius. Constantine then became the first emperor to tolerate, and on his deathbed convert to, Christianity.

Gale Warnings

Jeremy Grantham speaks out:

Investing Legend Jeremy Grantham Is “Amazed” At This Unprecedented Stock Bubble

Two weeks ago, the generally cheerful investing icon Jeremy Grantham unleashed fire and brimstone, taking his $7.5BN portfolio to a net short position for the first time since the financial crisis, and summarizing his dire assessment of the current unprecedented situation simply by saying “this will end badly.”

Stock-market legend who called 3 financial bubbles says this one is the ‘Real McCoy,’ this is ‘crazy stuff’

‘My confidence is rising quite rapidly that this is, in fact, becoming the fourth, real McCoy, bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we’re in one. And the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.’

And Burton Malkiel chimes in:

‘Cooped-up’ millennial traders have sparked a new pandemic — it won’t end well, warns Princeton economist

“The coronavirus has wrought devastating harm to the health of our nation and to the vibrancy of our economy,” he wrote. “With respect to financial markets, it has also given rise to a full-blown mania. Individuals, cooped up at home, working remotely on flexible schedules, with no social activities and no live sports to watch and bet on, have increasingly turned to day trading in the stock market.”

Billionaire Leon Cooperman agrees with Malkiel’s stance. The “Robinhood markets are going to end in tears,” he said during CNBC’s show “Halftime Report” on Monday.

Unemployment benefits have given many people a pay raise, while loan payments and rent have been suspended. So they are flush with cash, no doubt a welcome break from living paycheck to paycheck, and willing to gamble it in the hope of a big payday. However, this will soon come to an end.

Ding!

Jeremy Grantham’s 2250 is here. Now an “official” bubble.

It Does Not Compute

Jeremy Grantham’s discussion of the economic issues behind the immigration crises facing the world stunned me. Somewhat hypnotized by the religious and cultural issues, I simply had not realized the magnitude of the problem. Over to Jeremy:

The truth about immigration to the EU, in my view, is bitter. As covered in earlier quarterlies, I believe Africa and parts of the Near East are beginning to fail as civilized states.

■ They are failing under the pressure of populations that have multiplied by 5 to 10 times since I was born; climate for growing food that is deteriorating at an accelerating rate; degraded soils; insufficient unpolluted water; bad governance; and lack of infrastructure. Country after country is tilting into rolling failure.

■ This is producing in these failing states increasing numbers of desperate people, mainly young men, willing to risk money and their lives to attempt an entry into the EU.

■ For the best example of the non-compute intractability of this problem, consider Nigeria. It had 21 million people when I was born and now has 187 million. In a recent poll, 40% of Nigerians (75 million) said they would like to emigrate, mostly to the UK (population 64 million). Difficult. But the official UN estimate for Nigeria’s population in 2100 is over 800 million! (They still have a fertility rate of six children per woman.) Without discussing the likelihood of ever reaching 800 million, I suspect you will understand the problem at hand. Impossible.

To which you have to add the countries whose economic viability is based entirely on the sale of their energy reserves.

Party Time

Jeremy Grantham has recently been interviewed reiterating his expectation that this bubble will reach 2350 on the SPX before collapsing. He bases this view on historical bubbles which have exceeded two standard deviations. Maybe he’s right, but where I differ is that bubbles are all about emotion and behaviour, not about numbers. In fact, bubbles occur because people have decided to ignore numbers and rational analysis and let their hearts rule their heads. They are overcome with the satisfaction of steady gains, with the fear of missing out, with the feeling of belonging to the in-crowd, with the fear of being rejected or derided… I could go on, but nowhere on the list is any analysis of rational expectations.

People believe that somehow they will know when it is time to leave the party with their joie de vivre intact and their pockets full of cash. And maybe they will, but the problem is that in order to do so they need to sell their speculations to someone else. They need to find someone who is even more willing than they are to assume risk. And that can be very, very difficult if the lights are flashing, the band is packing up, and the only people with the capacity to buy are the hard-headed bears.

The time to leave the party is when happiness and euphoria are still rising and the social and emotional pressure to stay is high. That’s not so easy. You must be willing to watch the party go on without you as you forgo the music, the conversation, the punch and the snacks. It seems as if the party will never end. Remember Sir Isaac Newton? He left the South Seas Company party in good time for the right reasons, but then could not stand being left out. He bought back in and lost his shirt. And this is one of the smartest, if not the smartest, of men who ever lived.

And no, I feel no shame in mixing metaphors.

2200 Or Bust?

Jeremy Grantham proposed a little while ago that the stock market bubble would go as high as 2200 on the S&P before collapsing. I must admit I thought that an exaggeration at the time, but it is looking more and more plausible. Low volume/no volume levitation over the summer – 2200 is only 13% away – followed by a 1929-like October crash?

The 1929 recession started in March, it was subsequently realized, but markets ignored the data for a long time. Pretty much the same now – the first quarter GDP was negative, no matter what the cause, the housing market, always sine qua non of real economic growth, has turned south, real wages are declining, etc.

The propaganda flow is concealing a pretty sad reality even before you take into account the weakness in the rest of the world, to say nothing of huge bubbles in other countries.

Not Done Yet?

Jeremy Grantham has penned a new letter. He thinks the S&P still has running room, up to and beyond 2250.

On Yellen:

Yellen’s reprehensible choice of current price as a multiple of next year’s estimated earnings. (Either she’s painfully ill-informed or, most implausibly, not too smart, in which case sooner or later we’re scr*w*d, or she knows this measure is a third-rate prediction of true value and is cynically using it to tout the market, in which case we’re doubly scr*w*d! But at least that latter reason would be an ideal proof of her buying into her predecessors’ Put, in case we had any doubt.)

On the stock market:

  1. “That this year should continue to be difficult with the February 1 to October 1 period being just as likely to be down as up, perhaps a little more so.
  2. But after October 1, the market is likely to be strong, especially through April and by then or in the following 18 months up to the next election (or, horrible possibility, even longer) will have rallied past 2,250, perhaps by a decent margin.
  3. And then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up.”

Well, we’ll see. I think Jeremy’s view ignores the economic impact of QE which will be a major drag on stocks. As to Yellen, I don’t think it is a question of smart as much as seeing what she wants to see, like nearly all economists.

Seven Lean Years

This morning Ms Yellen is on deck to pontificate. Yet another idiot savant. Can run numbers, but understands nothing.

The bubble continues to inflate as bullish sentiment sucks in more and more retail buyers and Wall Street quietly withdraws. The fear of being “left behind” isn’t limited to Christian fundamentalists, that’s for sure.  Hussman and GMO both foresee negative returns out to seven years – seven very lean years, I suspect.

Of course, extremes can always extend. Let us hope this doesn’t get any worse. But Ms Yellen’s lack of useful analysis doesn’t provide much hope as she essentially promises to be a beardless Bernanke.

Valuation measures don’t suggest asset prices are in bubble territory or outside of normal historical ranges.

No? Following chart thanks to John Hussman

There’s none so blind as those who will not see.