If Jeremy Grantham is talking about a US 'superbubble', we should listen

[Celerity]

The Boston-based fund manager has hard-to-deny evidence to back up his prediction of a ‘wild rumpus’

https://www.theguardian.com/business/nils-pratley-on-finance/2022/jan/24/if-jeremy-grantham-is-talking-about-a-us-superbubble-we-should-listen

Jeremy Grantham’s warning that share prices are heading for a mighty fall is just part of the new year financial calendar, say his critics. On this occasion, however, the British co-founder of Boston-based fund manager GMO and highly regarded observer of stock market bubbles, may have got his timing spot-on.

Certainly “Let the Wild Rumpus Begin” was a terrific title for Grantham’s piece last week: a rumpus is roughly what we’re seeing, at least if one looks at the US, where the technology-heavy Nasdaq has lost 16% since the start of January. It was clobbered so severely on Monday that even the UK’s FTSE 100 index, a decidedly non-tech collection of stocks, was obliged to react to the apparent shift in investor sentiment. The Footsie lost 187 points, or 2.6%, even if a possible Russian invasion of Ukraine was also in the mix.

Grantham’s thesis is that US stocks are in a “superbubble”, an upgrade on last year’s diagnosis of “an epic bubble”, and that the US has seen only three other such extreme events in the past 100 years – the Wall Street crash of 1929, the turn-of-the-millennium dotcom mania and the housing market madness of 2006.

He ran through his checklist of a late-stage bubble, of which “the most important and hardest to define” is “the touchy-feely characteristic of crazy investor behaviour”. On that score, he has hard-to-dispute examples: the meme stock merriness of a year ago; dogecoin, a parody cryptocurrency, rising to a value of $90bn “because Elon Musk kept joking about it”; and shares in car hire firm Hertz soaring because the company said it would order some Teslas.

snip



LET THE WILD RUMPUS BEGIN

(Approaching the End of) The First U.S. Bubble Extravaganza: Housing, Equities, Bonds, and Commodities

https://www.gmo.com/europe/research-library/let-the-wild-rumpus-begin/

By Jeremy Grantham

Executive Summary

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. Today in the U.S. we are in the fourth superbubble of the last hundred years. Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle. The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.

Introduction

In a bubble, no one wants to hear the bear case. It is the worst kind of party-pooping. For bubbles, especially superbubbles where we are now, are often the most exhilarating financial experiences of a lifetime. I participated in a wonderful micro-cap fireworks display from 1968 to 1969, in which I made a small fortune (7 times the then full cost of a year at business school). My main stock, American Raceways, tripled while I was on vacation – $7 to $21 – then went to $100 by Christmas, only to lose it all even quicker by the following June, as almost all the fireworks exploded and crashed. This taught me a lesson, and it helped make me cautious. The experience also makes it easy for me to sympathize with the view that bearish advice in bubbles always comes from old fogeys who “just don’t get it,” because I received that old fogey advice back then and just didn’t listen. I doubt speculators in the current bubble will listen to me now; but giving this advice is my job and possibly the right thing to do. So, once more unto the breach, dear friends.

This time last year it looked like we might have a standard bubble with resulting standard pain for the economy. But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in U.S. equities, and the potential pain has increased accordingly. Even more dangerously for all of us, the equity bubble, which last year was already accompanied by extreme low interest rates and high bond prices, has now been joined by a bubble in housing and an incipient bubble in commodities.

One of the main reasons I deplore superbubbles – and resent the Fed and other financial authorities for allowing and facilitating them – is the underrecognized damage that bubbles cause as they deflate and mark down our wealth. As bubbles form, they give us a ludicrously overstated view of our real wealth, which encourages us to spend accordingly. Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down. To allow bubbles, let alone help them along, is simply bad economic policy.

snip

if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the U.S. alone

[Chainfire]

1. We certainly need a stock market crash

Are we having a groundhog day event of the last century. Is '29 and '33 just coming a little early? I am glad that I keep my little bit of money under the mattress where it can't disappear at the speed of light on some computer on Wall Street.

[Celerity]

2. It wouldn't be limited to just equities, he is talking across all asset classes, real estate, etc

[Igel]

25. Then teachers and public servants have no retirement.

Or the taxpayers get to fund 90% of it.

Implications matter.

[SWBTATTReg]

3. I don't know. With so many companies loading up on their shares when they got extra ...

money in the past (tax cuts), there's not as many 'open' shares out in the marketplace as there used to be. This propped up earnings per share, and other induces and kind of faked out normal returns. There was a lot of grief about this happening (that is, instead of plowing the earnings back into the businesses to better prepare the business down the road), they increased dividends, they used the extra cash to buy back shares, etc.).

There might be a backlash if the remaining amount of stock outstanding is still a large number of shares that the company can't readily 'play' with the numbers anymore.

[OAITW r.2.0]

9. Well said.

When Corporations follow the Dunlop/Welch business model, the future is maximizing shareholder value and destroying the very system that assured them profits in the past.

[roamer65]

4. There won't be a major crash unless we have an outright currency crisis.

We are fully fiat money now. We can create as much money as we want to reinflate the bubble.

The large crash will now only come from a dollar crisis when all confidence is lost in the currency itself.

Then what do we do? Move the zeroes back three places and rename the currency like Brazil, Venezuela or Argentina.

[Celerity]

5. You do understand that if we inflated the money supply and the Fed expands its balance sheets

enough to re-inflate a superbubble, that massive inflationary forces (far beyond those now) would then come to the fore?

The 2007-2009 financial crisis (for just one example) involved no

dollar crisis where all confidence is lost in the currency

[roamer65]

10. We have a lot of zeroes we can add yet.

…and the Federal Reserve will do it if needed.

They will just rig the inflation numbers as they have for the past 40 plus years.

[Celerity]

11. rig the numbers? lol, ok

[roamer65]

12. The inflation indexes have been changed over the last forty years.

Through addition and subtraction of certain categories and items over the past years.

Read up on lower level substitution by the BLS. That’s how they “cook the numbers”.

Why do they do it? Many government COLAs are tied to the CPI. Giving the CPI measurement a downward bias lessens the COLA increases.

[Celerity]

13. Yes, but those have been peripheral changes, the Fed cannot mask a say, 10% year over year inflation

rate if that were to occur.

Bottom line is, IF there was to be an across the board asset crash remotely the size and magnitude of the one talked about in the article, the Fed is not and cannot inflate its way out of it. They are not going to add 25, 30, 35 trillion USD to their balance sheets. Also, it does not a take a complete collapse of faith in the currency (as you suggested) to cause a massive asset crash. I already provided a very recent example that disproves that theory.

[roamer65]

14. Yes, the Fed will add that to their balance sheets.

Just watch. They will NOT let deflation happen. They will even use negative interest rates if needed.

Period.

The only reason deflation happened in the GD was we were shackled to 40 percent gold backing on Federal Reserve notes until 1933. That backing was dropped to 25 pct from 1933 to 1971. In 1971, we floated the dollar as a true fiat currency.

We are now in MMT territory. Have been since the 2008 crash. Ben Bernanke took us there.

[Celerity]

16. No they will not. They added $1.5 trillion or so during the 2007/09 financial crisis. You are now

saying that they would perhaps increase their totals by over 400% (if they added say 30 trillion usd) from its current 8.9 trillion or so bottom line.

https://www.federalreserve.gov/releases/h41/current/default.htm

Not happening, basically zero chance.


As markets churn, battered investors brace for Fed meeting

https://www.reuters.com/business/finance/markets-churn-battered-investors-brace-fed-meeting-2022-01-24/

NEW YORK, Jan 24 (Reuters) - Worries over a more hawkish Federal Reserve are roiling asset markets around the globe, and this week's monetary policy meeting may offer insight into how aggressive the central bank intends to be.

Investors expect the Fed to signal on Wednesday that it plans to raise rates in March, tightening monetary policy for the first time since it slashed borrowing costs to near-zero soon after the onset of the coronavirus pandemic nearly two years ago. Fed funds futures, which track short term rate expectations, have priced in a total of four rate increases this year, as the central bank fights to stem soaring inflation.

The Fed is also expected to give a final set of instructions on bringing its asset-purchase program to an end. That process began last November and at the current pace will come to a close in mid-March, around the time the first rate hike may occur. What the Fed does after that point with its nearly $9 trillion balance sheet is a key concern, and Fed Chair Jerome Powell may shed more light on that outlook at his press conference on Wednesday after the two-day meeting's conclusion.

Concerns that the Fed's ultra-easy monetary policies are coming to an end have slammed markets this month, wreaking havoc in the biggest technology and growth names as well so-called "meme" stocks that entered the spotlight almost exactly a year ago. (.TRXFLDUSPTEC)

snip

[roamer65]

18. I made $20k off from betting that they would not let markets crash in 2020.

Dow got down to 18k and I knew they wouldn’t let it crash and I bought stocks. In came unlimited QE and ZIRP a day or two after my buy.

BOOM.

I made $20k off from the reinflation.

I will make the same move again when it comes and it will, but with a lot more money.

I never bet against the Fed.

[Celerity]

20. This would be orders of magnitude larger, and if you think you can catch that falling knife, I hope

you are wearing some damn good gloves.

[roamer65]

29. The markets are a big casino.

Cant take it with you.

[OAITW r.2.0]

6. I'm on the sidelines......

75% of my money is in savings. If that starts going South, I will pay off the mortgage and 5 years of property taxes.

I got killed in the 1999 .com bust. Got the worst advise from a major investment company....he swapped me out my long-term winner - EMC Squared - for positions in AOL and AMP. In both cases, I should have known better - I was out of AOL as my browser choice and understood their 'walled garden' concept of the commercial Internet was coming to an end. And, in my job as an industrial buyer, I bought a lot of AMP product - industrial electrical connectors. I knew about the CEO's financial improprieties. But the guy assured me that this was the way to go, he painted a great future for both. Later, I realized that he was taking care of his Big Fish customers by swapping out their problems with winners the little suckers, like me, were holding.

Thus ended my interest in playing the market. But I wish I had access to online trading accounts back in the 90's like we have today. And had access to information - both reported and opinion - that exists today.

[FakeNoose]

17. It's always the "little guys" who get burned

[Alhena]

7. Long term bond yields will determine how big the crash is

If they go way up due to inflation fears then it will get very ugly. Otherwise, likely a manageable correction.

[roamer65]

15. What if the Federal Reserve buys up most of our treasury paper just like the Bank of Japan?

Then that indicator is gone.

The BoJ owns a VERY large slice of the JGB market.

[WHITT]

8. GRANTHAM

JEREMY GRANTHAM SHARES HIS MOST COMPELLING EVIDENCE THAT WE ARE IN A BUBBLE OF EPIC PROPORTIONS

* He saw the tech stock bubble inflating in 1997, three years before it actually burst.

* In the late 2000’s he warned of the developing subprime mortgage and credit bubble and came close to calling the actual 2008 bull market peak.

* He then called the market bottom nearly to the day in March of 2009.

More from his 'WealthTrack' appearance:

https://wealthtrack.com/jeremy-grantham-shares-his-most-compelling-evidence-that-we-are-in-a-bubble-of-epic-proportions/

(Video & Audio)

[PoindexterOglethorpe]

19. Sigh. Another Doom and Gloomer.

Keep in mind, that the overall movement of the stock market is up. It averages close to 10% a year. Yes, that's an average and includes those years where it goes down a whole lot. Another statistic is that the market goes up two out of every three years.

Trying to time the market is a fool's game. Don't. And diversify. Whether you buy individual stocks or funds, diversify.

I have a very good financial advisor. My money has grown steadily under his management, which is now some 20 plus years. He got me into a couple of annuities -- a dirty word here and elsewhere -- and what I'm now taking as income from those annuities is well above what I'd be getting from mere fund investments. Meanwhile, I am able to increase my take out from investments on a reasonably steady basis. I am better off financially than I ever have been. Don't misunderstand. I don't have the income of a wealthy person, just a modest income (from Social Security, small pension, the two annuities, and what I take from my investments) that allows me to live comfortably, and with an occasional splurge or "luxury" spending. It helps that growing up, and much of my working life, I had very little money, lived paycheck to paycheck and learned to be frugal. That's a real asset for me these days.

Oh, and just how good is Grantham at his prognostications?

[Celerity]

22. Grantham has been of the best predictors of asset bubble bursts for decades. 55+ years in the

markets.

Robert Jeremy Goltho Grantham CBE (born 6 October 1938) is a British investor and co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. GMO had more than US$118 billion in assets under management as of March 2015. He has been a vocal critic of various governmental responses to the Global Financial Crisis from 2007 to 2010. Grantham started one of the world's first index funds in the early 1970s.

https://en.wikipedia.org/wiki/Jeremy_Grantham

Grantham built much of his investing reputation over the course of his career by identifying speculative asset bubbles as they were unfolding. Grantham avoided investing in Japanese equities and real estate in the late 1980s during the peak of the Japanese asset price bubble, and avoided technology stocks during the Internet bubble of the 1990s. A decade later, he limited his exposure to the housing bubble. Writing in Kiplinger in 2010, Elizabeth Leary noted that many of Grantham's predictions can be confirmed by analysis of his past newsletters. In a 2021 interview, Grantham distinguishes between identifying overpriced asset bubbles (which he believes is not particularly difficult), and predicting when such bubbles will collapse (which he admits is impossible, stating only that asset bubbles will eventually end at an uncertain future date). Grantham also acknowledges his strategy can underperform market averages for years, testing the patience of his clients, but he asserts that his strategy has always paid off long-term by avoiding overvalued assets.

In GMO's April 2010 Quarterly Letter Grantham spoke to the tendency for all bubbles to revert to the mean saying:

For the record, I wrote an article for Fortune published in September 2007 that referred to three "near certainties": profit margins would come down, the housing market would break, and the risk-premium all over the world would widen, each with severe consequences. You can perhaps only have that degree of confidence if you have been to the history books as much as we have and looked at every bubble and every bust. We have found that there are no exceptions. We are up to 34 completed bubbles. Every single one of them has broken all the way back to the trend that existed prior to the bubble forming, which is a very tough standard. So it's simply illogical to give up the really high probabilities involved at the asset class level. All the data errors that frighten us all at the individual stock level are washed away at these great aggregations. It's simply more reliable, higher-quality data.

In his Fall 2008 GMO letter, Grantham commented on his evaluation of the underlying causes of the then-ongoing world credit crisis:

To avoid the development of crises, you need a plentiful supply of foresight, imagination, and competence. A few quarters ago I likened our financial system to an elaborate suspension bridge, hopefully built with some good, old-fashioned Victorian over-engineering. Well, it wasn't over-engineered! It was built to do just one under favorable conditions. Now with hurricanes blowing, the Corps of Engineers, as it were, are working around the clock to prop up a suspiciously jerry-built edifice. When a crisis occurs, you need competence and courage to deal with it. The bitterest disappointment of this crisis has been how completely the build-up of the bubbles in asset prices and risk-taking was rationalized and ignored by the authorities, especially the formerly esteemed Chairman of the Fed. ...

I ask myself, 'Why is it that several dozen people saw this crisis coming for years?' I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even U.S. Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke – none of them seemed to see it coming.

I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained – but we end up with an army of left-brained immediate doers.

So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored. . . .

So we kept putting organization people – people who can influence and persuade and cajole – into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don't have those skills.

[PoindexterOglethorpe]

23. I will go back to the point that the market

goes up in the long run. Grantham seems to be an eternal bear, and so when the market finally does go down significantly, he can claim prescience.

[Celerity]

27. That is vastly oversimplifying things. He also never said that over the long term the market

doe not go up. His expertise is calling WHEN bubbles will burst, including specific granular reasons why. He has not said for 55 plus years that there is always a bubble.

[PoindexterOglethorpe]

32. If he never said that over the long term the market goes up,

he is at best being deceitful. Because it does. The other thing about bubbles is that if you are not invested in the bubble, you are relatively unaffected. Again, being diversified is a very good thing.

Don't just buy tulips. Buy other things.

[Celerity]

33. Re-read what I said

He also never said that over the long term the market doe not go up. His expertise is calling WHEN bubbles will burst

I did mistype 'does' (left off the s) but that doesn't change the meaning, which is the opposite of what you just claimed.

[PoindexterOglethorpe]

34. So, how good is he at predicting the bubble bursts?

Again, those who constantly predict a market crash will eventually be right, sort of like the stopped clock. Meanwhile, staying invested, and ignoring people like him is the very best way to make money over the long term. Attempting to time the market, which is really what he is suggesting, is never a winning strategy.

[Celerity]

36. Already answered that question. It is clear that we are at odds from a philosophical investing basis

and I doubt we will reconcile any time soon. At least you did not say that Fed will add 25, 30, 35 trilion USD to their balance sheets if need be to re-inflate a superbubble (I was told above they would, lol).

cheers

[Disaffected]

21. There are thousands of individuals

acting as market prognosticators and "gurus". It is worth keeping in mind that a few of these will, once in a while, get a string of market predictions m/l right but, not because they possess any special insight but because they were lucky.

Recall a guy named Joe Granville IIRC from Florida who was a considered market guru for a week or two because he apparently correctly predicted some big market move(s) correctly. His fame was fleeting however as his subsequent utterances proved to be not so professorial after all.

Moral of story is don't even think about trying to time the market - you may get lucky for a while but such "luck" rarely lasts and, it is luck if it does. "Day traders" are the worst in that respect.

Best policy is to buy good quality dividend paying stocks as income allows and, hold on for the long haul.

[PoindexterOglethorpe]

24. Bingo.

Trying to time the market is dumb. Dumb, dumb, dumb.

[Igel]

26. A nice "Where the Wild Things Are" reference. n/t

[Metaphorical]

28. Perhaps

Three data points makes for an awfully weak signal, especially over the course of 100 years, and there are, frankly, a lot of Republicans who want there to be a recession because it increases their chances of getting back in power.

My own belief - the pandemic is showing signs of breaking, at least for a while. I think that by March, most states will be about where they were back in the summer. It may not be the last outbreak, but I suspect that we're past the worst. With the pandemic past, supply chain issues should largely resolve themselves, which in turn will cause inflation to slow (it is in fact doing that now).

The economy will slow somewhat because the labor market is too tight for it not to, and there are structural issues that likely need to be resolved, but it's not going to be a massive sell-off of everything because the last one was too recent. Too many companies panicked during that one, lost a great deal of money and ground, and will be a lot less inclined to do something stupid like releasing all of their workers at once.

[onenote]

30. If you make enough predictions, one will turn out to be right: the Grantham method

2019: Jeremy Grantham -- The bull market will not end with a massive pullback.
https://www.cnbc.com/2019/03/07/this-bull-market-will-not-end-with-a-massive-pullback-grantham-says.html

2020: Jeremy Grantham -- The market bubble will burst in weeks or months.
https://www.advisorperspectives.com/articles/2020/10/22/jeremy-grantham-the-market-bubble-will-burst-in-weeks-or-months

[Celerity]

31. Permabulls eventually get slaughtered. Same as it ever was.

I guarantee the 'there will not be a crash this time' crowd on here are basically carbon copies of big bulls on here back in 2007, hell even well into 2008.

[betsuni]

35. There's no bubble economy now.

[Celerity]

37. That is not the subject of the articles, which is the asset valuation superbubble.