Posted January 26, 2022
By Sean Ring
The Soothing Sanity of Grouchy Grantham
- GMOs Permabear-in-Chief Jeremy Grantham calls the beginning of the end.
- His report, Let the Wild Rumpus Begin, is filled with great anecdotes, charts, and facts.
- Its nice to know an investing legend agrees with the Rudes overall thesis.
You Now Have My Permission to Die.Grantham sets the stage with a killer executive summary. Here it is, in its entirety:
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.(Quickly, a two-sigma event is one where the market is trading two standard deviations away from its average. Were currently in a three-sigma bubble, which theoretically should only happen 0.3% of the time. - Ed.)It reminds me of Bane when, in The Dark Knight Rises, he says to Bruce Wayne, You now have my permission to die.Speaking of banes (of our existence), Grantham pulls no punches in assigning blame for our mess.The Fed and its former chairmen, Greenspan and Bernanke, are spared no quarter in his How Did This Happen? section.Grantham also singles out former SEC Chairman Arthur Levitt and Teflon Man Larry Summers for their parts in leaving the casino unwatched.Its a joy to read.And when he gets to the charts and anecdotes, its even more enjoyable.
Source: Bloomberg, via GMO
Grantham shows the last time a country had a rip-roaring stock market and an out-of-control real estate bubble.
Over 30 years later, either market in Japan still hasnt recovered.
That bodes ill for the US, which is experiencing the very same thing right now.
UN FAO Food Price Index
Source: UN Food and Agriculture Organization, via GMO
Its always amusing to hear people credit the Arab Spring as a peoples revolution and that they just wanted freedom.
One could say, no pita, no peace.
Or, starving young men have nothing better to do than to take up arms against governments that cant - or wont - feed them.
This is how revolutions get started.
But before that, the economic pain of having lower-income wallets stressed with food costs only adds to the pressure.
Grantham only used a graph showing the first US housing bubble in 2006.
As you can see from the graph above, were way past that point.
So not only can the young and low income not afford food, they cant buy a house at a reasonable price.
Only the Best Stocks Rose
Source: Bloomberg, Goldman Sachs, GMO
For a while, analysts have said only ten stocks or less matter.
This was no exaggeration.
Live by the FAANGs, die by the FAANGs.
It sounds like something Dracula would say.
Here are those top ten, courtesy of slickcharts.com:
- Apple Inc.
- Microsoft Corporation
- Amazon.com Inc.
- Alphabet Inc. Class A (Google)
- Tesla Inc
- Meta Platforms Inc. Class A (Facebook)
- Alphabet Inc. Class C (Google, again)
- Berkshire Hathaway Inc. Class B
- NVIDIA Corporation (chips for BTC miners)
- Johnson & Johnson
Granthams Quick Notes
In the cold light of day, these points are so obviously silly its amazing investors just went along with it.
- The meme stock madness of GME and AMC two companies in declining industries further decimated by Covid-19 that managed to rally 120x and 38x, respectively, from their post-pandemic lows to their 2021 highs, driven by message board sentiment, taking GME briefly to 20% of the entire Russell 2000;
- The dogecoin phase, in which a cryptocurrency conceived as a parody of the crypto craze went up nearly 300x, to a market cap of $90 billion because Elon Musk kept joking about it; and
- La pice de rsistance: after Hertz (one of 2020s meme stock stars) saw a quick stock surge from announcing it would purchase a fleet of Teslas, Avis rather plaintively said something like, Hey dudes, we might buy electric cars too, and tripled in a day!
Grantham must be shaking his head as I write.
What to Do, According to GMO
Heres what Granthams firm currently recommends:
Reduced equity, focus on non-U.S. Value and alternative strategies; Equity Dislocation at 20% (designed to profit from Growth bubble bursting); modest fixed income, no Treasuries, and only specialized credit.
If only for a good, quick education, read this piece in its entirety.
Its a refreshing look at the idiocy going on right now.
And it offers solutions, as well.
Its nice to see someone keeping the lights on amid this euphoric daze.
All the best,