Jeremy Grantham On Timing Bear Markets: 25% Upside Left And Then The Bust "We All Deserve"

Tyler Durden's picture

From Jeremy Grantham of GMO

Timing Bear Markets

My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market. Look at the market’s continued advance despite almost universal disappointment in economic growth. Exhibit 3 shows the economic forecasts for major economic countries made a year ago by the IMF compared to what actually happened. Only Japan was a modest pleasant surprise at 0.7% ahead of forecast and the U.K. and Switzerland scraped home by the skin of their teeth. Everyone else fell short. There have been few such occasions when such broad disappointment with economic growth still allowed the U.S. and most other major economies to make material upward moves in their stock markets. It is yet another testimonial to the global reach of the Fed’s stimulus of equities (as was the very substantial decline in emerging market equities on just talk of tapering!)

In equities there are few signs yet of a traditional bubble. In the U.S. individuals are not yet consistent buyers of mutual funds. Over lunch I am still looking at Patriots’ highlights and not the CNBC talking heads recommending Pumatech or whatever they were in 1999. There are no wonderful and infl uential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or in the U.S. in 2000, with Greenspan’s theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es. (There is only Jeremy Siegel doing his usual, apparently inexhaustible thing of explaining why the market is actually cheap: in 2000 we tangled over the market’s P/E of 30 to 35, which, with arcane and ingenious adjustments, for him did not portend disaster. This time it is unprecedented margins, usually the most dependably mean reverting of all fi nancial series, which are apparently now normal.) By June this year, markets felt relatively quiet and under the surface there was still a considerable undertow of risk aversion in the institutions. The Russell 2000 and the GMO High Quality universe were both just level with the S&P, all up 16%. Normally we would have expected the Russell to outperform handsomely. However, since then speculation has perked up so that today, the broad U.S. market is up 20% and the Russell 2000 is a more typical six points ahead while stocks in the GMO High Quality universe are several points behind. We have also had a sharp and unexpected uptick in parts of the IPO market in the U.S., so I would think that we are probably in the slow build-up to something interesting – a badly overpriced market and bubble conditions.

My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve. We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy. At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure. Deregulation was eventually a disappointment even to Greenspan, shocked at the bad behavior of fi nancial leaders who, incomprehensibly to him, were not even attempting to maximize long-term risk-adjusted profits. Indeed, instead of the “price discovery” so central to modern economic theory we had “greed discovery.”

(Memo: “price discovery” is the process that happens in an open and competitive and unregulated market, where the interplay of supply, demand, and cost structures determines the effi cient price. “Greed discovery” is the process by which a vastly and unnecessarily complicated fi nancial system is exploited by expert insiders. These insiders have far more knowledge than the lambs – formerly known as clients – and without adequate regulations the lambs are defleeced in a surge of “rent seeking.”)

In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so. In our view, prudent investors should already be reducing their equity bets and their risk level in general. One of the more painful lessons in investing is that the prudent investor (or “value investor” if you prefer) almost invariably must forego plenty of fun at the top end of markets. This market is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life. And with a Fed like ours it’s probably what we deserve.

Inconvenient Conclusion

Be prudent and you’ll probably forego gains. Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin. Your call. We of course are making our call.

Postscript 1

What can go wrong for the market? There is a slow and for me rather sinister slowing down of economic growth, most obviously in Europe but also globally, that could at worst overwhelm even the Fed. The general lack of fiscal stimulus globally and the almost precipitous decline in the U.S. Federal deficit in particular do not help. What are the odds in the next two years? Perhaps one in four.

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DirkDiggler11's picture

One in 4, hence 25% chance of a market crash over the next two years ? With those odds why wouldn't you go full retard and put every dime you can scrape up and go long the market ? You have a 25% chance of it blowing up in your face! and a 75% chance of making gains that at least keep you in check with inflation.

What a fucked up world we are living in ...

carlin401's picture

That's right, ...

Since the 1970's the rule has been if the FED lowers interest rates, ... the market goes up,

Yellen has promised 'negative interest' rates,

Thus the market will go up,

Logical? Fuck no,... but nobody ever said the USA was not a nation of fucking hair-lips, like PT BARNUM said "Never underestimate the stupidity of the US public"

Will it blow? Who gives a fuck, just stay far away from the USA, cuz the GUBMINT is going to have to rob everyone with a 'stash' of any kind, to keep the 80% on the DOLE voting.

Chris Jusset's picture

"And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience."


The central bankers know that this mega-bubble will eventually bust ... so they're already planning their bubble-cleanup strategies for when the bubbles pop in 2014-15.  Will they respond by blowing yet another mega-bubble after this one pops?  Stay tuned!

mvsjcl's picture

Who the fuck is this "we" he keeps writing about? You? Me?


No damn "we" there.

markmotive's picture

Eat it while it's hot.

Like lemmings walking down a path decorated with flowers and shiny things, ultimately leading to a cliff engineered by our dear leaders.

carlin401's picture

There is only one game these monkey's know.

It's a given there is NO buyer for US DEBT other than QE, ... so it cannot end.

There is nobody advocating 'austerity', its all 100% krugman now, we'll print our way to permanent utopia.

All has been telegraphed, ... interest rates will go up, and QE will go up to cover the cost of debt service.

BTC will go up, cuz all that social-media ( NSA SPY ) money has to go somewhere, and these kids are too fucking dumb to buy land or gold, like the chinese.

Keyser's picture

The time for acting to correct the ship has long past. It is now about avoiding blame when the collapse happens. At least the Russians have run the numbers. The gig is up in 2017 according to their statistics as this will be when the debasement of the USD, coupled with increase in bonds rates will cause the US to default. 

bunzbunzbunz's picture

If you want to go full retard, go buy bitcoins!@# Or get free ones. Bitcoin hourly free payout went back up after being lowered at . Stupid volatility.

zhandax's picture
Or if you don't want to go full retard, buy Spoos at 2:30, sell MOC and buy gold.  Kick the gold just before comex open.  Bitcoin thanks are accepted.
wee-weed up's picture



25% upside left?

Methinks he misplaced a decimal point...


aVileRat's picture


Like Fink, Ichan, Buffet, a smattering of ex-Dallas & now IMF whiz kids have said this is now the grim truth. Even if you bend your advanced AK Model right to be limit, 1850/1900 is the top even using the Fed's own model before that alpha flag effect starts going negative and we enter the 'pushing on a string' adventure. So while Yellin may claim she has 4000 points of runway left, the reality is that the equiv. of 1 QUARTER ramp has to last at least 1 year. Those points need to be rationed and if the market starts to price in 2017 growth, then we are pretty much in the dead zero of 1973 era hopium. That is hard economic history talking, no macro econ or quant jock can spin that truth away. 

Lets think about that. Ever seen that cartoon of Donald Duck in the great depression and he is slicing the pea until it is transparent ? Yeah, if your a mega-fund (or work at a mega-fund) suddenly those peas are looking pretty wafer thin. To put that into context for the MOMO; that would put Apple, at its current market cap and index weighting at a target price of 628/sh. Not even the high water mark and that is the bluesky estimate assuming the earnings are not revised downards on bad Holiday Sales. Great return on paper, but then adjust for the foreign sales currency effect for next years full-year QE. Now increase I-WACC for the 5% inflation and put the risk free rate at the long-term rate of 3.2%, that 628? Not looking so good now.

No way bond funds and pensions can work on yields of 1 to 1.8% front curve. Two things need to happen either 1.) Everyone into the growth + yield pool and equities go up another 25%. Maybe this IS the plan, everyone becomes bullish on the USA (and world) recovery, or 2.) The bond market pulls an OPEC. It's happened before, just not on this scale, but then again Keynes was all about going out like a rock star. Eventually Bill Gross is going to have to ask himself, like every other bond fund out there. What is the reputation cost of capital that is being brought onto his fund and legacy by keeping the "string" taught. ? I am going to bet this will be the tequilla shot topic of this Davos.


whirlaway's picture

If we were to really go up 20 or 30 percent from here it is more likely
To happen in 3-6 months rather than 1-2 years

HardAssets's picture

That's why I no longer waste money on financial newsletters. This guy's 'personal guess' is that the stock market will rise 20-30% within one or two years and then crash. Based on what metric and what theory ?

He thinks the market is over-bought.  So what, a lot of people think that, including those who think there's few other ways to make any returns.

Its very possible that 'someday' a lotta people will be 'caught by surprise'.  Why ?  Because they thought they or some 'market expert' can predict the future.  I can make my own 'personal guess' and not pay a dime for it.

monkeyboy's picture

Ah fuck it!

It's a good time as any to go all in.

Its Only Rock N Roll's picture

J. Grantham, whom I have the utmost respect for...sounds like a very frustrated bear.

fonzannoon's picture

It makes me happy when people call a spade a spade. Nice job it's only rock and roll.

Its Only Rock N Roll's picture

I read the entire report earlier today which this is taken from.  It was far from bullish.  This same article/post was called "Jeremy Grantham's Bullish Two Year Outlook" over at Barrons today, which is the furthest thing from the truth, as is the 25% upside left referenced here.  GMO went through a painstaking reevaluation of their valuation methodolgy and raised their fair value of the S&P from 1020 to 1100.  1100 will probably be a stopping point for the market when it travels below fair value someday.  They are the furthest from bullish and IMO this was Jeremy "capitulating" to the fact this nonsense can continue further.  Right or wrong he has NEVER put a % upside gain on the market in least that I have read over the past 10+ years.  Which makes the timing of this interesting to me.




fonzannoon's picture

Well for what it's worth I think he is wrong with his fair value view. It's over man. There is no downside target anymore. The reset number is Zero. We will spend the next phase watching more and more people close their eyes and jump (into the market). They will be rewarded. Everyone else will slowly drown fighting this and sticking with their morals. Maybe a few will truly get off the grid and find happiness in solitude, but that is rough. But when the day comes that this thing actually goes off the rails just kiss it goodbye. I don't think I will see a market that represents reality again. 

We talk about the market on here like you try to talk some sense into your buddy who is trashed at the bachelor party. You just want him to come home with you and start over tomorrow. Except this time he killed the hooker and she is in your trunk and you missed your chance to get the fuck outta there. Now we are all in.


Its Only Rock N Roll's picture

You are right, the market as we know it is dead.  However I think the market we knew has never been real to start with.  I have been around 20+ years most of which have been spent either building or the bursting of an unsustainable bubble.  What will remain after all is said and done will be some system of monetary exchange and claims to underlying assets.  How that will look is unknown, but I plan on trying to be around to see what it looks like and how I may participate.  I don't believe in the mad max outcome and I belive there will be some sort of rule of law.  The fourth turning will come and go.

It sounds like you need to read "Francisco's Money Speech".  Always gets me to think about what may come....

Love your analogy.  Since I quit drinking years ago I don't have to worry about the dead hooker in the trunk of my car anymore....but before I quit I worried about that alot. 


fonzannoon's picture

I've read it, and I do agree that this will come and go. I also want to be standing when it does.

aVileRat's picture

No question players will be standing, the big question is the quality of the assets and how the system resets. Plenty of people were left standing in the wake of the USSR, but they noticed, like Weinmar Republic that the consumer discretionary and medical services started going for 10 oz. a medical visit, the stockpiles went to zero fast.


Freddie's picture

GMO and Grantham have my respect along with only a few others like Dalio, Kyle Bass, Chanos, Hendry.  I think they know it's over as well but they cannot say it.  Ray Dalio keeps talking about fixing the machine.  I think he means well but the machine is f'ed'ed.

HardAssets's picture

<mostly deleted my post - nothing new - same ole, same ole - - -" it'll go up till it comes down, and it might come down like Black Monday - right after I go in heavier, no doubt "

Eireann go Brach's picture

If there is any justice in the world, and I believe there is, the whole house of cards will crash and crumble before Obama leaves office, to cement what the history books will show as the worst presidency of all time!

Imminent Crucible's picture

"will crash and crumble before Obama leaves office"

That would be both convenient and pleasant to behold, but it's not the way the world usually works. More often, the worst scoundrels get by with their crimes long enough to clear the country and retire in comfort out of reach of the ruined, jobless, raging masses who once adored them. Or sometimes, like Hugo "Parachute Woman" Chavez, they escape their just deserts by the cowardly expedient of dying before the crap hits the fan.

On the other hand, pretty much nothing is working the way it usually works any more.  So, just maybe, a giant flaming meteorite will strike the White House, the Capitol Building and all the regulatory agencies and most especially, the Marriner Eccles building just as unemployment reaches 100%, the Dow slips below 100 and the National Security Agency is destroyed by a controlled demolition at the same moment a Dreamliner loaded with Iranian central bankers flies into Langley.

Edit: Did you mean "last presidency of all time"?

bobert's picture

Your sense of humor is appreciated.

HardAssets's picture

A driver was stuck in a traffic jam on the highway outside Washington, DC. Nothing was moving. Suddenly, a man knocked on the window.
The driver rolled down the window and asked, "What's going on?"

"Terrorists have kidnapped the entire US Congress, and they're asking for a $100 million dollar ransom. Otherwise, they are going to douse them all in gasoline and set them on fire. We are going from car to car, collecting donations."

"How much is everyone giving, on an average?" the driver asked.

"About a gallon."

pavman's picture

Well duh this has nothing to do with Obama, everyone knows its all Bush's fault!

Son of Captain Nemo's picture

He's dropping acid if he thinks it will take that long.

He left out the part about the next World War that will be taking place during this "25% upside".

SunRise's picture

Oh it's just a world war?  BULLISH!

NoDebt's picture

OK, as much as I agree emotionally, I gotta ask:  overpriced relative to what?  Name the thing that ISN'T overpriced.

First person who says 'gold' (or any suitably real store of value) gets a cookie.

The entire universe of asset classes have all been driven higher to one degree or another by 30 years of constantly falling interest rates, ever-increasing government deficit spending and ever larger central bank liquidity injections.  If that ever stops (and it won't anytime soon) EVERYTHING goes down.

Imminent Crucible's picture

"Name the thing that ISN'T overpriced."

Integrity in high office is, I believe, at or below fair value at the moment.

NoDebt's picture

Touche.  But I can't find an ETF that tracks that asset class.  If I could, I'd still short the hell out of it.

zapdude's picture

The bankers will one day be hunted again...

For honor and for riches
I've labored long and hard for the bread
but on my corns too long you tread
you fine haired sons of bitches

-- Black Bart, reknowned Wells Fargo stagecoach bandit

Uber Vandal's picture

I am not part of WE, thank you very much.



DOGGONE's picture

Hey, hey, what do you say -- tell the fucking TRUTH!

carlin401's picture

History of the FED show's that so long as they 'stimulate' that the party goes on.

"Don't Fight the Fed"

That rule hasn't changed,

The rePug's with the their message of 'austerity' is KAPOOT,

SO Yellen will send QE 85 to 105, to 850 sky's the limit, and so long as the USA has the MIL power to back it all up, the world will slop it up, and in a generation, folks will not even remember these times.

Imminent Crucible's picture

And how will the USA be paying for all that big MIL power once Yellen has driven the FRN to intrinsic value?  In a generation, we'll be lucky if there ARE any folks to remember these times.

carlin401's picture

The US MIL already has the largest strategic petro reserves on earth, and coal,

You should go find online "US mil strategic energy reserve plan, 2050', ... never fear that the US MIL hasn't planned this out way into the future,

Being the biggest user of portable energe(OIL), and the biggest hoarder, the US MIL is also richest COMPANY in real fucking wealth.

Lastly, don't forget that by 2025 the USA MIL will control all the arab/persian oil, long after israel/usa incinerates that part of the world, the underground oil will be in NWO (TRIBE BUSH) hands.

carlin401's picture

If BTC which is 100% worthless can have a $6Billion USD capitalization, then the USA can print 'funny money' forever and have a zillion quadrillion capitalization, .. why the fuck not?

Blodget just yesterday said he thinks BTC can go to a Million USD, why not?

That's the point here, the world has reached a new level of insanity.


The emperor has no clothes, but nobody is listening, and all has been co-opted from FOX to NBC, to ZH.

fonzannoon's picture

"That's the point here, the world has reached a new level of insanity"


I could not agree moar.

game theory's picture

That's where Keynes gets at least one thing right: "the market can stay irrational longer than you can stay solvent."

Imminent Crucible's picture

"why the fuck not?"

That question should be directed to Rudolf von Havenstein or Gideon Gono. Or any other of the central bankers behind the 60 hyperinflations to date in the modern era.

Diogenes's picture

Too funny, imaginary money valued in another kind of imaginary money.

Wahooo's picture

They will have to buy pension funds for the political class to maintain status quo. This thing can go on for a long time.

ramacers's picture

yes, what we deserve. blood, unlike what we ever coiuld've imagined.

Son of Captain Nemo's picture

Well said.

It just goes to show you how the majority of Americans think. 

As long as it's not my house or town getting obliterated by a foreign Army, and I can continue to gamble with everything including my "house" and credit cards with the job(s) I still have -then life is good.

Imminent Crucible's picture

I don't think Americans are really quite that blasé about it all.  Until recently, my wife worked as a pharmacy clerk at one of the busiest Wal-Mart pharmacies in the country.  She said that it appeared that most of the people who came in were on some kind of psychotropic medication: antidepressants, anti-anxiety, anti-psychotics, etc.

My guess is that people who really feel "Life is Good!" aren't taking handfuls of Klonopin along with their Zoloft and lithium.

I could be wrong, but I suspect that all the credit card overuse is a kind of self-medication.  They don't know what else to do but go shopping, buy something and hope it distracts them for longer than the last iGadget.

bobert's picture

Psyclotropics by credit card.

SpykerSpeed's picture

Ohh yes, the terrors of "deregulation".  If only the government had regulated us more, we wouldn't have had the crash in 2008!