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Jeremy Grantham's Bubble Watch Update: "S&P To 2250 Before It Crashes"
When GMO's Jeremy Grantham says that he is "still a believer that the Fed will engineer a fully-fledged bubble" what can one say but, yes: it did so a few years back.
Recall that back in May, Grantham so far accurately predicted that on the back of central bank liquidity, the overstretched market will stretch even further "at least enough to drive the market to its 2-sigma level of 2,250 and perhaps a fair bit beyond... And although nothing is certain in the market, this is exactly what I believe will happen."
In fact, his prediction so far has been spot on in terms of not only magnitude but also timing, accurately calling for the recent swoon and subsequent rebound. Notably, he also offered his forecast for when the bubble would burst which he timed as follows: "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."
So here is how the legendary investor predicts the upcoming timing of events in the near future, with a focus on the presidential cycle:
The Presidential Cycle
Regular readers know the score: +2.5% a month for the seven months from October 1 to April 30, in year three on average since 1932 (a total of +17%). This is now the 21st cycle. The odds of drawing 20 random 7-month returns this strong are just over 1 in 200 according to our 10 million trials. But 17 of the actual 20 historical experiences were up and the worst of the 3 downs was only -6.4%, so the odds of this consistency plus the high return would be much smaller. The remaining 5 months of the Presidential year have a good but not remarkable record, over .75% per month, but the killer here is that the remaining 36 months since 1932 averaged a measly +0.2% a month!
With the 7 months having returned over 10 times the average of the 36-month desert, it may seem like a nobrainer investment for those seven of us not intimidated by the obvious simplicity of the idea, but be advised that going into this particular cycle there appear to be more negatives than normal. (Though many of the previous 20 occurrences may well have seemed that way to investors at the time. Who knows?) The negatives this time include the ending of the Fed’s bond purchase program. There is also talk of a rate increase early next year, given the recent recovery of the U.S. economy reflected in the improved employment report of early October (5.9% unemployed) and positive adjustments to the previous month’s employment numbers. Other negatives include the potential for escalation of several minor but intractable wars and the recent Ebola outbreak.
Some would mention the very substantial overpricing of the U.S. market at the top of the list but, surprisingly, overpricing has had no material effect on third-year returns or the particularly sweet seven-month subset: an average of 17% for seven months becomes 19% if cheap and 15% if expensive. Big deal. Value, however, is very important for the other three years in which the cheapest 25% have produced a respectable return of +12%, and the other three quartiles are absolutely not worth having, all three together averaging almost exactly nil! More disturbing to me than the obvious overvaluation is the large and growing number of other negatives – technical and psychological – put together by Hussman and other market experts. Nevertheless, despite my nervousness I am still a believer that the Fed will engineer a fully-fledged bubble (S&P 500 over 2250) before a very serious decline.
One can add the BOJ and ECB to the list now too, even if netting out the impact of Jim Bullard's verbal interventions.
So what is Grantham's advice to a prudent investor, by which don't mean your typical Virtu algo:
As always, the prudent investor (unlike the political year three) should definitely recognize overvaluation, factor in regression to the mean, and calculate the longer-term returns that result from this process. More easily, such prudent investors can use our seven-year numbers, which have a decent long-term record measured when we have viewed markets as overpriced, as we believe they are today, and a better record measured in the periods after bubbles break. The other necessary ingredients to the investment mix are suitable measures of risk, and when these are added to estimated returns we believe efficient portfolios can be produced. On our data, with U.S. large cap equities offering negative returns (-1.5%) except for high quality stocks (+2.2%), with foreign developed and emerging equities overpriced (+3.7%), and with bonds and cash also very unattractive, investors have to twist and turn to find even a semi-respectable portfolio. It is a particularly tough process today with nowhere to hide and no very good investments compared to, say, the time around the 2000 bubble when there were several. My colleagues Ben Inker and James Montier have written in some detail about the problems of investing in these difficult times.2 Designed to help your thinking about this topic, Exhibit 1 shows an example of a portfolio that might be used in a world that excludes private equity and venture capital, and for a client who can do without a benchmark and can settle for owning a (hopefully) sensible long-term efficient portfolio. Efficient, that is, in terms of trying to minimize risk per unit of estimated returns. As always, and particularly in this type of overpriced environment, there are no guarantees of success even if every GMO recommendation were to be implemented for, regrettably, we too are often imperfect.
His conclusion:
My personal fond hope and expectation is still for a market that runs deep into bubble territory (which starts, as mentioned earlier, at 2250 on the S&P 500 on our data) before crashing as it always does. Hopefully by then, but depending on what the rest of the world’s equities do, our holdings of global equities will be down to 20% or less. Usually the bubble excitement – which seems inevitably to be led by U.S. markets – starts about now, entering the sweet spot of the Presidential Cycle’s year three, but occasionally, as you have probably discovered the hard way already, history can be a snare and not a help.
The only problem is that once the bubble bursts, nobody will be able to put the Humpty Dumpty (or CYNK as some call it) market together again. Which is why the central banks will do everything in their power to avoid even a 10% correction. We are now in all in territory, and the next market crash will be the last: something the all-in central-planners know well, which is why the market's emergency preparedness system now gets a daily test run: if and when the crash begins, the stock exchanges will simply "break" as investors suddenly find they have been volunteered for the last bail-in.
Source: GMO
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Charles Evans, head of the Chicago Federal Reserve, said his goal was and S&P of 2200 before 2014. So it's already in the Federal Reserve's plans.
A totally rigged market between the Federal Reserve and it's infinite prined money and Wall Street.
William Dudley of the NY Fed is doing the buying.
... until it crashes to 1800. What a joke.
1800? Optimist....
More like 2250 then it crashes up to 5000
I have always wondered about this. You get Draghi or a Fed person here in the states jawboning about the markets and they suddenly jump. It is like they jawbone and then dump hoards of money into the markets to make them go. What a farce.
Rumor and innuendo are herding calls for the sheep. You look at the real numbers and then at the markets and you realize the inmates are running the asylum. This will not end well but its like watching a giant pile up on the interstate, exciting if your not involved.
I posed a September 2016 crash just yestereday on another ZH comment. Hae been saying it for abt 1.5 yrs now..
Look at the past crashes:
Clinton --> Bush
Bush --> Obama
Obama --> Hillary (sarc)
to be brief
6 years 1 month between 2001 recession and last one
currently, 5 years 5 months into "recovery"
do you REALLY think we can make it 2016?
fwiw, i firmly believe US recession start no later than Q1 2015
when recession hits it will crush earnings/stocks
Yeah, Christmas will be the killer. Those 4Q reports will lead directly to massive bankruptcy filings that none of the talking heads will be able to spin their way out of.
The fact that the fed is all in is exactly why the "market"won't crash. It will simply vaporize and there will be an outside force/false flag to blame. It will not be like 08 and us plebes will not make currency on the downside.
exactly....basically they have been setting 'targets' for the S&P since three four years ago...first it was 1800 then 1900 then 2000...and fuckin Evans may have a target of 2200 but its just going to get bumped up everytime we get there...UNTIL one time it doesnt...and yes an outside force will be the cause of it...and its not something that the MSM has been talking about...its wont be Russia, Ebola, Japan...it will be something else.
Connect dots...
ISIS...we will invade if they get nukes...CME located in Chicago. CME core part of the market...
CME...Chicago...ISIS...Nukes.
Hm.
Invade if they get nukes?!? Your not serious. I recall they have a few stolen planes they can't fly and no boats. Those fuckers can attack what they can walk or drive to and that's it. Of course you will have random nutters doing shit like hacking cops in new york but that is hardly an invasion. And a fucking nuke .... they would blow themselves off the planet trying to figure out how it worked.
“If we discovered that [Islamic State] had gotten possession of a nuclear weapon, and we had to run an operation to get it out of their hands, then, yes,” Obama told reporters at a news conference in Brisbane, Australia, on Sunday. “I would order it."
There's a link there for a reason...
Obama says, oh yeh...we gonna invade if they get n00kz. So...false flag, Chicago, nuke. Goodbye CME. Goodbye U.S. market. It wuz ISIS!!!111! MY SLAVES, GO FORTH AND INVADE.
Right on, whenever the next 'troubles' are set into motion, stawks won't be falling people just won't have access to any of their accounts and funds. Most likely be blamed on 'mass computer infrastructure hack attack'....oops sorry you people you now have nothing, hey good to Ya luck though, thanks for playing.
Just like Bernie Madoff, MF Global, Cyprus, Flash Crash, CountryWide, Sock Puppets, and Sub Prime...
All rolled into one.
"Aaaaaaaand, it's gone, it's all gone."
don't know about "vaporize" ... but fully expect replay of october 2008
Nope, it won't be like that. It will be like the flash crash, bank on it.
i mentioned this on ZH years ago...30% flash crash at 9:30:00000001, circuit breakers activated, markets halted 9:30:00:0000002.....any trades that occur will be insiders or institutions.....retail gets locked out like sheeps getting crated for the slaughterhouse....trading day is done....same shit happens next morning...dont think ANYBODY can hedge against that....unless youre already loaded up with gold, ammo and foodstocks.
https://www.nyse.com/markets/nyse/market-model
Specifically, the circuit-breaker halt for a Level 1 (7%) or Level 2 (13%) decline occurring after 9:30 a.m. Eastern and up to and including 3:25 p.m. Eastern, or in the case of an early scheduled close, 12:25 p.m. Eastern, would result in a trading halt in all stocks for 15 minutes. If the market declined by 20%, triggering a Level 3 circuit-breaker, at any time, trading would be halted for the remainder of the day.
A Level 1 or Level 2 halt can only occur once per trading day. For example, if a Level 1 Market Decline was to occur and trading was halted, following the reopening of trading, the NYSE would not halt the market again unless a Level 2 Market Decline was to occur. Likewise, following the reopening of trading after a Level 2 Market Decline, the NYSE would not halt trading again unless a Level 3 Market Decline were to occur, at which point, trading in all stocks would be halted until the primary market opens the next trading day
Bingo Doc.
"It's just too much. Sorry about guys, there's nothing I can do about it. Some HUGE paper sellers coming through here..."
https://www.youtube.com/watch?v=E1xqSZy9_4I
i'll be here
and will give you a tip of the hat if it does
lets see...like what sheepdog said...massive computer infrastructure outage aka internet across the country....we wont be able to even get onto ZH to post if thats the reason they can conjure up...
Grantham is the smartest guy in the room -- pretty much any room. Yes, there is an outside chance that the next breakdown will be an order of magnitude worse than anything he's contemplating, but that's a purely speculative forecast.
Life is not cinema, and dramatically satisfying denouements seldom occur.
While I agree that Robert is smart on many things, he is dumb as a rock on others. Anything that involves science is beyond him. He is the loon funding Lord Stern at the LSE for instance. And yes, I do know him through GMO.
2250
is that code for - i'm gonna be out well before?
In my view this is the outcome that intelligent and rational people will accept and prepare for. I completely agree Tyler.
The only problem is that once the bubble bursts, nobody will be able to put the Humpty Dumpty (or CYNK as some call it) market together again. Which is why the central banks will do everything in their power to avoid even a 10% correction. We are now in all in territory, and the next market crash will be the last: something the all-in central-planners know well, which is why the market's emergency preparedness system now gets a daily test run: if and when the crash begins, the stock exchanges will simply "break" as investors suddenly find they have been volunteered for the last bail-in.
i don't see markets dropping till deep into next recession (last go round the last bull i recall - kudlow - threw in the towel in sept 2008) ... but when it can no longer be denied it will fall ... and we'll get a healthy dose of "Shock Doctrine"
The bond markets folks! that'll be what crashes and money could well pour into stocks sending Dow to 40,000 within the next 2 years
walstreetpro2 said it best..
http://youtu.be/4k4xPUZRdC0?t=3m1s
Unfortunately, wallstpro2 is now back in prison.
10yr @ 1% ... written in stone
Agreed. That's been my call for some time.
I don't believe what any of these clowns say, 2 years ago none of them were even saying 'S&P 2,000', they just keep moving the goal posts so whatever put your money on black or red, good luck.
pure garbage
Yea really...'well, here's what we're projecting is gonna happen'....none of these ass hats has even predicted what's going to happen in the same week, they can fuck off and watch out for the guillotines all you money masters of high finance....fuckers.
"if and when the crash begins, the stock exchanges will simply "break" as investors suddenly find they have been volunteered for the last bail-in."
I firmly believe this. All the smug 'investors' I know who think they are so smart for staying in the market (and adding to their positions no less) will be shocked, SHOCKED to find out that when they want to get out of their positions, they won't be able to. Have fun watching your portfolio slashed, and then co-opted by TPTB.
where's the believer call back in 2009-10 ???????
Yeah, good luck keeping these balls in the air for another two years.
So he's using history as a guide,I don't think we can consider whats going on now comparable to any previous time.
All well and good, except that the bubble started 5 years ago. Was he napping or something?
For sure they will simply break.
Yes the Fed and central banks (the Fed not a central bank) will do all they can to keep the bubble from popping but the reality is that once the algos start the selling panic and the hedge funds try to squeeze through the door it will be too late.
Yelling fire in an over packed theater/
Black swans happen.
You need to have your short position in place. When it free-falls orders to sell will be tossed out with "too far off the market" as will your laugable "protective stop".
Unless you were trading on black monday in Oct 1987 you have know clue what broken is.
The 150pt drop in a few minutes by the algo in May (2014) aka "fat finger" is only a prelude.
When the market hits a circuit breaker for the day's limit what do you think happens when it re-opens?
Yellen, Bullard, Evans, Williams and Dudley won't let it crash.
They'll just follow Japan and print huge sums to buy stocks outright.
To the Federal Reserve they'll just print 10's of trillions more to save their Wall Street buddies.
The only force that kills the Federal Reserve and nullifies it is a currency crisis and hyperinflation.
Their currency backup plan is IMF SDRs. Yet another fiat.
As I have said from the beginning. I'm not going short until ZH turns bullish.
so, what's that, next week or so?
If the top is not this year, I completely agree that they run it thru the end of 2016. Obama wants to say everything was great when he left. His ego is bigger than the market.
Ah yes I'm sure it's all about the image of another ass hat puppet politician again, just like it was all about the Nov mid terms and didn't actually make any difference at all, O'Asshole just claims whatever anyway. Please.
I think it's a zimbabwean bull market. Dow 1million, loaf of bread $100,000 before it's all done. Most plebes don't understand inflation and will agree that the blame rests with whoever the pariah de jour is. It's all fiction anyway. The idea that everyone can invest in the market to fund their retirement. A clever scam by the ruling elite who need their heads removed from their bodies. Whoever's got the guillotines I'll help with the labor.
Party on Wayne.
What key geopolitical 'opportunities' might another U.S. economic stumble open up for Russia & China...? I wonder how gold will act or come into play during this misfortune?
While I appreciate the Divine Comedy of Rich Investment Managers supporting MMT, reading yet another rendition is getting to be like finding oneself in one of the 9 Circles of Hell.
As Bill Gross says," A credit based Financial economy depends on an ever expanding outstading level of credit for it's survival".
So Credit can't just dissapate into the atmosphere when it becomes worthless. Credit losses are always assigned to either Households, Business or Government.
When the Government borrows money and Prints Treasuries the difference between the Real Returns on the expenditure and the Costs have to be assigned to some sector of the economy. To economize on BS let's just state that the Costs are always and forevermore assigned to Households.
There is moreover, the issue of Credit being created without any accompanying creation of Real Wealth. So Grantham believes Resources are finite but Real Wealth is not.
I would like to state Categorically that I think MMT=A Warm Bucket of Slop.