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Grantham Says Fed "Bound And Determined" To Engineer "Full-Fledged Bubble"
Back in November, we highlighted the accuracy of Jeremy Grantham’s predictions about the trajectory of the central bank liquidity-fueled equity rally. In terms of how far the market can run before reality and gravity finally reassert themselves, bursting the centrally planned bubble and prompting a 2008-style “correction”, Grantham defined a “full-fledged” bubble as S&P 2250 and warned that a retracement of some 50% was possible depending on how assertive the Fed’s response to its real favorite economic indicator (stocks) turns out to be.
In GMO’s latest quarterly letter, Grantham is out reiterating his view that although US stocks may not have reached their peak in what he accurately calls a “strange, manipulated world” (we prefer “new paranormal”), he’s sticking with the idea that “bubble territory” is likely just around the corner as the Yellen Fed is “bound and determined” to facilitate and inexorable rise in asset prices. He also notes that the Yellen seems no more inclined than her predecessor to take Jeremy Stein’s advice on being careful not to adopt an “implicit policy of inaction” when it comes to bubbles. Here’s more:
The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls. In the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet.
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250 on our traditional assumption that a two-sigma event, based on historical price data only, is a good definition of a bubble.3 (As we like to describe it, arbitrary but reasonable, for it fits the historical patterns nicely.)
It would, in my opinion, be odd to have a Fed-driven cycle end before the economy is working more or less flat out as it was in 1929, 2000, and 2007, to take the three other biggest equity bubbles of the last 100 years.
And here’s Grantham on the balance sheet leveraging that we have said, on too many occasions to count, is driving equity prices by encouraging companies to borrow for buybacks while neglecting capex and depressing wage growth.
I still believe that before this cycle ends, the quantity of U.S. deals, including co- investments, should rise to a record given the unprecedented low rates and the current extreme reluctance to make new investments in plant and equipment (how old-fashioned that sounds these days) rather than into stock buybacks, which may be good for corporate officers and stockholders, but bad for GDP growth and employment and, hence, wages.
And the conclusion:
We could easily, of course, have a normal, modest bear market, down 10-20%, given all of the global troubles we have. If we do, then the odds of this super-cycle bull market lasting until the election would go from pretty good to even better. So, “2250, here we come” is still my view of the most likely track, but foreign markets are of course to be preferred if you believe our numbers. Stay tuned.
It appears then, that either one of two outcomes is possible: 1) in the best case scenario, we get a 10-20% correction, which would only serve to forestall the inevitable catastrophic bubble bursting and allow the super-cycle to persist for a little longer, or 2) the Fed successfully pushes the S&P past 2250 at which point we enter full bubble territory and eventually experience a dramatic pullback, the severity of which will ironically be determined by the response from the same central planners who created the bubble in the first place.
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We are in a bubble when no one realizes we are in a bubble.
Oil at $145 was a classical blow off top! Margin speculation and derivatives are still alive and well. What has changed? There's absolutely no buffer if a sovereign default happens or a bank goes bust. Sure, CBs can print to cover all losses - again - but hyperinflation is guaranteed to happen right after. They got lucky once and people were surprised and dumbfounded. CBs aren't going to cover all losses again. They know their currency wouldn't survive.
"They know their currency wouldn't survive"
Thats part of the plan. They can buy up all kinds of physical assets with their paper, then crash the currency to retain power. They can create a new currency anytime they want. Paper chits can be made meaningless overnight.
What do you suspect would be the easiest way to handle all world currency transactions without the need for bank tellers & managers?
Computers mean ~> good bye banking jobs & wall street jobs, hello automated world... (Can't you see the shift?)
Is that why they're all jumping on the BTC bandwaggon?
I don't want to dismiss that CBs have quasi unlimited fire power and can create new chits as they please. But not all of the wealthy elite is going to surrender their wealth to the whim of a central banker. The demand for real assets is already sky high in certain places. Luxury real estate for example. It HAS to show in the gold and silver markets at some point. Now they're saying that Dubai's bullion dealers are having a tough time?
Something doesn't add.
Maybe the CBs are stalling and preserving King Dollar etc at the expense of fresh liquidty for the wealthy. They created enough new chits and now they're done buying up everything they needed or wanted to.
Next up - consolidation and higher rates.
I get the feeling Wall Street has been playing hot potato with ever-higher stock prices to get Main Street sucked in. Problem is, the Public isn't buying. These frenzied price ramping tactics tell me Wall Street is waking up to the fact they may be the Greater Fool this time.
Is this the same group of bankers and financiers that can jet away to their private and secure plantations around the world?
Pretty good gig for a "greater fool". You think that countries like Barbados are going to turn these guys in when the second civil war begins in 'merica?
Good luck with that.
Depends on what they're holding and where they're holding it. They can live in Barbados but they won't have all their cash and stash there, no way. The banks will have to surrender to the governments and bail-ins will happen to fund payments.
Governments will fight to the last minute to try and stay afloat and even old friendships won't matter when a raging populace is breathing down the lawmakers necks to go after the thieves.
All bets are off at that time.
Exactly .. Money and assets aren't held in a vacuum. When it's time to cash out, who are you going to sell to?
Three good posts in a row! +3
I would guess that the real club members will "cash out" long before anyone else knew what the fuck just hit them.
Moreover, the real owners will somehow, maintain title to all those productive assets after WWIII, just like they did after WWI and WWII.
Come on guys.
<== Grantham (dies first)
<== The latest 'jew of the day' Fed Chair dies first (before a long and lucrative 'speaker fee' tour)
you are forgetting the pension funds - they are in - big time with yield benchmarks at 7%+ required with states that want lower contributions - for bonds and stocks alike - when rates go up - the assets blow up and the end game is lower or no benefits - the individual may be out of the market but the pension funds are in and a powder keg when they implode.
The current bubble began when the BOJ, Fed, and now ECB began artificially creating demand for massive quantities of real debt and at below organic rates...and the debt will never be paid off so the servicing of this and all other over-indebtedness will drive all CB policies.
The link shows what would happen if CB's slowed buying or actually moved to "normalize"...and the slight of hand, shadow QE that is the "foreign bid" in the Treasury market.
http://econimica.blogspot.com/2015/03/brics-blink-or-more-correctly-wink-and.html
Dunno, I bought one of those shortwave radios last month so.....
If he's related to Lady Grantham, he will know for sure.
The Baltimore Police Unions full statement
https://cbsbaltimore.files.wordpress...sa-mosby-3.pdf
Was unable to open your filing, Tryed open seveal times. Milestones
pretty sure that full-fledged bubble thing has been well under way for years
Yeah. I was like "until???" WTF? Whats this guy's interest in making people believe we aren't already in the mega bubble of all times that's about to pop?
Determined to? Equities are at "all time highs" asshat.
We haven't hit infinity yet, so we've got a ways to go.
I'm convinced that the Fed feels that if they're the one's that engineer and build the bubble, they are under the assumption that they can control it.
the fed is a war criminal, without the fed the US could never pay for our wars, as we are broke in real terms, but the FED keeps buying our debt..do you think ben or janet see themselves as warmongers? no I am sure they do not.
The USA is a corporation, corporations are often bankrupted on purpose...
Nevertheless, I'd suspect the Chinese will be moving in to buy up a lot of things cheaply soon...
The ever crashing rig count
http://1.bp.blogspot.com/-4pxAAdzwKus/VUJ-CX6F7SI/AAAAAAAAXdY/xRQCRWDTtE...
based on historical price data, as GMO defines, 2007 cannot be considered a two sigma event. it collapsed then, so what precludes it from collapsing now? i dont buy that argument. i think that without an official QE in place, even with NY FED manipulations, HFT and algos, we are exposed.
it is wishful thinking from GMO to consider that the market can fall 20% to SP500 at 1,600 and then advance to 2250 until elections. that's would be a 40% gain in roughly a year. it would take a very large QE4 and ungodly manipulation to achieve that. just don't see it happening in an election year, if the last 2 are any indication.
"We could easily, of course, have a normal, modest bear market, down 10-20%, given all of the global troubles we have. If we do, then the odds of this super-cycle bull market lasting until the election would go from pretty good to even better."
we'll see about that
last 2 US recessions
march 2001 to november 2001
december 2007 to june 2009
6 years 1 month between
current "recovery" 5 years 11 months
tick tock tick tock tick tock
Be still and listen. Grantham knows his shit.
Seriously knukles?
Very seriously -- Grantham = smartest guy in the room, pretty much any room.
Calling Greece, Greece you are needed for cleanup in aisle five.
It might become a bubble, but definitely NOT a bubble in any way right now? Just preposterous babble.
Managing ego driven tards through influence is an art. You will know they have failed when they resort to jack-booted thugs.
http://www.foxbusiness.com/industries/2015/04/06/duke-energy-to-buy-back...
Correction is so old fashion.
As bond/debt markets become more grossly overvalued, they pose a systemic risk along with overvalued stocks and this may be the dual contributor to the next major financial decline.
can we get him or any SANE person on the FED? You have to be a moron to not know this going to end badly! Very Badly!
It's all about M&A... towards Warren Beatty's dream of a single global company for whom we all work.