Let's discuss value investor Jeremy Grantham's thesis on "super bubbles" and his target for the S&P 500.
S&P 500 chart courtesy of StockCharts.Com, annotations by Mish with thanks to Jeremy Grantham.
Fourth Super Bubble
For almost a half-century, value-investing icon Jeremy Grantham has been calling market bubbles. Now, he says U.S. stocks are in a “super bubble,” only the fourth in history, and poised to collapse.
Please do yourself a big favor and play the above interview in entirety.
It's not a fluff interview. Bloomberg's Erik Schatzker grills Jeremy Grantham right from the get go about Grantham's view a year ago.
Schatzker: At the risk of putting words in your mouth, you are as certain [now] as you were then, if not more?
Grantham: I would say clearly more. I did freely admit, not in our conversation, but elsewhere, that I wasn't quite as certain about this bubble a year ago as I had been about the tech bubble of 2000 or as I had been in Japan or as I had been in the housing bubble of 2007. I used to think in terms of near certainties. This time I felt highly likely bit perhaps not nearly certain. Today I feel it is just about nearly certain.
Grantham discusses "crazy behavior" , noting that even in 1929 you had some magnificent rallies.
Schatzker: If you are right and stocks are in a multi-sigma deviation from the statistical trend, tell me what happens. The S&P 500 peaked at almost 4800 points. What is the bottom?
Grantham: The trend line, being slightly generous, is 2500. And most of the great bubbles, the super bubbles go below trend and stay there for quite a while. In 2000, the Nasdaq came down 82 percent but the Federal Reserve raced to the rescue so loudly and strongly they stopped the decline in the S&P at the trend line, It only declined 50 percent. This time trend is at most 2500. And I would expect, even if the Federal Reserve tries to do the same it will be hard to prevent the market from declining to that level.
Mish: There's much more in the interview. The above only covers 9 of 37 minutes.
Watch the video in entirety.
Let the Wild Rumpus Begin
The second favor you can do for yourself is read Jeremy Grantham's GMO Viewpoint: Let the Wild Rumpus Begin.
You will have to register to see it, but it will be worth it.
Epic Crash Coming
The third favor you can do for yourself is start paying attention to John Hussman.
Yes, I know, many consider him to be a washed up permabear. Well, valuations matter eventually. That time is now.
Given the S&P 500 looks short-term oversold, you may be thinking about defending this level. You may even be right, but be mindful where we are in context of historically reliable valuation measures that that put alternatives like the forward P/E ratio and the Fed Model to shame. pic.twitter.com/RCjTRDwlJq— John P. Hussman, Ph.D. (@hussmanjp) February 22, 2022
Top Dollar for Top Dollar
Chart by John Hussman, blue annotations by Mish
MAPE stands for "Margin-Adjusted P/E"
Unlike Grantham, Hussman's view is not locked.
Please consider Top Dollar for Top Dollar by John Hussman.
Why is it so hard to accept that speculative bubbles can burst? Interest rates were driven to zero for a decade. Yield-starved investors chased stocks to valuations beyond the 1929 and 2000 extremes. That speculation front-loaded more than a decade of future market gains into the present. Those gains are now behind us, embedded in breathtaking multiples. If history is any guide, a collapse in valuations is likely to return those gains to the future.
For now, the market continues to be in a “trap door” situation. Our gauges of market internals remain unfavorable, and valuations remain obscene. The market capitalization of non-financial and financial corporate equities hit $67 trillion at the recent peak. That’s a lot of stock market capitalization. The ratio of U.S. market cap/GDP began 2022 at a record extreme of 2.82, compared with a multiple of 1.88 at the 2000 bubble peak, and a historical norm of just 0.78. When you look at market capitalization, recognize that as much as 72% of it may be air. That is the hazard.
Hussman provides over 20 charts. It's not important to understand them all. The key chart is "You are Here".
Hussman also goes into a discussion of the "Fed Put" that is the Fed will cushion the decline.
OK, at what level? 50% at best as Grantham believes or something lower?
"As much as 72% of market capitalization may be air."
I have morphed into Grantham, but perhaps not quite Hussman. But like Hussman, I expect to be mocked for this post.
Previously I called stocks grossly overvalued. But then I thought it was possible for the excess to resolve by stocks going nowhere for long periods of time or by smaller declines that add up to a huge decline over times.
Now I am thinking in terms of a multi-year crash.
Grantham's target of 2500 as a minimum decline on the S&P 500 seems about right.
Is the any escape?
In aggregate no. For every seller there is a buyer. In this case a buy the dipper.
Someone must hold every stock every step of the way down, and pension funds will do just that.
Individually, investors have a choice. You can cash out, lighten up, or try to buy value. Grantham discusses this in the interview video as well.
But most won't. It is extremely difficult to believe what Grantham is saying, what Hussman is saying, and what I am saying.
Japanese Nikkei stock market index courtesy of StockCharts.Com, Annotations by Mish
Grantham called all the bubbles including the Japanese peak.
The Nikkei is still below the level it was at in 1989! And that is despite numerous 50%, even 100% rallies along the way.
If you want a bullish comment, then buy Japan, after decades of deflation the Nikkei has many reasonably priced issues.
In general, think outside the US.
The Decline Will Shock Bears
The upcoming decline will shock most bears. Many will by the dip, then that dip and then the next dip.
Some hedge funds will do this with leverage and blow up.
If you just retired and think you have a a big next egg and can ride it out in equities, expect your portfolio to fall by 50%, minimum.
If you are age 24 with few assets, you should be rooting for an epic decline.
What About Gold?
S&P 500 - What is the Pain Threshold for the Fed and Traders?
For sure, the Fed will "try" to halt the decline. And so will Congress by sloshing money everywhere.
The beneficiary of fiscal and Fed stimulus is highly likely to be gold.
Faith in the Fed is a key driver for gold. And the it blew the third major bubble in just over 20 years.
The Fed has no credibility and that should already be obvious. Soon it will be unavoidably obvious.
For further discussion of the idea the Fed is in control, please see S&P 500 - What is the Pain Threshold for the Fed and Traders?
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