His concern spans a wide range of asset classes.
Bond markets have never been so high “in human history”. Real estate is “suddenly pretty bubbling in almost every market in the world”. Equities are overpriced in the developed world, but “heroically overpriced” in the US.
It doesn’t take bad news to end this, it takes a slightly less optimistic outlook than we had last week.
– Jeremy Grantham
This world of rising asset prices may look fantastic, but it really only benefits retirees who can sell their wealth. For everyone else, Grantham says, this is a “pretty miserable world” where it costs twice the money to buy the same house your parents built and twice as much to build a portfolio of assets.
He sees the financial markets like a table tennis ball sitting on a jet of water.
“We kept increasing the pressure – more money, more moral hazard – and here we are at the peak.”
But Grantham is not looking for a big event or a big change in policy to drive the markets around – like a spike in interest rates that causes a taper tantrum, or some kind of black or gray swan event.
“It doesn’t take bad news to bring this down,” he says. “It takes a slightly less optimistic outlook than we had last week.”
The pessimistic termites
He argues that stock market history suggests that the most speculative assets will begin to fall first and then slowly but surely “pessimistic termites” will begin to eat away at the rest of the market.
For example, in 1929, high beta stocks began to fall long before the crash and have been declining for the year to date as markets collapsed. Similarly, high beta stocks went up long before the Nifty 50 crash in 1982.
In the lead up to the dotcom crash, tech stocks were down 30 percent, but the rest of the S&P 500 rose until “the pessimism termites finally balanced the market.”
Could a similar pattern be emerging now? Grantham thinks so, arguing that what he calls the “super madmen” of the financial markets are falling apart.
Investors in electrification in general, and Tesla in particular, have been hit in the past few months, with the auto company’s shares dropping 30 percent since their high in January.
Signs that speculative markets have already peaked
The air also came out of the bubble of the special purpose vehicle for acquisitions well and truly, he says. The index of SPAC stocks has fallen 30 percent since January, and nine of the last 10 SPACS listed are trading below their issue price of $ 10.
Grantham watched the SPAC case up close. His personal foundation invested in a battery manufacturer called QuantumScape, which is listed on a SPAC. The stock hit a high of $ 132 in December but is now trading at $ 27.
“I was in the paradoxical position of warning people about SPACs, but the venture company we bought 10 years ago became a SPAC,” he says.
The Nasdaq, Grantham says, likely peaked in February. Since then, it’s only been down 2.5 percent, compared to a 6.8 percent increase in the S&P 500.
“Super SPACs peaked in January, the Nasdaq in February. Maybe the termites will hit the rest of the market in a few months, ”says Grantham.
Even high house prices should mean again at some point, he says. The unproductiveness of living makes it impossible to pay ever increasing amounts for essentially the same assets.
The lessons of Japan’s long real estate winter – land prices are still not at the height of the Japanese real estate craze of 1989 – and the US housing crash of 2009 are still true.
“At some point there will be a reckoning day. The higher the multiple of the family income, the greater the likely pain, based on Japan and based on the US, ”says Grantham.
Why lower asset prices can’t be bad
He says lower asset prices aren’t necessarily a bad thing for investors in the long run.
“Here’s how it works. You can have a high-priced asset or a high-yielding asset, but you can’t have both. I would welcome lower asset prices that I’m confident will come.”
But the adjustment will be painful and ugly. Grantham says asset prices would have to fall only halfway past historical levels to trigger a “big bear market”.
May be. The problem with a perennial bear like Grantham is that he always seems to be warning that some kind of calamity is imminent.
And while he was close to calling the high point of the bull market in 2008, many would say that his best call was probably the low point of the bear market in 2009 and the beginning of that eternal bull market we are still in.
In addition, as Grantham admitted on Wednesday, GMO has had a very tough 11 years as a value investor, with 2020 being the worst.
Notably, however, the fund is slowly picking up steam as Grantham reports that its largest funds are performing in the top quartile as growth slows and value regains importance.
The worth of an investor like Grantham stems from their ability to think long-term, to withdraw from the weekly, monthly, and quarterly movements of the markets in order to think long-term trends.
For 15 years, for example, he’s been hammering on the dangers of climate change. He warned in 2011 that commodity prices would stop falling, as they have for 100 years, and rise again as increased demand met scarcity of supply – a trend that is now likely to be emerging in some commodities.
On Wednesday, he added another major concern to the list: the toxicity of plastics and pesticides and the potential harm they have done to the world.
He’s been closely watching sperm counts around the world, which he says have dropped 30 percent in his life; Where previously few couples struggled to get pregnant, today 15 percent of couples struggle and the number is growing.
He expects more lawsuits against pesticide and plastic manufacturers and greater awareness of the issue in the coming years. “This is a completely underestimated shock that will have an impact over the next 10 or 20 years.”
Is Grantham’s Bear Market Coming In A Few Months? Who knows – the power of central banks’ cheap money has proven to be very impressive so far.
But even the biggest bull is a better investor to understand how the biggest bear thinks about the decade to come.
