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Jeremy Grantham Regales Youngins With ‘Real Humdinger’ Of A Bubble Story
The last time I checked in on Jeremy Grantham, he was regaling CNBC with tales of what he called "the fourth ‘Real McCoy’ bubble of my investment career."
That pronouncement, delivered during a chat with Wilfred Frost, came on June 17.
At the time, the Robinhood set was busy bidding up shares of bankrupt companies, an exercise in abject absurdity. "We’ve now reached a level where you buy bankrupt companies and issue stock in bankrupt companies," an incredulous Grantham told Frost.
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I was one of those folks who kept looking at the markets through the lens of value investing prior to discovering this website and kept waiting for “the bubble” to burst because of the crazy valuations and high debt levels. Missed out on a lot of money due to my inability to recognize how market fundamentals have changed, but I feel much better these days just having a better understanding of those shifts in investing in this new world of central bank dominance. The fact is that the central banks can prop up valuations and basically can’t risk popping those bubbles themselves. It’s possible something does come along and pops this “bubble,” but as you’ve said many times, I wouldn’t bet against the folks with the money printing press. Sometimes this time really is different and that’s hard for people to recognize because they (myself included) prefer to hold on tightly to the world want to see it instead of how it really is.
All that being said, I’m still fortunate enough to be sitting on a lot of cash and wouldn’t mind a sizable correction.
Do note: This is more of a humor piece than anything else. I’m not suggesting he’s wrong. At all. I’m just saying that missives like the one he published on Monday are taken as gospel by legions upon legions of would-be fundamentals-focused investors, who will now be worried. And maybe they should be worried. But the thing is, if your main portfolio is properly allocated, and you’ve dollar-cost-averaged over time, even a 45% drawdown on the main equity benchmarks isn’t a catastrophe. He’s out here telling people the world is going to explode, basically.
And I just believe that people need to think through the ramifications of what they say for everyday people who may accept what they say as infallible. I guarantee you there are all manner of folks out there right now, making investment decisions based on that one letter from him. I just think that’s not a great idea. Even if he’s right, it still isn’t a great idea.
A “45% drawdown on the main equity benchmarks isn’t a catastrophe” only if the market recovers. That’s been the case for so many decades that it starts to feel like a law of nature, but it is not. What happened in Japan can happen here.
Most investors would view a 45% drawdown on the value of their accounts as catastrophic regardless of their cost basis. Once people see the value of their account(s) at a given moment in time, they generally think of that sum as part of their net worth (without breaking it down to realized and unrealized gains or losses and or cost basis).
I am not disagreeing with your original argument. Just making a point about money and human psychology.
Interestingly, if Grantham is proven prescient and the market does crash, there is a high likelihood that the U.S. government responds with even larger fiscal/monetary measures than in 2020 (possibly even utilizing MMT). Which in turn would probably lead to a rapid recovery in equity markets as well.
Guys (or gals) I don’t want to come across as abrasive, but if you’ve been in the market for any length of time and you’ve done any semblance of well and are any semblance of diversified, yes you should be able to weather a 45% equity drawdown — even if the recovery ends up taking decades. If you can’t take a 45% drawdown in one asset, then you’ve got yourself an asset allocation problem. Sorry. 🙂
Oh, to be young again.
I do not find your reply abrasive at all. You are advancing your argument without any apparent attempt to humiliate or demean. That said, I do find your dismissal of a 45% loss as merely an asset allocation problem a little hard to account for.
I suspect that a 27% overall loss (based on a 60/40 allocation) that would take decades to recover from would likely be life altering for the vast majority of investors.
I guess that’s the point. If you you can’t stomach a 27% drawdown in a 60/40, then a 60/40 is itself too risky and consider scaling it down to a 50/50 or 40/60. And coming back to the Japan comparison… anyone that was 100% allocated to Japanese equities in December 1989 (Japanese investors or otherwise) definitely had an asset allocation problem!
@Charm, if we’re questioning the old paradigms, then we might also question the safety of the bond side of your portfolio.
Hilarious. Thanks for this!
I stopped reading Marks in March. I couldn’t understand what he was saying.
Both Buffett and Grantham are from another time. They got rich when the rules of the game were different than the rules of the game today.
The financial markets could crash tomorrow and we could enter an even worse depression. If that happened, I wouldn’t be saying to myself “Buffett and Grantham were right about this being a bubble.”
If Buffett and Grantham want to help any longer, I would hope that they are increasingly active in philanthropy where it can do the most good, and that they are using their gravitas to change minds. Where they could be useful is when they are invited to give speeches to the elites, that they tell their audiences that if they don’t reform, it’s going to be over for them at some point, and new elites will take their place.
Buffett has alluded to this in some ways for many years now. I haven’t followed Grantham to know if he has been active in either philanthropy or in advocating for change.
My issue with Buffett is that he often says the right thing but then he goes and asks for a federal bailout of his failed investments… I can be a wonderful investor too with techniques like that…
Grantham’s philanthropy:
http://www.granthamfoundation.org/about.html
https://philanthropynewsdigest.org/news/jeremy-grantham-to-invest-1-billion-in-climate-action#:~:text=Investor%20Jeremy%20Grantham%20plans%20to,climate%20change%2C%20Bloomberg%20Businessweek%20reports.&text=%22Agriculture%20is%20in%20fact%20the,%2C%22%20he%20told%20Bloomberg%20Businessweek.
Made my day H, thx!
If you look at Schiller P/E we have been in a bubble since 2016. So this is a fast/slow double bubble? Throw housing in and make it triple bubble….but it is already called the everything bubble. Or asset inflation.
all of that b/c our elites, R Congressmen especially, couldn’t bear the thought of paying more in taxes… ‘makes you wonder…
thank you for putting it all in perspective with the humor. It does help me to gain my balance and footing.