Make Stocks Collapse Again

Will anyone hold Jeremy Grantham’s feet to the proverbial fire if his latest dire prediction doesn’t pan out?

Spoiler alert: No.

But, he will be celebrated if he’s even half-right. And that’s the nice thing about being a “brand name” in this industry. When you’re right, it’s evidence of the kind of superhuman acumen that made you wealthy in the first place. When you’re wrong (which, let’s face it, is most of the time), nobody remembers or, better still, markets get the blame for being “irrational.” So, it wasn’t you who was wrong, but rather markets.

The problem with that is just that markets have an annoying tendency to keep on being “wrong,” sometimes for years, which is just another formulation of the old “irrational longer than you can stay solvent” adage.

Importantly, it’s not just “legends” and luminaries who are usually wrong. It’s everyone, when it comes to markets. Because markets’ defining characteristic is a propensity to make utter fools of anyone who tries to play Nostradamus.

This doesn’t mean there aren’t such things as mispricings. But, for me anyway, a mispricing is something separate and distinct from a “bubble” or a “mania” or, on the other side, “oversold conditions” or “rampant pessimism.” A mispricing can exist almost objectively. There are most assuredly cases where the market gets things “wrong,” usually because nobody bothered to look close enough. The housing crisis is the most well-known example, but people have made careers out of identifying more mundane cases where a given asset simply doesn’t reflect some critical part of the story, not because of any broad-based delirium (during bull markets) or universal pessimism (during bad times), but because people just didn’t look. Or didn’t read the writing on the wall around some shift in consumer preferences. Or didn’t do enough research. Or didn’t talk to the right person at a company. Or didn’t know enough about some foreign locale. Or didn’t know a fraud when they saw it. Etc.

(Quick aside: Note that I said mispricings can exist “almost” objectively. “Almost” because there’s still a sense in which, at the end of the day, something that can be sold is always just worth what somebody will pay you for it. If I have a baseball card that, according to experts, is worth 25 cents, but my neighbor will pay $25 and I sell it to him/her, that card was worth $25 at the time of that transaction. Period. This is the only point on which I disagree with Bitcoin critics. Bitcoin is worthless, mostly because it doesn’t really exist. That said, if I buy “one” of these amorphous, digital concepts at $30,000 and I sell it at $40,000 24 hours later, it was “worth” $40,000 to me and to the person I sold it to at the time of that transaction — the inherent idiocy of our endeavor notwithstanding.)

The problem comes when folks assert that the entire market is mispriced. That everything is a “mania.” That stocks (in general, as an asset class) or bonds (because yields are deeply negative for core EGBs and even for quite a bit of corporate debt) are a “bubble.” Those types of proclamations are almost never based on the kinds of mispricings described above, precisely because when you’re talking about entire asset classes or, in some cases, the entire universe of assets, it isn’t possible to have identified an objective mispricing, where that means you can point to the exact reason why a given conjuncture is unsustainable. As ever, Michael Burry is the modern exception and there are historical exceptions too. He identified a mispricing with ramifications for the entire market and was able to say, with some degree of precision and specificity, what the issue was and when it was likely to become a problem.

All of that to say this: Grantham doubled down on his “fully-fledged humdinger” call (which was itself a double down on last summer’s “Real McCoy” pronouncement) in remarks to Bloomberg this week.

Essentially, Grantham is worried that Joe Biden and his “American Rescue Plan” will create more speculation and thereby make an already precarious situation even more so.

“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” Grantham told Bloomberg, which dutifully described him as a “legend,” only without the scare quotes.

“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” he added.

There you go, folks. It doesn’t get much more explicit than that, does it? Grantham all but promised that the current rally will collapse in “the next few months” because historically this has “always, without exception” been the case.

Of course, we can’t verify that, can we? Grantham hasn’t defined “obvious super-enthusiasm,” mostly because that’s not an objective term. It’s just an adjective, next to a noun with a superlative amended to it. It can mean anything Grantham wants it to mean. If pressed (and nobody will press him), he could just go back through history, point to instances where asset prices fell, and call the conditions that preceded the drop examples of “obvious super-enthusiasm.”

Hindsight is a helluva thing, you know.

Grantham, having clearly read the Bloomberg pieces I discussed in “Inside The Bubble,” said some of the stimulus money provided by Biden’s plan will “no doubt” be spent on stocks rather than food and housing. As Bloomberg wrote, “he envisions a collapse rivaling the 1929 crash or the dot-com bust of 2000.”

Could he be right? Well, of course. Theoretically, anyone could be “right” about anything at any time.

That simple concept is almost completely lost on most market participants. If I had told you, in October of 2019, that a bat-borne plague was going to crawl up out of a seafood market in Wuhan within two months, collapse the global economy within six months, and eventually kill more than 2 million people, the odds of my being correct would have essentially been 0%, assuming I had no special information about COVID-19.

Sweeping tales of the financial apocalypse are really no different. COVID-19 isn’t the only coronavirus. People have long said another pandemic was just a matter of time. China was just as “good” a candidate as any when it comes to picking an epicenter. Similarly, everyone knows stocks are going to crash again at some point. Generally speaking, “crashes” occur after periods during which stocks rise. And this is, after all, the greatest bull market in history by some measures (figure below).

So, sure. Equities could dive 80% in the next couple of months, as Grantham suggested.

If they do, he’ll be celebrated as a prophet. If they don’t, he’ll still be celebrated. Must be nice, right?

Oh, well. At least he and I agree on a couple of things. “Grantham has reservations about gold because it generates no income,” Bloomberg added, noting that “in his view, Bitcoin is make-believe nonsense.”