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.”


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11 thoughts on “Make Stocks Collapse Again

  1. I mean the “generates no income” aspect would also invalidate fine art. That’s probably a more interesting angle than gold or bitcoin. I’ve actually seen ETF’s for fine art now as a product. Is buying fine art investing? It carries historical precedent like gold and land. It’s harder to argue buying a Monet is just greater fool at play.

    1. It’s harder to argue buying a Monet is just greater fool at play…

      Not really… 🙂 It’s truly not quantifiable ergo only a fool would pay anything for it.

      It’s just there is always been such a fool and likely will always be, as long as 1- people have eyes to see and 2- wealth concentration at the top continues.

  2. Well, after this stimulus runs out, we continue to have the government overriding signed contracts among individuals/institutions and allowing non-payments of student debt and rent through (at least) September.
    If and when it looks like those will ever be required to be repaid, I might trim my “long”.

    1. Maybe part of a new concept of democratic capitalism is to have universal market ownership akin to universal healthcare. Biden has been talking some kind of government payout for every newborn. Should/could this be structured as a market investment so to give everyone some ownership. Done right it could help address the extreme unequal distribution of wealth as currently exists. It also could help unify national economic focus with everyone having skin in the game.

  3. H rightly points out- that nobody really knows where the market is going consistently. It is that simple. Of course some have more correct calls than others.

    1. “Of course some have more correct calls than others.”

      As it happens, just half will have more and half will have fewer correct calls. No one brags to much about having fewer, however.

  4. I am trying to think of a scenario under which the Fed would either not step in or if they did – to no effect.
    Been stepping in since 1940’s, each time more aggressively than the previous time.
    Hardly seems like the USA is at the end of our rope.

  5. If one believes in ‘the market is always right’ or some variation, however weak, of the efficient market hypothesis, then I think they are forced by logic to admit that everything we have seen since last April or so was known ‘at that point’. A minimum 2-year pandemic was known, as well as its attendant characteristics. The global government response, directionally, was known, including the unprecedented moves toward nationalization. Waves of layoffs and insolvencies were known. I read the phrase “look through” about 1,000 times last year in the financial world. Other than the binary moves in the decision tree (vaccine vs. no vaccine) and (stability vs. instability in US political transition), nothing much has really changed in an epistemological sense since early November. In other words, why now? Other than some explanation based in ‘pure psychology’, what has changed?

    Now if one doesn’t believe in any version of the efficient markets hypothesis, then they can say, consistently, that something is ‘on the verge of collapse’, a ‘bubble’ or a ‘mania’, based on whatever independent framework they believe in and use. They would be validated right or wrong only with a great deal of hindsight, which in essence would be a validation or repudiation of their independent theoretical framework. Whereas anyone who is even a little ‘relativist’, from the paragraph above, does not mean the same thing when they use the word “bubble”. Both sides fight over the word, but are really speaking distinct languages. I don’t know If Grantham falls in the latter group or in the former.

  6. The ever increasing number of assertive statements by experts and media commentators alike that we are in the mist of a 1999 style bubble about to blow the markets into oblivion gives me serious doubts it will happen any time soon. It is basically consensus now to attribute the recent market moves to manias, exuberance and speculation. I know there are signs of speculation and irrational behavior, I watch the tape daily, but I have a hard time concluding that additional fiscal relief will inevitably lead to a market meltdown of epic proportions. Can we see further retail call buying of Tesla and others? More Spacs? Sure. We most certainly will experience a market correction even without further stimulus or speculative behavior, but an 80% decline with rates pinned at zero, volatility subdued and Central Banks committed to intervene seems unlikely, not impossible, but simply less plausible than what we have seen recently, sharp corrections that investors and algos buy aggressively.

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