Jeremy Grantham: All the World’s a Bubble
April 28th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
In Money: Going Tactical, I wrote, “We’re looking at this situation and all we see are bubbles. Real estate bubbles. Currency bubbles. Equity bubbles.”
What’s the difference between me writing something like that, and someone like Jeremy Grantham saying the same thing a few weeks later?
I’m not responsible for Dick Cheney’s money.
I would, however, suggest reading Waiting for Clarity on the Brink of Oblivion before trying to play short term, leveraged paper games like the ones Grantham likes/dabbles with personally. Have you executed your strategic plan? Will you be able to time your exit properly, this close the edge? “High Quality” corporate bonds!? HA. Tell me another one. That’s the potential rat poison component to this otherwise great article.
Debt elimination. Diversification. Tangible assets. Water. Shelter. Food. Physical security. Community.
Once you’ve got all of that sorted out—you do have all of that sorted out, right?—why not gamble with some pocket change? You might win more, or you might lose it all. So what. It’s pocket change. It’s gambling. Consider Grantham’s “High Quality” corporate bonds talk and the rest of his spiel the way you would assess the placement of a bet on roulette. Only an idiot would bet a significant portion of his treasure on such a thing. Trying to hit one out of the park, without the strategic considerations taken care of this late in the game, is beyond stupid, it’s reckless.
He’s right about the bubbles, though, and that’s why I posted this.
Via: The Street:
While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.
One, unsurprisingly, is legendary value investor Jeremy Grantham — the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything.
“From Indian antiquities to modern Chinese art,” he wrote in a letter to clients this week following a six-week world tour, “from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time!”
“Everyone, everywhere is reinforcing one another,” he wrote. “Wherever you travel you will hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets must keep rising,’ and ‘private equity will continue to drive the markets.’ “
As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.
“The mechanism is surprisingly simple,” he wrote. “Perfect conditions create very strong ‘animal spirits,’ reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism.”
And it becomes self-sustaining. “The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you.”
It’s something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP — equity.
Grantham concludes that every asset class is expensive today compared with historic averages and compared with the cost of replacing it. By his calculations, the only assets likely to beat inflation by any significant margin if you hold them for the next seven years are managed timber, “high-quality” U.S. stocks, and bonds.
…
“The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds,” Grantham warned. “Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity.”
Ouch.
Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.
As for timing, he concedes that’s impossible to predict. But here’s the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic “exponential phase” just before they burst. Like Japan in 1989 or the Internet in early 2000.
“My colleagues,” wrote Grantham, “suggest that this global bubble has not yet had this phase and perhaps they are right. … In which case, pessimists or conservatives will take considerably more pain.”
Grantham is being disingenuous. There is no such thing as a “bubble” in everything. If you can buy a house with a tulip bulb, then tulip bulbs are in a bubble and housing is not. But if absolutely everything is becoming increasingly expensive in currency terms, this is a different animal. This is currency devaluation, or if you prefer, runaway monentary inflation. This is the WORST possible condition to be purchasing bonds! So Grantham is either an idiot or a liar. My bet is on liar.
There is a way to take the confusion out of evaluating the relative value of various assets. Look at ratios of real things. In a previous marriage long ago, we bought a very nice house in Oregon in 1989 for 200 oz of gold, close to this long term historical average gold price for an above average house. To buy a house like that in NZ today would cost 1000 oz of gold. So maybe both assets look like bubbles to Grantham, but the housing asset is five fold more bubbly.
i think we’ve near hit the peak of it already. placing alex and grantham on the same page, money/credit has had the exponential growth curve that trends towards a crash. the japanese yen carry trade, the u.s. dollar, etc. everything else is simply being swept up in the debris path like the breaker wave at the prow of a ship.
To add a more conspiratorial tone:
– Do you think the “powers that be” (the banking elite etc) do not see this coming? They’re smart people after all.
– What do you think will be the reaction of the majority of people when this shitstorm makes landfall?
– If you were the authorities, considering the above point, what laws would you enact to ensure your survival as the ruling elite?