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Waiting for the Last Dance -- Jeremy Grantham

edited January 2021 in Other Investing
For those with an interest....Grantham's "epic bubble" market call and current investment suggestions...
The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.

investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely.
This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.

I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. But few professional or individual investors will have been able to have ducked.....we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.
https://gmo.com/americas/research-library/waiting-for-the-last-dance/
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Comments

  • Jeremy

    Thanks. It's funny...that thought passed through my "aged" mind after I left my keyboard behind. Just checking back in now....
  • edited January 2021
    I know that SPCA is an animal welfare organization, but what is SPAC?
  • Special Purpose Acquisition Company (SPAC)

    https://investopedia.com/terms/s/spac.asp
  • Thanks for posting! It reinforces my opinions that optimism is running rampant. As I have said before - if something can’t last forever, it will eventually end.

  • Thanks, Bee.

    I read the article, and it all sounds credible to me. Am I insufficiently skeptical?
  • Hmm, really concerning when the wise elders sound the alarm...

    Sure seems more and more like late 90's except with an exponential sense of reckless investments being made... price to sales ratios are off the charts insane

    I'm thinking that black swan outfit universal is going to make multiple billions in 2021....

    In the meantime, party on Wayne, party on Garth...

    Best,

    Baseball fan
  • This is the time to review your holdings and asset allocation. Not saying we will get another large drawdown as last year, but something to prepare for when and if that happens again.
  • Attempts to maintain my chosen level of asset diversification are defeated by the constant increases in equity valuations. It's a nice problem to have.
  • sfnative said:

    Attempts to maintain my chosen level of asset diversification are defeated by the constant increases in equity valuations. It's a nice problem to have.

    Yes, indeed!

  • This year the market has broaden out to the smaller caps and value stocks. Yacktman fund out-performed value index last year by holding high quality value stocks. I anticipate it will continue to do well going forward. I have several small-mid cap funds but like to expand to small value funds.
  • edited January 2021
    @davidrmoran...."today, more 'party on"

    Yes. This market thrives on anticipating additional new stimulus programs. Market bulls may even be pleased if the virus makes a strong last stand and thereby delays the arrival of the "economic recovery". That delay would give those bulls more time in which to anticipate sunshine and rainbows ahead. The eventual arrival of the "recovery" will force market participants to confront what it entails. That may prove to be a bubble bursting event if it less than a Goldilocks outcome. What tricks would the Fed pull out of its bag at that point? Maybe directly purchasing stocks (with the help of the Treasury)?
  • A little more from Grantham:
    his “favorite Tesla tidbit” is that it boasts a market cap of $1.25 million for every car it sells, 140 times the GM figure of $9,000.

    Investing legends Carl Icahn and Jeremy Grantham see a stock market bubble
  • edited January 2021
    Grantham article is downright scary. Edit: Adding: So if he is right and interest rates are still at an all time low but sure to rise at somepoint ... where do you hide?

    I know it depends on your investment horizon. For investors retiring soon or relying on dividends etc... it may be downright frightening to imagine a major correction in 2021. If you have 10 to 20 years before needing a distribution, perhaps you can what? Keep more money in Cash? Thoughts?
  • edited January 2021
    @JonGaltill, our own contributor to the monthly commentary, Lynn Bolin provided many insightful articles on preparing for retirement. Here is one from January 2021.
    https://mutualfundobserver.com/2021/01/as-i-age/

    Charles also writes for Seeking Alpha, another good resource to inform yourself in prepare for another black swan events. If you did well during March 2020's drawdown, you are on the right track on your asset allocation.

    @davfor and davidmoran,
    Any insights on this bullishness?
  • edited January 2021
    Warning: Investors need to understand their individual circumstances and their volatility and risk tolerances.....

    FWIW....Most of the time I just observe. Market timing is left to others. (2019 to 2020 were exceptions to this observer mind set while a new secondary investment portfolio was being established.)

    These are just a few somewhat random thoughts and opinions as 2021 begins from a generalist investor who typically acts with multi-year investment time frames:

    ***Its important to acknowledge the stock market is very expensive by historical measures -- particularly on the growth side. The articles linked above make that clear.

    But...

    ***The Fed is now part of the investment landscape in ways it was not in the past. That hit home to me in early 2019 when the Fed abandoned its rate tightening efforts ( Powell Put ).
    ***The Fed further clarified the breadth of the Powell Put by acting very aggressively last winter when the markets were in turmoil. It has also suggested it will intervene aggressively if market turmoil erupts again in the near term.
    ***Having Janet Yellen as Treasury Secretary will probably increase coordination between the Fed and Treasury.
    ***Having the Democrats in charge probably means additional fiscal stimulus will occur this year.
    ***The pandemic will probably have a significant ongoing disruptive economic impact for much/most of this year. The probable shape of the post-pandemic investment landscape may not come into focus until late this year or next year.

    My investment portfolio thinking:

    The combination of near zero interest rates, the Feds aggressive stance, and substantial fiscal stimulus helped me to decide to leave my allocation to stocks somewhat elevated by my standards when the annual review was completed in December (strong stock market performance and a shift of about 5% of the portfolio from ZEOIX to utility stocks in August had bumped it up during 2020). But, a nod to uncertainty resulted in the purchase of GBLMX, CRAAX, and SVARX as well as some trimming of growth stock holdings during the transition from 2020 to 2021.

    Now I am just watching while keeping my eye on VIX out of curiosity. My crystal ball is still quite unclear about how long the Fed/fiscal stimulus part of the equation will succeed in keeping the bulls mostly in charge of the stock market. Maybe for multiple years if the Fed and fiscal policy makers navigate well??? But, maybe Grantham will prove to have been correct and the profitably investable top occurred last summer!!!

    Other portfolio notes:

    ***There is adequate cash in reserve (SPAXX, JPST, and RPHYX) and enough investments in bond funds to enable an investment portfolio reallocation into stocks if a significant (20%+) market decline occurs.

    ***I am a 70 year old retiree. The dividends, distributions, and any capital gains received during the year are invested separately in the "Cash Pot" for release to a non-investment account at the end of the year. So, the set-aside beginning this month is for probable release at the end of 2021. But, there are adequate reserves outside the investment accounts to ride out an investment apocalypse event if that occurs during the year.








  • None, none, none.

    This perplexing scenario to witness I have discussed in the briefest of ways w the august LBraham and JWaggoner, meaning exchanging a few rueful wtf words, and they list the usual suspects, chiefly fomo w tina (per the ongoing likely course of interest rates, mentioned above, plus new and ongoing disaster relief payments).

    Plus a certain amount of rich-millennial behaviors (robinhood etc.).

    But these ain't insights, really, nor is saying that this time some of it 'really is different' (permanent shift in p/e).

    Also, these handful of factors many people have been pointing out for a long time.

    I have been out of equities 100% since May 11, when nobody saw a 30% rise still ahead, of course.

    Now. A real and significant dip takes us back to only say 28k Dow, a defined bear market back to only ~25k. It was not long ago at all that more than one big investment house were saying Well, okay, when we slump into the 26k area or whatever, it will be time to buy aggressively.

    Anyway, greed stamina, and fundamentals, being what they are, that ain't happening. There has been a lasting shift upward, and no 2000 or 2009 ahead. CWood at Ark and others like her have started to write about the chronic underestimation of technology.

    So ... upon dips I intend (he said) to put lots into VONV (p/e ~27) and CAPE and then sit tight (he said) for a few years. At ages 72 and 74 soon, we have enough years of cash for us to manage, looks like.

    All very vexing, and if I had stayed the course in May we could be sending out so many more donations!
  • edited January 2021
    That was very helpful and I can understand where you are coming from. If I panicked in March 2020, I would have missed out on a huge finish to 2020. I know we can't time the market and I'm nervous after having a great 2020 year but I'm not retired or close. So, I don't want to be foolish (although I'm equity heavy) and ignore what's in front of us.

    @davfor and @sven thanks for sharing. Enjoyed Reading Charles Lynn link as well. Really interesting.
  • @JonGatIII, Be mindful of the risk going forward. I survived both the tech bubble in 2000 and financial crisis in 2008 through my risk-adverse asset allocation. Even then it took years to fully recover the loss. It was a humbling experience and the black swan events will come again. It is a simple question of when and not if.

    2020 was an aberration event with the Fed being part of the market as @davfor pointeded out by buying stocks and bonds while reducing interest rates to near zero. Without the Fed the stock market would be still in red as the country is in deep recession. There are consequence to these Fed's action such as higher inflation, devaluation of USD, lower bond yields and etc. While you have the luxury of time, it is helpful to learn to become better informed investors.
  • ... can understand where you are coming from. If I panicked in March 2020, I would have missed out on a huge finish to 2020. I know we can't time the market ...

    I did not panic, I trust, and was not trying to time, in the usual sense. By May 11 all of our equity fund holdings were back to breakeven or abovewater (except for FRIFX, not a huge portion). I projected that this plague was going to be much worse and longer-lived than most were saying, which has turned out to be the case. (I'd lost to covid at end March my oldest college friend, of 55y nonstop acquaintance, healthy etc. --- a jarring, sudden-enough death.) I believed the economic impact was going to be much worse than predicted, including crippled consumer spending. Turned out to be only partly the case; certainly the latter did not occur. All this thinking of mine was informed by extensive reading and some crude numbercrunching. I thought if we could avoid a >20% monthslong / yearslong drop in this early stage of our retirement we would be better off. So as with so much in life I regret it only in hindsight.

    I can however guarantee that right after I get back in the really big broad market drops will occur, without fail.
  • @davidmoran: You had company when you did some selling in the spring. I, too, predicted that the pandemic would cripple the economy and the markets. Had I done nothing, my assets would have weathered the storm. I sold a mid-cap value fund in my retirement account that subsequently recovered beautifully. Now value is all the rage.

    FWIIW, I also predicted (to no one except the other person who inhabits my head) that DT's election in 2016 would cause markets to tumble. Moral: retirees have too much time to worry and they make mistakes.
  • Thank you for sharing your thoughts on this very productive tread. Yes, 2020 was a rough one as many of us survived while earned a few bucks. 2021 will be different again. Stay safe.
  • >> retirees have too much time to worry and they make mistakes.

    I make innumerable mistakes but am myself way too jammed w things to do to worry --- only the mistakes part :)
  • edited January 2021
    Here are a couple of more stock market bubble articles, the first one short and second one with a fair amount of detailed background info:

    First Article: Warren Buffett's favorite market indicator hits 13-year high, signaling global stocks are most overvalued since the financial crisis

    The gauge climbed past 121% last weekend, Bloomberg data shows, marking its highest reading since October 2007. Welt market analyst Holger Zschaepitz flagged the worrying milestone in a tweet.

    "Buffett indicator sounds the alarm," he said. "Global stock mkt cap has now topped 120% of global GDP, and thus the same level as before the crash in 2008."

    Second Article: Yes, Virginia. There Is A Stock Market Bubble. Lance Roberts

    We see that the claims on the economy should, quite intuitively, track the economy itself. Excesses occur whenever the economy’s claims, the so-called financial assets (stocks, bonds, and derivatives), get too far ahead of the economy itself.

    The increase in speculative risks, combined with excess leverage, leave the markets vulnerable to a sizable future correction. The only missing ingredient for such a reversion is the catalyst to bring “fear” into an overly complacent marketplace.

    It is all reminiscent of the market peak of 1929 when Dr. Irving Fisher uttered his now-famous words: “Stocks have now reached a permanently high plateau.”
  • edited January 2021
    Grantham ties a close at hand deadline to his bubble call and warns more generally about future inflation:
    ‘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…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.

    “If you think you live in a world where output doesn’t matter and you can just create paper, sooner or later you’re going to do the impossible, and that is bring back inflation,” Grantham warned.
    https://pionline.com/investing/grantham-warns-biden-stimulus-further-inflating-epic-bubble

    https://marketwatch.com/story/stock-market-legend-sees-few-weeks-of-putting-your-last-desperate-chips-into-the-gamethen-pop-11611347617?siteid=yhoof2
  • Front Row , Bloomberg, Jeremy Grantham interview video, about 28 minutes
  • edited January 2021
    catch22 said:

    Front Row , Bloomberg, Jeremy Grantham interview video, about 28 minutes

    Much of what Grantham says appeals to my old fashioned mind. BUT. The Fed at this point appears to be fully committed to managing the economy. It clearly accepts the inefficiencies that result from the "artificially low interest rates" (per Grantham) it engineers. If the stock market bubble does burst, it will not surprise me if the Fed and Treasury figure out a way justify purchasing stocks. Managing the stock market could be deemed necessary to stabilize the financial system and the economy as well as to minimize hardship among vulnerable labor force participants and those still seeking employment.

    https://thestreet.com/opinion/federal-reserve-buy-stocks
  • Picked up this link on *The Big Picture* more of the same

    “ Bronte’s strategy has not changed. But we act with extra caution: keeping positions small, watching our hedges carefully, and increasing our willingness to “duck and cover” when danger lurks. Meanwhile we are honing our list of garbage SPACs and other dross sold to retail. It is a target rich environment. One day—when the targets are not shooting back with such vehemence—we will short more aggressively. Till then we just wish to keep the book under control.
    You, dear clients, however have a choice to make – and we will understand if you make it. Our recent results are not good; but we believe our future will be better, for this period too will end. However, perhaps you possibly know a young manager who has earned well over 100 percent this year. You might want to take your money there. It pains us to say this – but given our results we will understand if you do.

    And maybe it will work. But it comes with a warning. Of the tens of millions of people who have come to the market in the past year or so and are up big, some will be great – but most will be this cycle’s go-go victims. For them 80-95 percent losses beckon.
    Be careful out there. And stay rational. We will be.
    The Bronte Team”
  • edited February 2021
    I listened to that Grantham interview on Bloomberg 2-3 times one day recently. He lays out a convincing case. But there are equally good arguments on both sides.

    As far as Grantham’s argument goes he’s focused on three areas: (1) He thinks artificial risk asset impetus has been supplied from over a decade of easing by the Fed and other central banks. Since he doesn’t think this can continue much longer (deficits / unrealistically low rates) he sees an eventual popping of the “bubble”. (2) He sees a near hysterical chasing of return today irregardless of risk - a euphoria he equates with the final stages of bull markets. (3) He takes issue with high valuations in some sectors - technology particularity.

    It should be noted that Grantham is more sanguine re value stocks, thinking there are pockets of opportunity in that depressed sector. He sounds downright bullish on emerging markets - if one has a long enough time horizon.

    Each investor needs to consider his own time frame, risk tolerance, overall financial situation before undertaking any changes. I’ve grown a bit more cautious over the past couple months. The last two years were good to most investors. So, irrespective of Grantham, I see no compelling reason for a retiree to be overly aggressive at this point. I’m sharing how my allocation has changed in recent months as I try to protect 50+ years of accumulated retirement savings. Your situation is doubtless different and so should be your approach.


    * End of 2020: Alternatives 25%, Equity/Balanced Funds 25%, Diversified Bond 25%, Cash & cash alternatives 15%, Real Assets & Commodity 10%.

    * Today: Alternatives 33%, Equity/Balanced 20%, Diversified Bond 20%, Cash & cash alternatives 15%, Real Assets & Commodity 7%, Benchmark Fund (PRSIX) 5%.


    Explanatory Notes:

    - TMSRX accounts for about 50% of the alternative portion. PRPFX comprises most of the rest.

    - I’ve gone much shorter on the diversified bond holdings. DODLX is the riskiest one at 50%. The rest consists of short term bond funds like newly opened TSDLX.

    - I’ve moved most of the cash into a medium duration TIPS index fund,

    - I’ve switched from TRRIX to PRSIX as my benchmark and have added a small allocation to that fund. One difference between the two above funds ... PRSIX commits 0-10% to a Blackstone hedge fund. TRRIX does not.

    - There remains a small spec position in a mining fund.
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