The Boy Who Cried Wolf

Jeremy Grantham:

“Today in the U.S. we are in the fourth superbubble of the last hundred years.Previous equity superbubbles had a series of distinct features that individually are rare and collectively are unique to these events. In each case, these shared characteristics have already occurred in this cycle. The checklist for a superbubble running through its phases is now complete and the wild rumpus can begin at any time.”

https://www.gmo.com/americas/research-library/let-the-wild-r…

Is he fibbing, or is this time the real thing?

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Cathie Wood agrees, sort of:

Cathie Wood believes that if a market bubble is growing, it is being created within value stocks and not growth names.
“In our view, the real bubble could be building in such so-called “value” stocks with much higher valuations in the context of a five-year investment time horizon as opposed to last year,” Cathie Wood wrote in ARK’s latest quarterly report.

Wood added: “Meanwhile, the valuations of many innovation related stocks have been cut in half.”

https://seekingalpha.com/news/3789355-cathie-wood-in-our-vie…

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The “GMO Explaining P/E Model” chart in the Appendix is interesting…if true.

Jives with other’s thinking: stocks got cheap in 2009, fairly valued in 2020, expensive now.

I don’t really follow Grantham at all, but his name came up on some forum not long ago (perhaps here?) and someone quickly linked to a dozen+ articles that he has proclaimed the same exact thing almost every year over the past 13-14 years.

I suppose one of these years he will be right, and will be on every TV station being hailed as Nostradamus

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Cathie Wood believes that if a market bubble is growing, it is being created within value stocks and not growth names.
“In our view, the real bubble could be building in such so-called “value” stocks with much higher valuations in the context of a five-year investment time horizon as opposed to last year,”

So, value stocks outperform modestly for the first year in 10, and all the sudden they are in a bubble? Give me a break. She’s just talking her book. Stocks at reasonable price/earnings or other appropriate valuation metrics are abundant, some with growth prospects, they’re discussed on this board all the time. No bubble in value stocks that I can see.

Wood added: “Meanwhile, the valuations of many innovation related stocks have been cut in half.”

A business with no earnings trading for 100 x sales gets cut to 50 x sales could still be ridiculously overvalued, anchoring on past share price is not a useful approach to valuation.

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Right or wrong, I have to agree with he and Munger on this topic:

Grantham:"Cryptocurrencies leave me increasingly feeling like the boy watching the naked emperor passing in procession. So many significant people and institutions are admiring his incredible coat, which is so technically complicated and superior that normal people simply can’t comprehend it and must take it on trust. I would not. In such situations I have learned to prefer avoidance to trust."

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Dont you think it seems more likely this time than it did the last time? And isnt this time more like the time before the last time?

Is he fibbing, or is this time the real thing?

Oh, it’s certainly the real thing this time…in certain corners of the markets.
Insanity doesn’t have to hit everybody in the village for the village to be deemed a crazy place.

Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.

Jim

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Normally most securities in the market trade within the broad range of normality, with occasional pockets of insanity for the flavour of the day.
These days it sometimes seems more like the reverse.

A random peek into that:

Value Line covers 1700 stocks every week, and has done so for decades.
Since 1997, on a typical day, an average of 50 of those are trading at more than 10 times last-four-quarters sales, under 3% of them.
As of January 3 the figure was 176 stocks, over 3 standard deviations above the average proportion.
Heck, 47 of them are trading at over 20 times sales.
It seems that an unusually large number of stocks is being seen with boundless optimism.

Berkshire is trading at about 1.91 times recent sales, in case anybody is wondering.
It’s not a meaningful metric for any one firm, but it’s a token attempt to stay on topic.

Jim

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Just wondered if theres any data of how ADRs perform in bear markets vs domestic listed firms. Eg if BABA has an 8 to 1 ratio and the HK listing is holding up nicely does it bolster the US share price?

Cathie Wood gave the single worst intvw I’ve ever heard on Invest Like the Best a few years back. She refused to name one investing mistake or error she had ever made. Her analysis was so facile it was laughable.

I shorted ARKK last March and have been enjoying it ever since.

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“Oh, it’s certainly the real thing this time…in certain corners of the markets.”

I agree. Take the NASDAQ, for example. It’s down 12.5% from its November high, and still trading at 37x earnings. How low do you think it will go before it recovers to its November high? 15% below the November high? 50% below the high. I’d guess closer to 50% than 15%. We’ll see.

Grantham tends to be basically “right” but without too much effort or accuracy related to time. Therefore the market goes far further in whatever direction and the valuations get more extreme all while he is chanting (whatever he’s chanting).

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As of today, the U.S. has seen three great asset bubbles in 25 years, far more than normal. I believe this is far from being a run of bad luck, rather this is a direct outcome of the post-Volcker regime of dovish Fed bosses. It is a good time to ask why on Earth the Fed would not only have allowed these events but should have actually encouraged and facilitated them.

If I had copied and pasted every part of this article I wanted to I would have needed to post the whole thing. But, the above is the $64,000 question. For you youngsters here, you may need to look up this reference.

It appears that there was insufficient damage done by the previous housing and stock bubbles. What did we miss? the Fed asked. “Bonds,” they shouted through their hallowed halls. Bonds! Add those this time!

I have been warning of this disorder for years; so long that I am tired of hearing myself say it. But, just because someone is wrong in the present moment – though there is evidence that even now that may not be true – it doesn’t mean that the thesis itself is not accurate. It involves timing, and timing is a bitch.

If I wanted to put on my conspiracy hat, I could say that the Fed and its masters in the political class have been kicking the can down the road. “Peace and prosperity in our time,” they chant. “I will have made mine and be out of office, political or enterprise, before it all falls apart.” Is this why?

Or, I could say it is all of the elites. Those with power, privilege and prestige have many more opportunities than the bottom 99% to profit from this insanity. They encouraged a Fed policy that would allow them to use their wide range schemes for the creating and protecting of wealth; unconcerned about the eventual damage that will be done to the much less fortunate. Is that what is happening? I think so.

Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years? How does Mr. and Mrs. John Doe protect themselves? Their mortgages will be underwater and their saved wealth in stocks and bonds will be decimated. Do the people who created this mayhem for their own personal gain care about them? Apparently not.

When this all ends, as it will, we will have accomplished a hugh transfer of wealth from the small and medium to the rich and powerful. If the value of the stock in your company’s IPO falls from $2 billion to $500 million, you are still more than OK. If your already barely sufficient retirement savings fall in half or more, you are not OK.

Future history will not be kind to the architects of this looming catastrophe.

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Another data point: Looking at the market in tech jobs, salaries have easily increased 100-300% from five years ago. It’s really bananas out there. Big tech and well funded startups are throwing tons of cash/equity at tech folks because there is so much demand for them. Feels exuberant to me.

A few other signs that worry me:

  • Ridiculous valuations of tech stocks, both public and private (There are more than 900 tech startups that are worth more than $1B now; in 2015 there were 80 [1])
  • My wife (who is not in tech) asked me about what Bitcoin and NFTs were, which tells me things must be close to peak hype
  • Meme stocks and the related irrational (nonsensical) things going on in the market

No idea what’s going to happen but things are so crazy now, there is no way it’s going to last forever. I’m sitting on a decent amount of cash and am employed at a steady company who should not be too affected by a downturn in some of the above trends. Mostly just twiddling my thumbs and nibbling at things that look cheap.

[1] https://www.nytimes.com/2022/01/19/technology/tech-startup-f…

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There are more than 900 tech startups that are worth more than $1B now…

For certain values of “worth”…

Jim

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I haven’t been following this thread too closely but I recall vividly and rather worryingly Grantham said last summer something along the lines:

First there will be a collapse of the low quality names. He used the term confidence termites.

Then the confidence termites will spread to the quality assets.

It looks like the first act has absolutely started. I see Netflix is down in a big way today. Is this the beginning of the second act that takes out the quality companies as well. We will see. But it’s looks to me Grantham’s prediction is shaping up nicely.

I have always been an anxious type and my instinct is to sell a little to have more cash. However, I’m 90% Berkshire and will probably ride this out. I have found over the years that when I start selling I eventually sell everything. And that is usually not a great idea. I’m kind of preparing myself for a 50% drawdown in Berkshire. But am taking solace in the possibility that I will not be spending any of my Berkshire for at least 10 or 20 years. Plus as I read through Adam Meads Complete Financial History of Berkshire Hathaway, it is so clear that Berkshire rarely makes major capital allocation moves and that they are almost always during periods when there are no bids for great assets.

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Elias, why will people’s mortgages be underwater when they’ve borrowed at incredibly low rates and housing prices have gone way up? I don’t understand your comment.

If your already barely sufficient retirement savings fall in half or more, you are not OK.

A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.

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A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.

I’m not so sure about that. Price volatility isn’t risk.
If you are early in retirement, you want and perhaps truly need a positive real return.
Failure to meet the minimum return is a real risk, whereas a transient fall in prices isn’t.

Anyone wanting or needing a positive real return owns zero bonds, as there is almost nothing with a positive real yield.
Especially if there are fees.

There is no reason for a gigantic cash pile.

What does that leave for most people?
Equities fall in price by half pretty regularly, but they’re what you’d want to be the bulk of the portfolio.
So, from that point of view, I wouldn’t say anyone was doing anything wrong being exposed to a 50% drop.
I’d be wondering more about the people who foolishly traded returns they need for steadiness they don’t.
Sales done over a very long period will inevitably get very average valuation multiples.

The only exception I can thing of is that the pension pot is much to small, and going to run out soon, long before you’ll likely croak.
In that situation, a big drawdown is a big issue.
You’d probably want a barbell portfolio: tons of cash, an a small allocation to “lottery ticket” investments that just might pay off in multiples.

If you’re nearer the end of your retirement, it’s a different story.

Jim

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Whatever the case, how could you put an innocuous explanation to the intentional manipulation of asset prices over the last 20 or so years?

Well, recessions hurt, and economists think they can make them hurt less.

I’m very slowly reading Alan Greenspan’s The Age of Turbulence. Essentially, economists, and fed economists especially believe they can use the tools they have to control the economy for the benefit of society. They recognize that markets can get too inflated, but inflated markets also show an increase in labor participation by people in lower rungs of society, so it’s hard to argue that they let this occur to benefit the rich at the expense of the poor.

A recent example of markets getting too inflated was the real estate run up leading to 2007. But a lot of the policies that inflated the bubble helped middle and low income Americans build wealth they otherwise could not have. At the time, I’m sure it looked like a reasonable tradeoff.