Taps Coogan – January 21st, 2020

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Jeremy Grantham, billionaire co-founder of Grantham, Mayo, & van Otterloo (GMO) and one of the early creators of ETFs, recently spoke with CNBC to warn of what he sees as a market bubble ready to pop.

Mr. Grantham warns:

“I think (peak vaccination) is probably the latest it’s likely to go. It’s entitled to go tomorrow if you look at all the signs. They’re every bit as good as they need to be to break this bubble. As soon as the new president is settled in, that would be a perfectly good time for the bubble to start deflating. But let’s assume that we get lucky and it carries on. Then, indeed, I imagine a world where the last of the investors are getting their second vaccination, they take a quick trip… that they’ve been postponing for two you years… and then they sit back in the bathtub on a Saturday morning and they realize that the world really hasn’t changed. It has all the problems it had a year ago. Global trade is declining as a ratio. Global growth is getting steadily slower and slower for the last few decades and the population profile is busting. There are fewer baby cohorts and each one is smaller than the one before…”

On the somewhat brighter side, he sees emerging markets as less overvalued and likely to outperform on a relative basis:

“There is a glimmer of decent news here and that is that the gap between… emerging markets and the US has only been this big two or three times. Whereas the US is as overpriced as it ever gets, emerging markets are respectably priced. I suspect that they will go down with US markets, but they will go down very much less because they are much cheaper, and emerging markets are in many ways the growth that’s left in the system… and yes, of course cash will do very nicely…”

People have been calling a top on this bubble for all sorts of good reasons since the early 2010s. Valuation metrics have been getting more stretched for years and many now sit in the 100% percentile (as in the most expensive ever). Most of the terminal warning signs are there: run away retail speculation, surging call option volumes, an IPO frenzy, meteoric rises in unprofitable companies, consecutive years of big double digit market gains, etc…

The Fed has papered over all of this and is screaming from the rooftops that it has no intention of ever stopping, not even if inflation overshoots. The Treasury has over $1.6 trillion sitting in its general account at the Fed just waiting to be injected into the economy at the drop of a hat (or market). Backdoor MMT and helicopter money have become de-facto policies.

With historic forces weighing on both sides of the seesaw, one thing looks increasingly clear: we are headed for extreme outcomes.

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