Taps Coogan – July 24th, 2021

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Jeremy Grantham, Co-Founder of the global investment management firm GMO, recently spoke with Wealthtrack’s Consuelo Mack to outline his biblically bearish outlook of financial markets. Mr. Grantham, who correctly predicted the Dot-Com Bubble, the Housing Bubble, and famously turned bullish on stocks near the bottom in 2009, is now describing the current market as a bigger bubble than either the Dot-Com bubble or the 1929 bubble, and likely to end just as badly.

Some excerpts from Mr. Grantham:

“There are examples of large scale craziness and meme investing etc… for which there is simply no parallel in 1929 or 2000. 2000 had Pets.com’s and they were kind of glorious, but they were scores of millions or a few hundred millions (of dollars), but we have crazy things now that are billions and in some cases tens of billions…”

“The thing about the (economic) underpinnings is they always look terrific. In 1929, the market didn’t peak because when they thought the underpinnings were terrible. They peaked when the market’s enthusiasm for the underpinning was approximately the highest it had ever been in history. In 2000, in March, the world, including the boss of the Federal Reserve, Alan Greenspan, they all thought that the system had never been better. At the top of the Housing Bubble in 2007, Bernanke and the boys thought that the US Housing market had never declined… They have never gotten it right. The Federal Reserve in particular has never had a clue about asset bubbles. They don’t even address it. They act as if they don’t exist, expect on the upside they occasionally take credit for the wealth effect helping the economy along… What they never did was they never took dis-credit for the reverse side. The market is a mean reverting mechanism and eventually it goes back to a fair price…”

“This time we are really playing with fire because we have an overpriced bond market. Jim Grant would argue the most overpriced in 4,000 years. We have, in my opinion… the most overpriced US equity market in history. We have a US housing market that three weeks ago reached the same multiple of median family income as it did in 2006 at the peak of the housing bubble, and we have commodities that have recently run amuck such that the Goldman Sachs index of non-energy, which is food and metals…, has just equaled the peak of 2011 which is said to be one of those commodity super-cycle events. So, this is the first time we’ve ever risked three and a half asset classes bubbling at the same time. If and when we reach a period of pessimism, the potential unraveling in terms of perceived wealth is much greater this time than it will ever have been before…” 

So long as the Federal Reserve is ‘printing’ $120 billion a month and buying financial assets, simultaneously increasing the supply of capital hungry for any yield it can get and removing the lowest risk yielding assets from financial markets, who knows how much more ridiculous this bubble can get?

Every single major bear market in the US since at least the 1920s has been preceded by a Fed tightening cycle. In 1989, the last year of the infamous Japanese Nikkei bubble, the Japanese central bank raised benchmark rates from 4% to over 6%, and they kept raising rates for over a year after the market peaked and then halved.

The Fed can’t even commit to a timeframe for developing a timeframe to slow the record pace of QE. For years, they’ve used low official inflation as an excuse for round after round of QE and accommodative policy. Now that the Fed itself has forecast that Core PCE inflation, the lowest of all inflation measures, will average 3.4% for all of 2021, well above their 2% target, they’ve decided they don’t care about inflation anymore.

This Fed doesn’t want to tighten. Someday that will change, if only momentarily. Presumably, Mr. Grantham will have the last laugh, but until then, the madness continues raging.