Coppelson: My rebuttal to Jeremy Grantham’s bubble thesis

Some persist with their claims the market is about to collapse, or at the very least, that technology stocks are a bubble. But they’ve been saying that for the last 14 months, and some have actually held this line for eight years.

The market overall, even after recent falls, continues to hold most of its gains of the last 14 months. As these extraordinary times continue, even some of the most well-known and accomplished investors both here in Australia and overseas are perplexed.

In one example, in an article I read about eight months ago, several well-known fund managers were warning that dark times were coming and that this rally had gone too far. The article was so persuasive that I suddenly thought that I was going to be completely wrong. I worried (for about a minute) that we were on the cusp of a massive drop and thought I’d better sell down some holdings.

But then I stopped and thought, “Hey wait a minute; I actually read the exact same stuff from most of these fund managers 11 months ago, eight months ago, five months ago and again now.”

Many were there in May 2020, after the initial rally - or just two months after the rally had started and we had risen +20% - with very similar and pervasive comments. Many who have been so wrong – you could say 100% wrong –have again hit the headlines. They’re again telling us (and scaring many again - as they did seven months ago) - that markets are on the verge of major drops and that now is the time to cash up or sell.

It’s important to realise that many have been saying that same thing for a long while now. And yet, despite all their dire warnings the ASX 200 is +62.4%, Small Ords +84% and the S&P 500 +92% (and NASDAQ +107%).

Market gains in the face of alarmism

Yet - despite the bubble warnings - the ASX 200 has been up 13 out of the last 14 months:

• May-21 +1.93%
• Apr-21 +3.46%
• Mar-21 +1.76%
• Feb-21 +1.00%
• Jan-21 +0.31%
• Dec-20 +1.06%
• Nov-20 +9.96%
• Oct-20 +1.92%
• Sep-20 -4.03%
• Aug-20 +2.24%
• Jul-20 +0.51%
• Jun-20 +2.47%
• May-20 +4.23%
• Apr-20 +8.78%
• Mar-20 -21.18%
• Feb-20 -8.20%

I read recently another bubble article. Such things always cause a lot of fear. They always quote the great US investor Jeremy Grantham, co-founder of fund manager GMO Investment and Asset Management. He has been one of the most successful investors, so gets plenty of attention when he says anything.

Livewire Markets ran a big special on Grantham: 

“This is a bubble, this is serious… In an exclusive interview that runs for nearly two hours, Grantham explains why he believes we’re in the late stages of another great bubble and his expectations for when it will come unravelled. He also explains why others fail to act in the face of bubbles, and we discuss some of the assets best placed to weather the storm.”

Macro

6 essential takeaways from my exclusive interview with Jeremy Grantham

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I have heard some get very worried whenever he gets front-page coverage due to his outstanding reputation – but also it's worth realising he has been a Bear for a very long time.

In January 2021, Grantham called the current rally a “fully-fledged epic bubble” featuring “extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behaviour”.

“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,” said Mr Grantham, who made similar calls towards the end of the dotcom boom at the turn of the century and ahead of the financial crisis more than a decade ago.

So, he has picked the other two “bubbles” in 2000 and 2007 – so his record is excellent and we thus should be in fear that this imminent crash is about to occur.

Who knows if he will be right? If he is he will be heralded again as one of the greats who predicted the 2021 crash just before it happened. But there is just one problem, it’s this: it’s not the first time he has said this.

Grantham has been predicting this “bubble crash” for many years. And if you had listened to him in that time , you would have missed out on one of the great bull markets.

Grantham is famous for calling the Japanese, tech, and housing bubbles. So when he speaks on this topic, the media and many investors pay attention. But as this fear of a crash worries us, it’s also important to realise that he has also made many other big calls that never materialised. Once you look at them, it becomes obvious that these bearish calls are not new, but have been made for the last decade.

Some of his famous calls – that many investors quoted back then as a reason why the market was close to a crash – include:

• 2010 – Have cash, wait for stocks to fall
• 2010 - It buys you the right to buy the U.S. market - if the S&P drops from 1,220 today to 900 - which is what we think is the fair value (S&P 500 finished that year at 1,257 +12.8%)
• 2011 – Grantham sees most global equities as ranging from “unattractive” to “very unattractive” – valuing the S&P 500 at “no more than 950.” (S&P 500 finished that year at 1257 (-0.1%)
• 2012-Jeremy Grantham warns 2013 will be a Dangerous Year for stocks (S&P 500 finished that year at 1426 +13.4%)
• 2013 - Much of everything else is once again brutally overpriced
• 2013 - The S&P 500 is 75% overvalued (S&P 500 finished that year at 1848 +29%)
• 2014 - Big stock bubble will end badly in 2016…
• 2014 - …And then around the election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed can dig up. At that point, he claimed that an S&P 500 level of 2,250 would be “100% overvalued.” Six years since then (the 100% overvalued call) the S&P 500 is at 4,077 (now +81% above 2,250). (S&P 500 finished that year at 2058 +11% & at the end of 2016 it was 2238)
• 2015 - GMO founder Grantham says markets ‘ripe for major decline’ in 2016 (S&P 500 finished 2015 at 2043 -0.7% & 2016 at 2238 +9.5%. And it's now (April 2021) at 4,077 or +99% above that level – and that’s NOT including dividends that investors would also have received!

So, if one day we see another market crash of say -25% or more, then he would be proven 100% correct and be able to claim he called it.

But if you have been calling the market a bubble “every year” for 10 years straight (and the S&P 500 has gone from 1,115 at the end of 2009 to 4,077 now) then you have missed a return of +265%" (plus dividends).

Given we see these falls every decade or so (1987, 2000, 2008/2009, 2020), it’s only a matter of time until he is “proven” right” (and then the media will proclaim that “he picked it").

Right now many are “nervous” after his big call – but it’s the same call we have heard now for at least 10 years.

*Ed's note: Please see Richard's comment below where he expands on his reasoning.

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