Legendary Investor Jeremy Grantham Calls End Of ‘Super Bubble’ in US Asset Markets

I know that I have let the economics and investing element of my blog lapse terribly – I admit that it is an aspect of the ‘Great Reset’ era’s affect on me, along with some personal issues, that have seen me deprioritise thinking and writing about ‘money’ to be less than other more pressing issues, but it is also a reflection that I have found the market uninteresting to write about because my views have not changed significantly since I last wrote on the subject in May 2020 in “Uninvestable Markets” [Actually I did post on the topic 31 May 2021 – see below].

Jeremy Grantham’s latest writing for GMO – “Let The Wild Rumpus Begin (available by subscribing at GMO) and discussed by Bloomberg in “Jeremy Grantham Doubles Down on Crash Call, Says Selloff Has Started” – has encouraged me to say something on FaceBook so that I have (once again) done my part in putting important information in front of friends and more to consider, and for the them to do with it what they will.

My lack of writing on finance has, nonetheless, been on my mind and I have on occasions started drafting a new piece. Looking back through my drafting folder I can see that the last time I sat down and began drafting an ‘investment position update’ was in March 2021. I feel now is the right time to actually complete that, but for the moment here is my FB post:

Change of ‘pace’ – You may not have heard about it yet but the stock market had a bad week. That does not necessarily mean next week will be bad, but I have personally been positioning for the dramatic fall that this ‘legend’ of investing is talking about since the rapid bounce back after the COVID collapse.

I enjoy reading this type of research (Grantham is an ex-scientist, also, and so I am often struck by how similarly we think) but not everyone does.

To put it simply, because central banks have been printing money, and even moreso during COVID, the stock market has been run since the GFC like a casino that has set its odds to pay out. This is a big part of the escalation in inequality in society. It has flowed through into excesses in lots of places besides stockmarkets also – like property (in many countries), bonds (the reason for low interest rates), and other investables like art and precious stones.

And cryptocurrencies, of course.

I have been concerned for how the GFC was handled, and felt things were getting precarious 3 years ago. Around a year ago I wrote at MacroEdgo that I considered investment markets uninvestable because it was all essentially speculation based on one underlying assumption – central banks can and always will rescue markets no matter what.

Investing is buying based on a sound basis of future profitability.

Buying based on the hope that somebody will pay you more in the future for your asset is speculation, and it is extreme when you feel you cannot lose (because the system is ‘rigged’ in your favour).

I never offer financial advice but I suggest a little reading up this weekend, and I suggest a good start is my ‘manifesto‘ piece on MacroEdgo (accessible via the top menu) which explains a bit about ‘sequencing risk’ and how a major loss in investment value within 15 years of retirement can be very difficult to bounce back from. It also explains how ‘buy the dip’ does not always work out (as Grantham also explains).

Most of all consider investment strategies and whether current practices and market conditions are aligned with them.

The difficulty with investment bubbles is that because they are based on questionable logic, if any at all, it is fraught to apply logic to when it will end. Because bubbles come from extremes of optimism, it is hard to find or hear pessimists and it seems that bubbles are only ‘detected’ after they pop and the severe consequences are being felt. Yet we have had so many over the years that nobody can deny that they occur.

But the voices that are loudest when the bubble is in full swing are the people profiting most from it and have the most to lose (either directly from asset price falls or transactional costs from increased funds flow in bull markets – the worst conditions for them are markets where people have lost all interest because of lackluster returns). So they will apply all sorts of superficially appealing logic that the bull market will continue, and that others are doomsayers and those jealous that their risk aversion has caused them to miss the fun and gains in wealth! And, of course, those amateur ‘investors’ who have made so much in the bull market, and are inclined to believe it is due to their intelligence over luck, don’t want to believe that their fortunes are about turn, or risk missing more of the gains – the main US stockmarket increased by some measures by over a quarter last year from already very high levels.

This is pretty much the same story for all bubbles.

Actually, on second thoughts, after having read what I wrote in that draft dated 15 March 2021, almost a year ago now, it is of little use in a new piece so I will place it below for a little ‘extra flavour’:

I am sensitive to the fact that the Macro(economics) aspect of MacroEdgo has been relegated over the past 12 months. I am certain that the poignancy of the times are not lost on my readers, and that I have a voice that I feel needs to be heard on those more pressing issues. 

Moreover, the reality is that my opinions over the state of markets has not altered significantly since I wrote relevant pieces 6 months ago including my post “Uninvestable Markets” [  https://macroedgo.com/2020/05/21/uninvestable-markets/   ] published last May and making these key points:

– ….

The fact that science has outperformed my most wildly optimistic opinion on the provision of tools to combat the pandemic – producing vaccines in a timeframe which I dared to hope, when many were sceptical, but at an efficacy beyond what I dared to dream – has improved my views on the economic impacts of the pandemic. Given markets have not been pricing according to fundamentals, but rather on expectations of extraordinary support from central banks, the positive benefits to humanity from these interventions and then on the economy will likely have a less predictable effect on markets.

I have been very inactive in markets and with portfolio movements because my view on the markets has not altered. That has been fortunate as my desire to write on social and socioeconomic issues has never been greater than over the last year. I am now approaching my 100th post, a productivity rate that I never could have predicted when I launched MacroEdgo in October 2019.

Nonetheless, it has always been on my mind that I had not updated my “Current Positioning” page, including updating my annual investment performance to June 2020, since releasing my SMSF Position Update: April 2020 keeping the (gold) powder dry”. [https://macroedgo.com/current-positioning/smsf-positioning-april-2020-keeping-the-powder-gold-dry/]

I will not repeat the points I made there as it pre-dated the above-mentioned post, but I will refer at times to some specific points to compare and contrast with my actions and current views. For transparency I will spell out my portfolio activities to understand how the portfolio came to be positioned as it now is.

Firstly, on my Current Positioning page I have now included my year to June 2020 performance of ??%. I was tracking for better performance at the time that I wrote my April 2020 positioning update, but soon after that I decided to position for another market fall taking profits from pharma companies and selling some gold and placing it into reverse ETFs which would profit from a fall in market pricing. As I described in “Uninvestable Markets”, I saw then – and even more so now – that going long in the market was equivalent to gambling. So I had a choice of either doing nothing and staying in gold, or doing some short-term positioning trying to improve my investment performance. Once I decided to actively position for short-term movements I had to decide which side to be on, and I got my positioning wrong for the time.

In October I gave up on that positioning. Then in November, following good returns (exceptionally, or even too good from one in particular) I decided to liquidate my long holdings with my two preferred fund managers (taking unit trusts down to minimum holdings to keep open). When I saw that particular fund’s returns skyrocketing relative to the market which in itself was already strong, I decided things are probably just getting too stretched and I would rather by totally out of the market.

Unpublished draft of an investment update dated 15 March 2021

[Addendum 26 Jan 2022: Oops, I forgot that I posted a brief post on 31 May 2021 entitled “Spotting Shaving Cream Froth On Fluffy Snow Piled High In A Long Blizzard From 50 Feet” where I modified that opening sentence and repeated again my views on the ‘frothy’ uninvestable markets].

What a complete update will show is that I have continued at times to position for a sharp downturn in markets, trying to be nimble to minimise losses as the market moved from simply being a ‘bubble’ into a ‘super bubble’ according to Grantham. That was a possibility I also foresaw back in May 2020 in “Uninvestable Markets” when I said:

To be clear, I am not saying that I believe that stock market indices are likely to fall 90% from current prices. I am saying that the way that the stock market and central bankers are behaving, markets are about as likely to melt up from here as they are to fall to the March 23 [2020] lows or lower. However, if markets do melt up, then I would become more fearful of the consequences for our economies, nations and geopolitics.

I have been reasonably successful at minimising those positional losses and last Monday went short again with that same bearish ETF and will be adding to that bearish position on Monday (a market bounce would be expected before long before heading down even more sharply, if this is the collapse I expect, but staggering the position allows me to cushion losses if this is not quite the time while also capturing much of the fall until I begin taking profits).

Oh, and I still have a high weighting to gold and some silver – to cover both inflation and major market/societal dislocation – and I hope that I can manage to find a way to invest in value in developing Asia (ex-China, which is the problem for a private, small scale investor) described by Grantham, and also in agreement with one of my main investment themes, and if I had the resources to buy a quality apartment in Florence (as mentioned previously) with up to half of my investable asset value I would do that [I knew I mentioned this idea before, and it was here]…

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© Copyright Brett Edgerton 2022

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