Throughout 2021, Jeremy Grantham has been warning about the stock market and everything else being in an epic bubble as we’re in the late stage of the bull market since 2009. Will it burst or just keep roaring on?
I remember a time when memes used to just represent funny and ironic commentary on popular images, and now they’re attributed to hyped stocks that suddenly go up a lot in price and fanfare.
Of course, nobody knows what will happen in the future, but we can still be prepared as investors no matter what happens.
Jeremy Grantham published an article for GMO entitled “Waiting For The Last Dance,” in which the current bull market has finally matured into a fully fledged epic bubble and that this could be the most important event of our investing lives.
In commentary that Grantham gave to Bloomberg, he said the US market should have been able to unravel at any time after January 2021 based on historical experiences.
While we’re in uncharted territory, the bull market could still continue, but Grantham seems to believe we may have a bear market and recession sooner than later.
Let’s consider some economic and market conditions and signals, like how there could be concern for the $10.5 trillion corporate debt bubble.
Famous investor of “The Big Short” fame, Michael Burry has warned us about “the mother of all crashes” coming.
The bond market has been mystifying as US Treasury bond yields have been declining, which means people are either piling into them or the Fed is just buying a lot of the assets, both of which could be a warning sign for the stock market.
Despite how the real inflation rate could be in excess of the “risk-free” bond interest rate, people might be buying bonds to take cover and have less of a loss when other types of assets might decline even more in the future.
In bull markets, people expect the prices of securities to keep rising, whereas a bear market is defined as securities declining by at least 20% or more over usually 2 months or more.
Separately, an economic recession used to be considered a decline in real GDP over at least 2 quarters, but is now considered to be significant decline in economic activity lasting more than a few months per the National Bureau of Economic Research.
It should make sense that we would see a bear market when we have a recession unfolding. I include what could be potential causes of an economic recession in the future that may burst the “Everything Bubble,” and they primarily include a loss of confidence in the economy and investments, high interest rates, a stock market crash, declining house sales and prices, a credit crunch and a liquidity crunch, and asset bubbles bursting.
There’s been so much monetary and fiscal stimulus that so many in the media have been saying the US economy is red hot. The Fed’s dual mandate figures of economic progress may not yet be signaling enough of an economic recovery, however.
We’re still at an unemployment rate of 5.9% as of June, which ticked up from May. And PCE inflation is at 1.85% as of May. Both of these figures at not yet at the Fed’s target rates to reach max employment and price stability and moderate long term interest rates. This is probably why the Fed is just holding steady and we’ll see what actions they may take in the coming months, if any.
It feels like an upside-down world because Grantham said that markets peak when people are extrapolating near perfect economic conditions into the future indefinitely, and based on the current Fed dual mandate economic progress, it doesn’t look like we’re at peak economic conditions but yet the markets seem like they could be peaking. Or they could just keep going up.
Even though the Shiller PE is at 38+, there doesn’t seem to be anything in the way of stopping the current trend of potentially reaching the Dotcom peak Shiller PE of 44.
I think Grantham would agree with Buffett Indicator in that the Total Market to GDP (Wilshire GDP) is at 234%, which is a whopping 134% more expensive than the normal 100% fully priced or “fairly valued” threshold. Grantham said we’re at levels in the stock market that has exceeded levels we were at previously in the Dotcom Bubble, and this notion is reinforced by the Buffett Indicator.
Grantham said looking at most measures we’re more expensive than even in 2000, and his favorite metric to use is Price to Sales (PS) ratio. Back in January 2020, we were even at a higher PS than in the Dotcom Bubble peak.
We’re now at a PS ratio of around 3.2, which is double the average of around 1.6. Even the Dotcom era PS was around 2. So we’re at least a whole point above the Dotcom Bubble Price to Sales ratio peak.
This is signaling to me that this can’t be ending well, whatever might be coming. Based on what a lot of respected investors are saying, I’d like to take more caution than be too aggressive right now.
Regardless of what these conditions and signals may portend about the future, I’ve got some action steps for you to consider and possibly take. This includes having an emergency fund of at least 3-6 months, if not a year’s worth, plus evaluating your current asset allocations to assess how comfortable you are with what you’re currently invested in.
Like Charlie Munger has said, “nobody knows when bubbles blow up.” Maybe everything’s fine and we just need to keep HODLing. But it doesn’t hurt to be prepared so I encourage everyone to keep studying and learning to be the best investors they can be.
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