Grantham: Short the World

Jeremy Grantham's Q1 letter (www.gmo.com) paints a startlingly gloomy picture, even for him: For the first time in history, every major asset class is experiencing a bubble at the same time.  Globally, economic conditions have gotten so good, credit has gotten so accessible, profit margins have gotten so high, and investors have gotten so diversified, that risky assets no longer provide any expected premium over safer ones and there is nowhere to hide.   Even forestry, Grantham laments, has become a mainstream asset class.  The resulting race to scarf up the world's trees has reduced expected timber returns to a paltry 5%-6%.

As before the 2000 crash, Grantham is convinced that it's NOT different this time--and, therefore, will end badly.  He dismisses the idea that, in order for the markets to correct, we will need a catalyst (and, because we don't know exactly what it will be, we're safe).  He ridicules the theory that "private equity" will drive up stock prices indefinitely (and suggests that, in hindsight, this latest bubble will be called "The Private-Equity Bubble").  He acknowledges that predicting the timing of such a correction is impossible and, therefore, that all asset classes might get even more expensive for years (this was what happened in the late 1990s: Grantham and other value-driven forecasters called the top too early and suffered years of predictable ridicule and scorn.  Then the market crashed, and they were heroes.).

Grantham's less-gloomy colleagues point out that bubbles usually peak in a final orgy of excitement, in which markets rocket to levels that previously seemed unimaginable (e.g., 1999 and 2000 for tech, 2005 for housing) and that, globally, we haven't seen such a blow-off yet.  So perhaps, Grantham admits, the party will go on for a while longer.  But, he adds, "bubbles always burst."

 

Comments

[Dylan Ross]

I think the “final orgy of excitement” is relative to the bust that follows and cannot be titled such until after the fact. If global bubbles were to bust tomorrow and leave people in a prolonged dire stretch, they may look back at the period of time leading up to today as that, “final orgy of excitement,” in comparison to what lies ahead. When the tech bubble peaked, many thought the party was just getting started.