It’s always a good idea to pay attention to Jeremy Grantham. Jeremy Grantham’s interesting words from a Barron’s interview.
What else are you seeing in terms of sentiment?
There is a high level of enthusiasm from the financial professionals, hedge funds in particular. This time you have a very high level of confidence from the professionals—but not a very high level of confidence from the individual investors. The individuals are a bit more down to earth. They felt the pain of 2009 longer than the institutions did, and they have been slow to come back into stocks when you look at net buying of mutual funds. There has never been a bubble where individuals were not flooding into the market at the very end, though sometimes they are pretty late to the game. By the end of a real bubble, individuals are gung-ho, and they are not gung-ho yet. That says a lot.
What’s brought about the discrepancy?
The belief in the Greenspan-Bernanke-Yellen put gets greater and greater each time there’s a crisis. So we start in ’94 with a bond crisis and a very successful bailout. Then we have the Long-Term Capital Management blowup in 1998. There’s a bailout, which is very successful again. We have the Y2K bailout, which was a little unnecessary. And then we have the 2000 bubble and the ensuing collapse—the biggest bubble in American equity history. Uniquely, the stock market does not go below trend, even though the market is down 50%.
In 1929, it crashed through the trend line and stayed there for 20-odd years. The Nifty Fifty crashed through the trend line in 1973 and stayed down there until ’86-’87. What is not typical is a bubble like the one in 2000. The market tumbled over three years, but it didn’t even reach trend. And the cavalry comes over the hill with enormous stimulus and moral hazard, the kind of implicit promise that they would bail investors out in a crisis, which they did. And the market, never having hit even fair value for a minute, then doubles. I described it as the greatest sucker rally in history.
How does this tie in with your point about institutional investors versus individuals?
The hedge funds said: “Boy, this is really great. The Fed did it once, they did it twice, they did it three times, including in the 2000 crash, and now they are probably going to come back and even bail out the housing bust.” And, sure enough, the Fed busts its tail to do everything that mortals could possibly do, and everyone says how wonderful it was. To which I say it is like rewarding the captain of the Titanic for helping women and children into the lifeboats with admirable bravery, forgetting that it was only his recklessness in driving through the dark night in a famously glacier-intensive part of the ocean that caused the accident in the first place.
The key is that, for the hedge-fund guys and the smart institutional players, their faith in the Greenspan-Bernanke-Yellen put is getting massive. So they say that whenever things break, the Fed comes back in and puts the floor way higher than where it used to be. And the institutional players become more and more bullish. In each cycle, they use a bit more leverage and take a bit more risk. That’s where we are surely now.
How overvalued are U.S. stocks?
They’re 65% overpriced. If they go up another 30%, you would have a true bubble, at which point stocks would be close to twice their fair value. Similarly, in 2000, stocks were more than double their fair value. So they are quite capable of doing that. But my point is that with the professionals getting reinforced by the Fed going back to 1994, it will be very surprising if they don’t keep on playing this game until the market at least hits a classic bubble definition. Bubbles don’t usually stop until sensible investors, value investors, and prudent investors have been hung out to dry and kicked around the block. That hasn’t happened yet, so that tells you there is probably quite a bit left in this rally.