by Robert Huebscher, 10/22/20 Dow 27,400. S&P 500 3,400.
Jeremy Grantham has made a science of studying asset bubbles, correctly predicting the path of the Japanese, dot-com and housing overvaluations. Today’s bubble in U.S. equities is unlike any other, he says, but it will burst in months, if not weeks.
Grantham is the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. He was interviewed via webinar on October 21 by Alex Shahidi, who is a managing partner and co-chief investment officer at Evoke Wealth and ARIS Consulting, a Los Angeles-based asset manager, as part of its master speaker series.
“We are in a bubble,” Grantham said, “but it is unlike any other.” The excessive bubbles of history took a great economic situation and extrapolated it into the future, based on an assumption that today’s perfect conditions will continue.
But doing that today leads to the opposite of a bubble, Grantham said, given that P/E ratios are at the highest 15% of their historical values despite the dismal economy.
Everything is overpriced, he said, but there is no way to say when they will peak. To call that peak, it is useful to look for signs of “crazy” behavior.
“That was not lacking in the rally off the COVID low,” he said. That was a late-stage rally with a rapid surge in prices. Another sign of craziness is the flood of interest in special-purpose acquisition companies (SPACs), which he said are based on the proposition to, “give me your money and trust me that I will do something useful with it.”
“That is a real testimonial to the speculative nature of the market.” He added that the same is true with the valuations of Hertz and Tesla, the latter of which he called a great company but an unjustifiable stock at today’s price.
“The stories are everywhere and are what you need for a bubble to break.” But, he said, that is an indicator but does not offer certainty that we are close to the break.
It could be weeks or months, he said.
“You cannot be as certain as in prior bubbles,” Grantham said. Those bubbles were due for near-certain collapses.
“My bet is that reality will catch up with the high P/Es.”
According to Grantham, a high P/E is an intrinsically dangerous and risky situation that relies on investor confidence. “If you break confidence and are way overpriced, you are looking at substantial declines.”