The stock market is in a 'fully-fledged epic bubble' – Warns Jeremey Grantham

It's a full fledged epic bubble, writes one of my favorite investors Jeremy Grantham of GMO.

“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.” 

He further states:

“Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives.”.

I have personally witnessed and traded during the craze in dot com, Enron, WorldCom and many other companies during run into (and after 2000s), followed by craze in natural resources' companies and those which were booming on the back on subprime loans during the 2007/2008 run-up.

And since 2009 we are witnessing one of the longest bull market in the entire stock market's history.

We are also seeing fast crashes and furious recoveries.

The Bull market craze is even crazier since Fed introduced unprecedented support to the markets during the Mar'20 covid-19 market crash! 

Here is some perspective from there 3Q research letter:

Whether it was Hertz stock rising 10-fold in the spring as a high beta recovery play despite the fact that the company was bankrupt and shareholders wouldn’t have benefitted from a recovery even if it happened, or Kodak stock rising 30-fold after announcing it was going to start making chemicals to enable the production of Covid-19 treatments, very odd and speculative things have been going on. As a more traditionally Growth-y example, Tesla has risen some 800% since the fall of 2019 on the back of 17% growth in vehicles sold. It now has a greater market cap than the sum of all the other U.S. automakers, all the European automakers, and all the Korean automakers, with Honda, Mazda, and Nissan thrown in for good measure. That collection of companies sold approximately 100 times as many cars as Tesla did in 2019!!

Well, we have even more craziness recently especially in the electric vehicle and energy storage sector (QS etc. comes to my mind).

So, is "value" long gone and it's only about "growth" and "stories". I love this quote from him:

“The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak.”

So, what defines as the last stage of a bull market, we get some clues from his writings:

Another more measurable feature of a late-stage bull, from the South Sea bubble to the Tech bubble of 1999, has been an acceleration3 of the final leg, which in recent cases has been over 60% in the last 21 months to the peak, a rate well over twice the normal rate of bull market ascents. This time, the U.S. indices have advanced from +69% for the S&P 500 to +100% for the Russell 2000 in just 9 months. Not bad! And there may still be more climbing to come. But it has already met this necessary test of a late-stage bubble.

So when can we expect this bubble to burst?

My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment, the most pressing issue facing the world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID crisis, and valuations are absurd. “Buy the rumor, sell the news.” But remember that timing the bursting of bubbles has a long history of disappointment.

You can download entire letter here.

So what to do?

If you are one of OP Inner Circle members, you know I personally have been lucky to call out the tops in Late Jan/early Feb 2020 and then bottom around mid march 2020. We have been Bullish since Nov 4th with 3889+/- as the upside target in mind.

However, I shared some historical market insights for perspective here. I have also sounded alerts on Jan 4th to our Inner circle members that 3 out of my 4 short term indicators have triggered bearish bias. These are the same indicators which triggered Jan/Feb 2020 pullback.

But do remember, as I say-

Not every pullback is a market crash, but each market crash was preceded by a market pullback

So this pullback doesn't mean it is a full fledged market crash, but it also doesn't mean that it suggests that bull run will continue.

So I would suggest, if you have been dancing to the tunes of the Fed music being played since 2009 and if you want to continue to dance, then dance. But dance closer to the exit.

Happy Trading,

Manoj Kumar

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