Speaker 1: Jeremy Grantham, he’s a value investor. He’s a student of market bubbles, and he’s the chief investment strategist of GMO, then investing firm with over one hundred eighteen billion dollars of assets under management. He normally doesn’t do that many interviews. However, recently he went on Bloomberg Finance with some pretty stern things to say.
The bull market that started in March 2009, the longest bull market in history, has matured into a speculative fever of rare proportions, he said. It is a fully fledged epic bubble. Put it this way. When you have reached this level of obvious super enthusiasm, the bubble has always, without exception, broken. In the next few months, not a few years. You can’t maintain this level of near ecstasy. It can’t be done because you’ve put in your last dollar you are all in. What are you supposed to do beyond that points? You can’t borrow any more money. You can’t take on any more risk. How do you keep that level of enthusiasm going indefinitely? And quote the answer is you can’t just like when you drink alcohol or coffee, the high has to turn to a low and the exact same thing will happen with the market. You know, you’ve got so many different signs that point to a bubble.
One of those signs that Grantham talks about is the amount of trading going on. He said, if you want a crazy example of a sign and you need crazy, by the way, that’s the best timing for a bubble. Top is crazy behavior. You look at the over-the-counter trading. I was a big over-the-counter trader and a speculative bubble of 1969. So last February, it traded about 80 million shares for the month and it worked its way steadily throughout the year until November. Then it got to around three hundred and eighty. So it had gone up four times. And then in December it went to one point one five trillion shares for the month, having tripled, then tripled again in a single month. These are spectacular performances and quotes. So what we’re seeing is more and more traders entering the market looking to make a quick buck. As Grantham’s said, over ten times more trades were placed at the end of twenty twenty compared to the start. This is a signal of greed even more than greed. It’s a signal of euphoria, delusion. Everyone’s making money in the stock market. Let’s all join in. Let’s all do the same thing. I don’t want to miss out. And this pushes prices higher and higher. But always remember what follows greed. And the new paradigm is denial, then fear, then capitulation. And one of the things that is causing this euphoria and the market is this free money that everyone seems to be getting. Here’s what Grantham said. The sad truth of a lot of the quotes stimulus is that it didn’t increase capital spending. It didn’t increase much in the way of real production, but it flowed a lot of it eventually into the market one way or the other. And I have no doubt some of this new round of stimulus will. And if it’s as big as they talk about, this will be a very good making of a top for the markets, just of the kind that the history books would enjoy. We will have a few weeks of extra money and a few weeks of putting your last desperate chips into the game and then an even more spectacular bust and quotes the USA government’s had two point six trillion dollars of stimulus spending in 2020 and 900 billion dollars worth of stimulus tax relief. That is expected to continue to be the case in twenty twenty one more free money given out. And at the end of the day, if you keep giving people free money, they think, oh, that’s nice to have.
All of my friends are making gains in the stock market. I’m going to put it there to try and make a quick buck. And this pushes prices up and up and up. That’s one reason why Grantham thinks we’re at the Greed Delusion new paradigm section of this graph. He said. We’ve had even more spectacular Fed friendliness and government friendliness. So we’ve had for once the joining of fiscal spending with the Fed’s behavior. And the result of this is that confidence has risen and risen. And so finally, people are reaching for the greatest demonstration of competence they have had and their investment career. They’re borrowing more money to throw into the market. Their belief in the market is profound. The common wisdom is with the Fed on your side, how can you lose, end quote? But at some points, the market has to come back to reality, just like when we daydream someone’s. Going to tap us on the shoulder and take us back to the real world eventually, that will happen with the stock market, too. As Jeremy Grantham said, the market is going to end up as we know where it is going to end up. And all of the paper in the world will not change the level that is justified by the flow of dividends and earnings. That is, after all, the only thing that you can end up eating is the flow of dividends. And sooner or later, the stock market will once again boring, boring sell on the future flow of dividends. That is not going to be changed materially on the size of the check that we get over the next few weeks. OK. One of the great analogies on how the stock market works was made by Benjamin Graham, the father of value investing. He said in the short run, the market is a voting machine, but in the long run it is a weighing machine. Why he’s trying to get at is in the short run. The stock market is all about emotions and investing sentiments. How much free money do people have on them? How happy and greedy are investors feeling? But in the long run, the stock market will always reflect reality. And reality is that a stock is a piece of a business and a business is worth how much money that it generates. Right now we’ve seen the stock market reach all time highs, but businesses are generating way less money than what they were before. And that’s because the stock market is not in touch with reality. There is too much free money in the market and too much euphoria.
One example that Jeremy Grantham gives to reflect this is his own stock quantum scape. He said, My own stock in Quantum SCAP, it came into the market at ten dollars and shot up to 130 at 130 dollars a share. It was bigger than General Motors or Panasonic. This is a brilliant company, but has no trouble admitting that it won’t be producing any batteries for four years. No sales, no profits and bigger than GM. There is nothing like that in 1929. Nothing of that scale, nothing like that even in 2000. And quote, because people have so much free stimulus checks coming in, they are willing to throw ridiculous amounts of money. Even stocks there aren’t earning any profits. In fact, Quantum SCAP, the stock that he is talking about, made a negative fifty one million dollars of profit in 2020, but it still has a market cap of 17 billion. This just shows you how disconnected the stock market is from reality. As Grantham’s said, if you go back to before the illness, what you say is we have lost considerable strength in the economy. We have fewer people working and we have a reduced stream of goods and services, and yet the price is much higher. So if you believe in market efficiency, which is wrong, was it wrong before or is it wrong now? But is it really justified that we have delivered a serious wound to the global economy and the global stock market has gone way up? It doesn’t feel right. And I think we all know that this is a monetary game and you can keep these little monetary bubbles going for just so long, as long as you keep confidence levels rising. But when confidence hits these levels, the history books are pretty clear. It’s very difficult to increase your enthusiasm from a state of mild hysteria, which is where we are today and quiet’s. And the other thing that doesn’t exactly help is the Fed have already played all of their aces. They are good cards have been played out in 2020. They lowered interest rates from around 2.5 percent to effectively zero. They did this to try to stimulate the economy and make sure that the market recovered from its crash. But they’ve played their cards. Now, you can’t lower it anymore. It’s at zero. So the next crash, it’s a lot harder for the Fed to step in and prevent or minimize the damage, Grantham said. In 2000, it went down 50 percent and the reason only went down 50 percent and bounced back relatively quickly was because the Fed came charging in to the rescue and they lowered interest rates. But now you’re down interest rates and you have to realize that that most of the easy pickings of saving the game by ramping rates down is behind us at the lowest rates in history. You don’t have a lot in the bank to throw on the table, do you? So we’ve got the Fed.
They don’t have the power that they normally did throughout history. Look at the interest rates throughout history and they’re saving. Grace was always the fact that they could. Lower rates because rates were so high today, we don’t see the Fed having that power and that could result in a very bad crash because you’re mixing the wrong ingredients, you’re mixing euphoria and greed in the market, but also investors who don’t understand the market well or understand the value of their investments. These are the problems that we are facing in the current market and they could be our demise. Let me know your thoughts and the comments below.