THE FEARFUL, SPECULATIVE MARKET
Excellent thoughts from Jeremy Grantham’s latest quarterly letter. He remains a long-term bear, but had some awfully unfortunate timing when he turned short-term bullish last quarter….Always worth a read, however:
“So, how will this unusual struggle resolve itself? Despite growing nervousness and despite a slowing economy, I am so impressed by the power of low rates and Greenspanism (for lack of a better or shorter description) that I would still put odds of 45% (down from 50% last quarter) for the market to rise to over 1400 (down from 1500 to 1600 last quarter) by October of next year, accompanied by a speculative spin. On the other hand, I also have to recognize that the 21% I put on a quick and rapid decline to fair value looks even more likely today, perhaps closer to 30%. If the market does indeed continue down the current sell-off path, it should result in some unusual movement in the Russell 2000 (small cap index) and possibly even the junky stocks, which might give up their unusual relative strength in a real hurry. I can imagine a situation, for example, where the Russell 2000 gives up a relative 10% in two to three weeks as the aggressive investment world finally has second thoughts on the wisdom of continuing to speculate and changes its mind in its usual rapid way. (Remember, you read it here first.) High quality is perhaps not so promising in this respect, but could still win by several percentage points if the world becomes more circumspect. It would be more typical for quality to outperform over several years.”
Read the full letter at GMO.
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This and Hussman should be read in conjunction I think.
There is no doubt in my mind whatsoever that stocks are expensive, but placing odds on the market going to further levels of overvaluation as per Grantham’s thesis (ie; 45% probablility) is even more of a speculation than speculating on the market itself!
If the market is overvalued, the market will work it out over a longer time frame. Placing %’s on such outcomes has left me feeling quite confused. Am I missing something here?
I would say Grantham is still “optimistic” regarding the reflation continuing on for a while before the next big crash. (He does NOT think it is a good thing). His odds are down to 45% from the 50% he gave in his “Race to new highs” piece in April so he really hasn’t shifted that much. His timeframe is by the end of next year and he speculates that the market might reach only 1400. (Back in April he feared the the market might completely lose its senses and rise to 1500-1600) before collapsing once again.
He was spot on in April 2009 when he expected a rally (last hurrah) to about 1100 by year-end 2009 or early 2010. He simply became more and more impressed by the nature of the rally and the power of free money to power asset markets even in the face of weak fundimentals.
Bears have been badly burnt in this rally.