Jeremy Grantham, co-founder and chief investment strategist of money management firm GMO, warns that a combination of Fed money printing and stir-crazy investors have inflated a “real McCoy” asset bubble that will burn a lot of individuals.
During an interview on CNBC, Grantham was asked his thoughts on the stunning market rally from the March lows. He said he’s been completely amazed. However, cautions this is the only rally in market history that is occurring while the economy is struggling.
“Regarding the stock market rally since March: I’ve been completely amazed, almost since the low. The speed and now the extent, and the lack of major interruptions along the way. It is a rally without precedent… and the only one in the history books that takes place against a background of undeniable economic problems. All the other ones took place at a time when the market at least believed that things were great. They may have been wrong on occasion, but they believed at the time that everything economic and financial was terrific. And this time everyone agrees that the economics have a major problem.”
When asked about the increase in new trading accounts being opened since the stay-at-home orders were issued, Grantham said these new traders were looking for an outlet and turned to the stock market, and that the Fed also shares some of the blame for the markets unprecedented rise.
“I think perhaps being cooped up, indoors, makes people feel frustrated, looking for outlets. I think that may have played some psychological role in the massive participation of individuals. Clearly the Fed scattering money around has created a favorable environment, as it often does. And with this amount of money slopping around and with the economy depressed, it would be fairly traditional for some of the money to find its way into the market. So that in itself, is unexceptional. It's the ignoring of the downside problems that is perhaps exceptional.”
Grantham also warns that while we have seen a few bankruptcies so far, like Hertz, that the economic fallout from the economic lockdown will extend for years, and against that backdrop it is hard to see a full economic recovery. “I think it is quite likely that this will have tentacles going out years into the future, that whole industries will never fully recover. I think if you push any economist they will tend to agree with that statement. If you wound a few major industries on a long term basis, it’s hard to imagine the broad economy will get back to a fully-healthy state,” Grantham added.
Not in a Bubble?
He said despite the massive rally since March, he wasn’t convinced that we were in a bubble. But now, he says his confidence is rising, and that we are now in a “real McCoy” bubble.
“This is crazy stuff. And I’m talking about not the last three or four months, but the last few weeks. We’ve now reached a level where you buy bankrupt companies, you issue stock in bankrupt companies, that will probably be used to pay off the bondholders, and you bid up favorite companies to ludicrous levels. This is really the real McCoy.”
Surprisingly, Grantham believes the more maniacal stock buying we see, the better it is for bears expecting another collapse.
“Like 1929 or 2000, you want to see as much crazy participation by screaming leaders of wild investors as you can possibly see. That should make any bear feel better. Even in the three or four weeks since I was writing about how little confidence I have compared to the other bubbles, my confidence is rising quite rapidly that this in fact becoming the fourth real McCoy bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we are in one. And the chutzpah involved in having a bubble at a time of massive economic and financial uncertainty is substantial.”
Grantham Sends Out A Warning
He does have a warning for the new investors who have found early success in the markets. He congratulates the ones who cashed out, but warns the rest they are playing with fire.
“I certainly applaud them if they cash out and put it in their piggy bank. God bless them, they’ve done well. The US right now is simply playing with fire. You might make a lot of money in a really short time, but recognize that you are skating on thin ice. It’s a job for hedge funds, real professionals, and a lot of them will get burned. It certainly is not a task for individuals.”
Finally, Grantham offers a bit of advice:
“Sell US (stocks) 100%, buy emerging and throw the key away for a few years and you’ll have a story for your grandchildren about how you outperformed the investment professionals and everyone else.”
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