Grantham Predicts MAYHEM Next Week

 I do think we're in a bubble but I also  think it's unlike any other book The  Great bubbles of History whether it's  sassy bubble or 1929 or the tech model  you take a very good economic situation  and you merely extrapolate it into the  future and if you do that and it  actually occurred the market would be  worth very high multiples of book and  earnings and so on it's a very simple  game believe in today's perfect  conditions and assume unrealistically as  it turns out that it will go on forever  if you did that today and you  extrapolated today's conditions which  are miserable you would of course have  the very opposite of the bubble so that  makes it unique we're in the highest  five percent of pe's and we're in the  lowest five percent of economic  conditions today so there's never been  anything like that in history and why  has it happened we know the trouble is  of course covered and we know the push  on stock prices is a combination of  central banks Federal Reserve and fiscal  spending and it's Global so we have  never had such a global agreement that  every government is looking to spend and  every government is looking for their  Central Bank to accommodate this is an  enormous push and what we discovered  long ago is how effective that is at  moving stock prices it's as if every  dollar that is not absorbed by the real  world flows through line of least  resistance flows through into asset  pricing that is what is happening it's a  very impressive struggle between the  real world of productivity and  employment and GDP and the paper world  of PE ratios and house prices pushed by  easy credit low interest rates of course  being key and just plentiful supplies of  money flapping around to those people  who are likely to buy houses and stocks  it is not necessarily the case at the  small business level at all so this is  not necessarily terrific for the real  broad economy but it is clearly terrific  for the stock market and the question is  does the real world eventually catch up  and since this is novel economy just  like the novel virus you can't be quite  as certain as you could in Prior bubbles  I described our confidence in Prior  Bubbles as near sir all of those things  of course occurred and you can't be that  certain this time because the forces are  unique it's going to make life more  intellectually interesting however my  bet would be of course that reality will  catch up with the ipes when you buy  overpriced assets you get a guarantee of  a low return what you don't get is the  guarantee of being wiped out next week  my belief is that if you're trying to  time the breaking of a bubble the value  is not that important all of them are  overpriced and whether they're  overpriced at 25 times earnings or 35  times earnings or in Japan at 65 times  earnings it's very difficult to work out  in any sort of academic way since you're  dealing with craziness where it's going  to Peak I much prefer to look for signs  of truly crazy behavior because every  bubble that really crashed and broke in  a spectacular way which most of them did  was preceded by craziness by legendary  stories this was notably lacking as I  wrote and talked about over the years of  the 10-year bull market it has not been  lacking really in this Valley of the  covet low we have seen not only a  terrific rate of acceleration in the  price rise double the normal bull market  which is characteristic that  acceleration is characteristic at the  late stage bubble but we've also seen  wonderful craziness the Sparks which are  a promise to use your money give me your  money and trust me I'll do something  useful with it there's a real Echo of  the south sea bubble where we have such  a spectacular opportunity we can't  reveal what the purpose of your money is  yet and they got lots of money and ran  off with it I'm not saying the spikes  will run up with your money and I am  saying it's a real testimonial to the  speculative nature buying hurts a  bankrupt company and having it go up  four or five six times in a real hurry  and so on and so on you read about your  own having a Tesla quadruple interview I  own a Tesla It's a Wonderful car I think  they're spectacularly interesting  company but are they four times the  company they were before covered I don't  think so these stories are everywhere  and they're what you need before a  bubble breaks and we saw them in early  2000 and late 99 and we saw them in late  1929 before the crash we saw them in  Japan and here we are again so I think  this is an indicator not a certainty but  a strong possibility that we are quite  close to the bubble breaking in terms of  psychology perhaps a matter of weeks or  months not years and I am sympathetic to  the argument what am I supposed to do  the yields are so low but the market  doesn't care that you don't have easy  safe Investments to make and your  desperation is your own math and what it  does is focus on the difference between  short-term and long-term on the short  term you can say I'm offered Nothing by  fixed income I get something out of  stocks even though it's half what it  seemed to be in the yield it's still  better than nothing therefore I'll do it  and the price is right and that is a  logic that you hear one way or the other  all over the place and then there's the  argument in the long term which is in  the end all assets equal replacement  costs house prices go up but if you can  build one at Half Price you put a  ceiling on it if you can create a new  company at half price I am a great fan  of venture capital for this reason I've  spent my entire life fighting the FED  frankly what I will say is this that  typically the FED wins many more rounds  than we have but in the end we've had a  knockout In the End the Fed has not been  able to keep the tech bubble going  indefinitely it sent it over the 21  times earnings of 1929 and sent it up to  35 but it couldn't go on in definitely  even Japan that went to 65 the price  they paid when you finally knocked it  out was here we are 31 years later not  even faintly close to the high of 1989.  if you go into their real estate market  which was an even bigger bubble I think  the biggest bubble including the sassy  bubble ever for tulips they went down  for 30 years and now they're bottoming  out maybe but they're bottoming out in  Central City prices at a quarter of  where they came from the land under the  Emperor's Palace in 1989-90 was indeed  worth the state of California to give  you some idea we spent a day or two  checking it out it really was true and  the price you pay for that is you could  be 50 years later and still not back to  that level again I would say don't fight  the FED if you're a short-term player  but if you're a long-term player you  have to be prepared to fight the FED on  occasions as long as inflation is not  really Gathering State when you find  yourself facing a slowing global economy  you have to kick it and it needs massive  government stimulus on a sustained basis  a few years ago I debated Jim Grant who  called me an apostate amongst Valley  managers or hedging about this time is  different I maintain that the former  dangerous words this time is different  should be replaced by the five most  dangerous Words which is this time is  never different that is a very dangerous  idea to think that you can never have  important permanent changes and I think  almost everything has changed since 2000  so the certainties that we used to have  no longer exist but that was five years  ago that was before the most massive  move against value on any way you can  measure it now we are off the scale so I  don't think a value is as dependable and  useful a weapon as it was for 70 years  prior to 2000 but I think it's a very  handy weapon when you push the  parameters so far that it hits  historical lows against gross cells so  we may not snap back the 120 I would  have calculated 20 years ago but we are  going to have a very big reversal in  favor of value stock sooner or later I  think we can be pretty safe about that  and one of the things comes down to the  nature of the facts I don't recommend  necessarily going short but I do  recommend owning as few U.S equities as  you can face emerging equities merging  markets are not only at an unprecedented  low relative but they are actually quite  cheap absolutely compared to the US on  their own and who are they they're China  who is going to represent according to  the World Bank over 30 percent of the  entire world's growth over the next 20  years and India which is going to be an  increasingly important player and then  you have the Brazil and so on  collectively they are much the bigger  part now of the global GDP these things  move very fast I think about on Emerging  Markets is really betting the future  against past and the only thing that  makes life interesting outside emerging  are the Fangs intellectually interesting  but when they've gone up 10 times in a  hurry you have to say it's  intellectually more interesting than it  is financially interesting and the  reason I recommend not going short  shorting is a desperately difficult game  you can never be certain that they don't  the fangs and the growth stocks put in  one last push that will shake you loose  you simply will not be able to take the  pain as a short sale government spending  done correctly very good for the economy  very good for workers which in the U.S  have not had a real increase per hour  work since the mid-1970s can you believe  where even Dopey Europe has more than  doubled in China and Vietnam has more  than 10 people and so on it is a bit of  a pickle my advice really quite simple  you emphasize Emerging Markets you  de-emphasize the us if you have to own  the U.S you go for deep value I did not  say that three years ago five years ago  but if I had to choose between doing  that and avoiding the US entirely I  would do the latter you only need one  big asset Box by the way to get rich  Emerging Markets as I said is way over  half of the global GDP it is growing far  faster and because of the size of China  it's guaranteed to do that it's going to  have a much better growth rate this year  under stress much better than the GDP  growth of the development and it's got  26 countries it covers every industry  you would want why would you be moaning  and groaning when you have such a good  opportunity it's 10 times learning it's  cheap it's a great opportunity by and  large in most of the things that matter  to me I have to make the sick joke that  yes America is exceptional it's become  exceptionally bad in that we have the  worst life expectancy the worst  morbidities the worst social measures of  almost anything children to 16 year olds  number of people in prison number of  people who get shot on and on and on  it's quite distressing however the old  rates of 15 maybe will never come back  again let me just point out that debt is  simply Double Entry bookkeeping for  every dollar of debt there is someone  who is owed a dollar why I care if every  other Japanese owns every other Japanese  tons of money so that in total the debt  looks intimidating by historical  standards yet from a U.S point of view  looking at internal debt it's totally  irrelevant and has proved to be by the  way they have been moaning about  Japanese debt levels for my entire  career and it has never had material  consequences that I can see they have  plenty of things going wrong from time  to time but none of them have really  come down to Leverage