Things Are Too Easy / Are We In A Bubble?
This piece titled "Waiting for the Last Dance" by Jeremy Grantham of GMO Partners is making the rounds, which makes the case that the market is now checking off all the emotional characteristics of a major bubble.

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It's definitely worth a read, but here is a quick summary:

Grantham thinks that we are in the midst of one of the biggest financial bubbles in history, on par with the South Sea bubble of 1929 and the Dot Com crash of 2000.

The reasons he cites are:

  • Most of the time major asset classes are reasonably priced relative to one another. But right now asset prices have moved far away from fair value.
  • Bubbles are typically marked by crazy speculation. Grantham points to speculation in Hertz, Kodak, Nikola, and Tesla as current examples.
  • Grantham observes that at Tesla's current market cap- now over $800 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM.
  • The "Buffett indicator" which is total stock market capitalization to GDP broke through its all-time high 2000 record.
  • In 2020 there were 480 IPOs, including an incredible 248 SPACs, which is more new listings than the 406 in 2000.
  • There are more than 150 non-micro-cap companies (that is, companies with a market capitalization of over $250 million) that have more than tripled in the year, which is over 3 times as many as any year in the previous decade.

Personally, while I think it prudent to be prepared for a crash in equity prices, the bullet points above feel like they could use a lot more discussion. It feels as though Grantham's main point is "things have run up a lot, and eventually there has to be a correction."

To which @sraone aptly pointed out: "More money has been lost anticipating a Market Correction than the Market Correction itself"

But I do think Grantham makes a good point regarding the catalyst for a downturn, namely, once the Covid vaccine is rolled out, the most pressing issue facing the world economy will have been solved. Market participants will breath a sigh of relief, then look around and 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 still sky-high.

Grantham's solution is to move to Value and Emerging Market stocks.
Michael McGuiness's avatar
These are really great points. Thanks for the write-up! Will definitely read the full report over the weekend.
Josh Worden's avatar
Oh no!! Sell sell sell!! (Just kidding, I won’t be that flighty and reckless, although these points do make me consider waiting to invest more for awhile)
Amanda's avatar
Agree with @mikemcg - will read this. Based on your summary I’m wondering how much it make sense to compare the possibility of a $TSLA bubble with the whole economy? And what the long-term role of globalization is for the GDP: Stock Market ratio? The fact that we have so many large cap companies is probably a memo in of itself - but without reading the article I’m not sold that it’s indicative of a bubble (other alternative rationales). Great summary!
Amanda's avatar
I’m very excited about emerging market stocks.
Nathan Worden's avatar
You're asking the right questions- the most valuable thing about the report is asking 'why' to his various points and to see if you come to the same conclusions he does.

To your questions 'does it make sense to compare the possibility of a Tesla bubble with the whole economy?'

Tesla makes up about 2% of the S&P 500 index:
So even if Tesla were to implode, "the market" would be fine.

Although FB, AAPL, AMZN, MSFT, and TSLA together make up about 23% of the S&P 500, so there is a case to be made that a pop of tech valuations could meaningfully lower S&P500 benchmark.

Your question about the long term role of stock market capitalization to GDP ratio is something I also want to look into more. I have heard of the Buffet indicator, but want to look into explanations for why it is so high.
Terminal Value's avatar
@amanda Thing to watch with emerging markets vehicles is, many EM-focused ETFs are overweight slow-growth behemoths like telecoms, banks, and state-owned companies. They often suffer from country concentration too—the average EM ETF is about a third China. My buddy Lawrence Hamtil (@lhamtil on Twitter), a financial advisor, is a big EM skeptic & has written extensively on their vulnerability to political turmoil and currency instability
Nathan Worden's avatar
Thanks for sharing this @valueterminal ! That is very informative.
Amanda's avatar
Great insights @valueterminal ! Appreciate the resource 😊
Fiducia Investing's avatar
Great recap!

If everyone is thinking we are in a bubble... are we in a bubble? O.o

I see both sides of the argument for bubble vs not being a bubble. Highly recommend Howard Marks latest Memos on the oak tree website talking about current day valuations / tech
Nathan Worden's avatar
I love Howard Mark’s insights. Haven’t read his latest memo yet. Looking forward to it.
Fiducia Investing's avatar
He’s a sound mind in the midst of bubble calling. I love it. Spent hours the last few days reading his posts. 🧘🏻‍♂️
Joyanta's avatar
I like Howard marks...slightly contra to this dude. Investing (especially active) is never easy, often one has split views at any one time, but still we have to see the next day, week, month and year(s) :(
Joyanta's avatar
@nathanworden happy with your APPN :)
Nathan Worden's avatar
It's a good day to be an Appian shareholder, that's for sure :D
Ray Carroll's avatar
Great thread and shares everyone
North Star Capital's avatar
Great read. I think there are pockets of bubbles in today's markets. If you look at some of the EV stocks I have a hard time believing that we haven't pulled forward years (decades) worth of performance and growth. Companies like $NIO and $TSLA come to mind. Disclaimer - This isn't a shot towards anyone who invests or is invested in those companies. I commend you on your ability to handle volatility and the subsequent gains you have reaped.

On the other hand, there are pockets where I think things are trading at a fair or even cheap prices (especially when you consider where rates are). Large cap technology comes to my mind. Companies like $META and $GOOGL are trading at or near market multiples despite growing the top and bottom line significantly faster than the S&P 500.
Ryan Mahony's avatar
In the 2000 tech run up, investors anticipated a digital revolution sparked through the internet which would be taking place. They were largely correct but it has taken us 20 years to achieve massive scale. The companies being bid up today have much stronger balance sheets, revenue stability and innovation. Sure, we could have a 20-30% drop in asset prices but I don’t see a drawn out multi year protraction. The free flow of information and ideas, the rate of innovation and significant liquidity in the system should be a floor in the markets today.

Value will continue to play catch up but is unlikely to outperform for multi year periods.
Nathan Worden's avatar
^ This is where I tend to end up too when I try and think through why "this time is different."

Grantham focuses on metrics that mainly compare with 2000, so it's fair to point out all the ways 2021 is very different than 2000, as you have done.
Terminal Value's avatar
There is no question that there are excesses in global asset markets as we sit in January 2021, but note that Grantham has been bearish for many years. On GMO's website, scroll back to August 2017 and you can find a quarterly letter complaining "Why are stock market prices so high?" and a white paper entitled "The S&P 500: Just Say No". Both sentiments turned out to be poor counsel...
Nathan Worden's avatar
I had known he had a bearish tilt, but haha wow you are right, he's been a bear since 2017 (or before). Good sleuthing.