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June 22, 2020 | Grantham: “This is the Real McCoy of Bubbles…Crazy Stuff”

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Billionaire investor and GMO co-founder Jeremy Grantham is growing more and more sure that the U.S. stock market’s rebound amid the coronavirus pandemic is a bubble that will end up hurting many people.

“My confidence is rising quite rapidly that this is the fourth ‘Real McCoy’ bubble of my investment career…“We’ve now reached a level where you buy bankrupt companies and issue stock in bankrupt companies” Grantham told CNBC’s Wilfred Frost.  Here is a direct video link.

A note on Grantham’s comments about emerging market securities and how they offer better value than “ludicrously” priced US corporate securities today.  While this is true overall, the problem is that equity correlations are highly coupled globally in terms of trend and money flow.  When US stocks rise and sell off so do corporate bonds and other global equity markets all at once (note price action year to date as one vivid example).

In this environment, stocks and corporate debt are all jelly beans that are indiscriminately bought and sold in forced liquidation all at once.  Thus, when jelly beans start falling it does not matter much whether one is holding purple or red,  they all fall together and there is little capital protection in equity diversification.

This is why Grantham adds that if one must own equities today they are best to hold zero in the US and if they own some in emerging markets they must be able to “throw the key away for a few years”.   In other words, only where the buyer can ride through large drops and not need nor want to use the money or withdraw income for several years, is an allocation to ex-North American equities today a reasonable bet.

Just a tiny fraction of potential investors have enough time, resources and income from other sources that they are comfortable in the ‘it doesn’t matter if asset prices crash and take years to recover’ category.

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June 22nd, 2020

Posted In: Juggling Dynamite

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