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Let’s discuss value investor Jeremy Grantham’s thesis on “super bubbles” and his target for the S&P 500.

S&P 500 chart courtesy of StockCharts.Com, annotations by Mish with thanks to Jeremy Grantham.

Fourth Super Bubble

For almost a half-century, value-investing icon Jeremy Grantham has been calling market bubbles. Now, he says U.S. stocks are in a “super bubble,” only the fourth in history, and poised to collapse.

Please do yourself a big favor and play the above interview in entirety.

It’s not a fluff interview. Bloomberg’s Erik Schatzker grills Jeremy Grantham right from the get go about Grantham’s view a year ago.

Q&A Snips

Schatzker: At the risk of putting words in your mouth, you are as certain [now] as you were then, if not more?

Grantham: I would say clearly more. I did freely admit, not in our conversation, but elsewhere, that I wasn’t quite as certain about this bubble a year ago as I had been about the tech bubble of 2000 or as I had been in Japan or as I had been in the housing bubble of 2007. I used to think in terms of near certainties. This time I felt highly likely bit perhaps not nearly certain. Today I feel it is just about nearly certain.

Grantham discusses “crazy behavior” , noting that even in 1929 you had some magnificent rallies.

Schatzker: If you are right and stocks are in a multi-sigma deviation from the statistical trend, tell me what happens. The S&P 500 peaked at almost 4800 points. What is the bottom?

Grantham: The trend line, being slightly generous, is 2500. And most of the great bubbles, the super bubbles go below trend and stay there for quite a while…

…click on the above link to read the rest of the article…

Fed’s New Paradigm Adds Helium to the Stock Bubble

December 25, 2020

Fed’s New Paradigm Adds Helium to the Stock Bubble

Valuation are not only high, they are among the highest on record.

The Laws of InvestingThe Wall Street Journal asks Has the Fed Rewritten the Laws of Investing?

It has been an odd year with the Covid-19 crisis hammering the economy, but stocks recovering from sharp losses and then powering to new highs. As a result, standard measures show valuations are at rarely-seen levels that have typically ended in tears.

The S&P 500 trades at 22 times analysts’ expected earnings—its most expensive level since the dot-com bubble. It also trades at its richest multiple to its inflation-adjusted earnings over the past decade—the valuation method popularized by economist Robert Shiller —in nearly 20 years. The total value of U.S. stocks as a percentage of the U.S. economy, which Warren Buffett once called “the best single measure of where valuations stand at any given moment,” is now higher than at any point during the dot-com years.

Stocks vs Interest Rates

Some suggest stocks may not be as expensive as they seem because that interest rates are extremely low.

John Hussman has pointed out the fallacy of that theory many times. The Journal explains the fallacy this way.

The 10-year Treasury largely reflects investor expectations of what the overnight rates set by the Fed will average over the next decade. The Fed responds to what is going on with the economy, setting rates higher when it is trying to cool things down, lower when it is trying to heat things up. So low yields are tantamount to a low-growth, low-inflation economy—one in which profit growth would be low, too. Why pay up for stocks under that scenario?

…click on the above link to read the rest of the article…

Fourth Turning Economics

August 5, 2019

Fourth Turning Economics

“In retrospect, the spark might seem as ominous as a financial crash, as ordinary as a national election, or as trivial as a Tea Party. The catalyst will unfold according to a basic Crisis dynamic that underlies all of these scenarios: An initial spark will trigger a chain reaction of unyielding responses and further emergencies. The core elements of these scenarios (debt, civic decay, global disorder) will matter more than the details, which the catalyst will juxtapose and connect in some unknowable way. If foreign societies are also entering a Fourth Turning, this could accelerate the chain reaction. At home and abroad, these events will reflect the tearing of the civic fabric at points of extreme vulnerability – problem areas where America will have neglected, denied, or delayed needed action.” – The Fourth Turning – Strauss & Howe

The quote above captures the current Fourth Turning perfectly, even though it was written more than a decade before the 2008 financial tsunami struck. With global debt now exceeding $250 trillion, up 60% since the Crisis began, and $13 trillion of sovereign debt with negative yields, it is clear to all rational thinking individuals the next financial crisis will make 2008 look like a walk in the park. We are approaching the eleventh anniversary of this crisis period, with possibly a decade to go before a resolution.

As I was thinking about what confluence of economic factors might ignite the next bloody phase of this Fourth Turning, I realized economic factors have been the underlying cause of all four Crisis periods in American history.

Debt levels in eurozone, G7, US and Germany

The specific details of each crisis change, but economic catalysts have initiated all previous Fourth Turnings and led ultimately to bloody conflict. There is nothing in the current dynamic of this Fourth Turning which argues against a similar outcome. The immense debt, stock and real estate bubbles, created by feckless central bankers, corrupt politicians, and spineless government apparatchiks, have set the stage for the greatest financial calamity in world history.

…click on the above link to read the rest of the article…

Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”

May 14, 2019

Stocks Crater – 3.5 Trillion Dollars In Global Market Cap Wiped Out – China Considers “Dumping U.S. Treasuries”

Wall Street responded to our escalating trade war with China by throwing a bit of a temper tantrum. On Monday the Dow Jones Industrial Average was down 617 points, and that was the worst day for the Dow since January 3rd. But things were even worse for the Nasdaq. It had its worst day since December 4th, and overall the Nasdaq is now down 6.3 percent in just the last six trading sessions. Of course it isn’t just in the United States that stocks are declining. Since last Monday, a total of approximately $3.5 trillion in market cap has been wiped out on global stock markets. And since it doesn’t look like we are going to get any sort of a trade deal any time soon, this could potentially be just the beginning of our problems.

China fired a shot that was heard around the world on Monday when they announced that they would be dramatically raising tariffs on U.S. goods…

China will raise tariffs on $60 billion in U.S. goods in retaliation for the U.S. decision to hike duties on Chinese goods, the Chinese Finance Ministry said Monday.
Beijing will increase tariffs on more than 5,000 products to as high as 25%. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously.

According to CNBC, these new tariffs are going to be particularly damaging for U.S. farmers…

The duties in large part target U.S. farmers, who largely supported Trump in 2016 but suffered from previous shots in the Trump administration’s trade war with China. The thousands of products include peanuts, sugar, wheat, chicken and turkey.

…click on the above link to read the rest of the article…

The “Stock Market Crash Of 2018” Is Rapidly Transforming Into “The Financial Crisis Of 2019”

January 4, 2019

The “Stock Market Crash Of 2018” Is Rapidly Transforming Into “The Financial Crisis Of 2019”

Stock markets are crashing all over the world, we are seeing extremely violent “flash crashes” in the forex marketplace, economic conditions are slowing down all over the globe, and fear is causing many investors to become extremely trigger happy. The stock market crash of 2018 wiped out approximately 12 trillion dollars in global stock market wealth, but things were supposed to calm down once we got into 2019. But clearly that is not happening. After Apple announced that their sales during the first quarter are going to be much, much lower than previously anticipated, Apple’s stock price started shooting down like a rocket and by the end of the session on Wednesday the company had lost 75 billion dollars in market capitalization. Meanwhile, “flash crashes” caused some of the most violent swings that we have ever seen in the foreign exchange markets…

It took seven minutes for the yen to surge through levels that have held through almost a decade.

In those wild minutes from about 9:30 a.m. Sydney, the yen jumped almost 8 percent against the Australian dollar to its strongest since 2009, and surged 10 percent versus the Turkish lira. The Japanese currency rose at least 1 percent versus all its Group-of-10 peers, bursting through the 72 per Aussie level that has held through a trade war, a stock rout, Italy’s budget dispute and Federal Reserve rate hikes.

This is the kind of chaos that we only see during a financial crisis.

Investors are also being rattled by the fact that China just experienced its first factory activity contraction in over two years…

The People’s Bank of China said on Wednesday evening it had relaxed its conditions on targeted reserve requirement cuts to benefit more small firms.

…click on the above link to read the rest of the article…

2018 Was The Worst Year For The Stock Market Since The Financial Crisis Of 2008

January 1, 2019

2018 Was The Worst Year For The Stock Market Since The Financial Crisis Of 2008 Now that the year is finally over, we can officially say that 2018 was the worst year for stocks in an entire decade. Not since the last financial crisis have we had a year like this, and many believe that 2019 will be even worse. And of course the truth is that stocks are still tremendously overvalued. Stock valuation ratios always return to their long-term averages eventually, and if the Dow Jones Industrial Average plunged another 8,000 points from the current level that would begin to get us into that neighborhood. Unfortunately, the system is so highly leveraged that it will not be able to handle a price decline of that magnitude. The relatively modest drops that we have seen already have caused a tremendous amount of chaos on Wall Street, and a full-blown meltdown would quickly result in a nightmare scenario potentially even worse than what we experienced in 2008.

For investors that had become accustomed to large gains year after year, 2018 was a brutal wake up call. The following comes from Fox Business…

2018 may be remembered as the year the Grinch stole your retirement or stock investment account.

December was the worst month for the Dow Jones Industrial Average and the S&P 500 since 1931, as tracked by our partners at Dow Jones Market Data Group. The S&P 500, the broadest measure of stocks, lost 9 percent and the Dow over 8.5 percent.

For the year, stocks turned in the worst performance since 2008.

According to the bulls, this wasn’t supposed to happen. In the middle of the year, they were projecting that a “booming” U.S. economy would continue to drive stock prices higher, but instead we just witnessed the worst three month stretch for stocks since the 4th quarter of 2008, and the month of December was the most painful of all…

…click on the above link to read the rest of the article…

This Is Exactly The Kind Of Behavior That You Would Expect During A Stock Market Implosion…

December 28, 2018

This Is Exactly The Kind Of Behavior That You Would Expect During A Stock Market Implosion…

If a doctor tells you that his patient’s condition is swinging up and down wildly, is that a good sign or a bad sign? Of course the answer to that question is quite obvious. And if a doctor tells you that his patient’s condition is “stable”, is that a good sign or a bad sign? Just like in the medical world, instability is not something that is a desirable thing on Wall Street, and right now we are witnessing extreme volatility on an almost daily basis. On Thursday, the Dow was already down several hundred points when I went out to do some grocery shopping with my wife, and at the low point of the day it had fallen 611 points. But then a “miracle happened” and the Dow ended the day with an increase of 260 points. As I detailed yesterday, this is precisely the sort of behavior that you would expect during a chaotic bear market.

As Fox Business has noted, bear market rallies are typically “sharp, quick and usually short”. I figured that the momentum from Wednesday would carry over into the early portion of Thursday, so I was surprised when the Dow was down by so much as we neared the middle of the day. But then around 2 PM we witnessed an extraordinary market surge…

The Dow Jones Industrial Average posted a 865-point swing in less than two hours. The blue-chip index had been down in mid-afternoon more than 500 points to cut the previous session’s gains in half, before bargain hunters and short covering turned a big decline into a modest gain.

An 865 point swing in less than two hours is not “normal”.

…click on the above link to read the rest of the article…

U.S. Stocks Just Had Their Best Day Ever – And Here Is Why That Is A REALLY Bad Sign…

December 27, 2018

U.S. Stocks Just Had Their Best Day Ever – And Here Is Why That Is A REALLY Bad Sign…

The Dow Jones Industrial Average just posted its biggest single day point gain ever. On Wednesday, the Dow shot up 1,086 points, which shattered the old record by a staggering 150 points. It truly was a remarkable day, and this is the sort of “Santa Claus rally” that investors had been hoping for. Many are convinced that this rally is an indication that the crisis of the last three months is over, but as you will see below, this sort of extreme volatility is actually a really bad sign. But for the moment, the mainstream media is pushing the narrative that everything is once again peachy keen in the financial world. Just consider the following quote from CNN…

“Investors went bargain shopping the day after Christmas, where stocks just got too cheap relative to earnings, future earnings, any reasonable assessment of earnings,” said Chris Rupkey, managing director of MUFG. “The coast is clear, back up the truck, investors are saying enough already, the world is not ending.”

The coast is clear?

Really?

Do you think that they were saying the same thing on October 13th, 2008? On that day, the Dow Jones Industrial Average rose 936 points, and at the time it was the biggest daily point increase that Wall Street had ever seen by a very wide margin.

Of course that was right in the middle of the last financial crisis, and stocks just kept on tumbling after that massive rally.

But then on October 28th, 2008 the Dow Jones Industrial Average rose 889 points. Up until Wednesday, that was the second biggest daily point increase in U.S. history.

Was the crisis over then?

No way. Subsequently, the Dow kept on falling until it eventually bottomed out in early 2009.

…click on the above link to read the rest of the article…

This Was The Worst Week For The Stock Market Since The Financial Crisis Of 2008

December 22, 2018

This Was The Worst Week For The Stock Market Since The Financial Crisis Of 2008

Just when you thought that things couldn’t get any worse, they did. During normal times, a Friday before Christmas is an extremely boring trading session, but these are not normal times. On Friday, the Dow Jones Industrial Average was down another 414 points, and that brought the total drop for the week to 1,655 points. The marketplace has been completely gripped by panic, and CNN’s Fear & Greed index has just registered the highest “fear rating” that we have ever seen. I keep saying that we have not witnessed anything like this since the last financial crisis, and the numbers clearly back that assessment up. In fact, this was the largest weekly percentage drop for the Dow since October 2008…

The Dow just suffered its deepest weekly plunge since 2008and the Nasdaq is officially in a bear market.

The miserable performance reflects deepening fears on Wall Street of an economic slowdown and overly-aggressive Federal Reserve.

Apprehension about a looming government shutdown and anxiety over higher interest rates were two of the major factors that pushed stocks down on Friday.

Normally trading volume is very, very light in the days leading up to Christmas, so what we just witnessed was extremely unusual. Trading volume on Friday was “really heavy” with “more than 12 billion shares” changing hands…

In a bad sign on Friday, volume was really heavy. More than 12 billion shares changed hands on U.S. exchanges on Friday, the biggest volume in at least two years.

When I have warned about a “rush for the exits” in the past, this is the kind of thing that I am talking about.

Many investors were panic-selling on Friday because they wanted to be out of the market before things closed down for the holidays, and stock prices just kept getting hammered lower and lower.

…click on the above link to read the rest of the article…

Worst Market Crash In A Decade: The Dow Has Fallen More Than 4000 Points As Stocks Rapidly Approach “The Capitulation Phase”

December 21, 2018

Worst Market Crash In A Decade: The Dow Has Fallen More Than 4000 Points As Stocks Rapidly Approach “The Capitulation Phase”

We have not seen anything like this since the financial crisis of 2008. On Thursday the Dow Jones Industrial Average lost another 464 points, and over the last five trading sessions it has lost a total of more than 1,700 points. CNN’s Fear & Greed index has swung all the way over to “extreme fear”, and there has only been one December in all of U.S. history that was worse for the stock market than this one. But back at the very beginning of October, most of the experts never would have imagined that the year would end this way. According to CNBC, the Dow Jones Industrial Average hit an all-time record high of 26,951.81 in early October, and investors were feeling really good about things at that point. But on Thursday the index closed at just 22,859.60, and that means that the Dow has lost more than 4,000 points in less than three months.

All of the major trend lines have been shattered and all of the key support levels have been breached. When analysts look at stock charts these days, all they are seeing is sell signal after sell signal. One investment strategist told CNN that stocks are “quickly approaching the capitulation phase”…

“Equity markets are quickly approaching the capitulation phase after having broken below critical support,” Sam Stovall, chief investment strategist at CFRA Research, told CNN Business.

According to Google, “capitulation” means “the action of surrendering or ceasing to resist an opponent or demand.” In this case, the bulls are on the verge of surrendering to the bears, and if that happens we could see a tremendous amount of chaos break loose on Wall Street.

…click on the above link to read the rest of the article…

“Something Is Wrong Here”: U.S. Stocks Plunge Again And Are Having Their Worst Quarter In 7 Years

December 16, 2018

“Something Is Wrong Here”: U.S. Stocks Plunge Again And Are Having Their Worst Quarter In 7 Years

The Dow Jones Industrial Average plummeted another 496 points on Friday as panicked investors continue to pull billions of dollars out of the stock market. With less than two weeks to go until Christmas, the markets are not supposed to be experiencing this kind of turmoil, but it is happening and there is no end in sight. During the fourth quarter of 2018, we have already seen the S&P 500 fall 11 percent. Even if it doesn’t go down any further, that will be the worst quarter in 7 years. And of course the S&P 500 is not alone – at this point all of the major indexes are officially in correction territory. Things are certainly getting quite frightening on Wall Street, and many believe that the worst is yet to come.

Despite widespread assurances from the mainstream media that the wise thing to do is to keep your money in the market, investors are pulling money out of equities at a near record pace…

Jittery investors yanked a record $39 billion from global equities in the latest week, according to a Bank of America Merrill Lynch report released Friday. That included $28 billion that exited US stocks, the second-highest on record. And a record $8.4 billion was pulled from investment grade bonds.

The “race for the exits” that we have been witnessing really is turning into a bit of a stampede, and once panic starts to spread it can be very difficult to stop it.

So why is all of this happening?

Well, one market strategist told CNN that “something is wrong here” and that his firm cannot deny that we are in a “global slowdown”…

…click on the above link to read the rest of the article…

Could GE’s Slow Collapse Ignite A Financial Crisis?

December 3, 2018

Could GE’s Slow Collapse Ignite A Financial Crisis?

Will GE be the proverbial “black swan?” – It had come to my attention that General Electric was locked out of the commercial paper market three weeks ago after Moody’s downgraded GE’s short term credit rating to a ratings level (P-2) that prevents prime money market funds from investing in commercial paper. Commercial paper (CP) is an important source of short term, low-cost, liquid funding for large companies. At one point, GE was one of the largest users of CP funding. As recently as Q2 this year, 14.3% of GE’s debt consisted of CP. Now GE will have to resort to using its bank revolving credit to fund its short term liquidity needs, which is considerably more expensive than using CP.

Moody’s rationale for the downgrade was that, “the adverse impact on GE’s cash flows from the deteriorating performance of the Power business will be considerable and could last some time.” Keep in mind that the ratings agencies, especially Moody’s, are typically reluctant to downgrade highly regarded companies and almost always understate or underestimate the severity of problems faced by a company whose fundamentals are rapidly deteriorating.

As an example, Moody’s had Enron rated as investment grade until just a few days before Enron filed bankruptcy. At the beginning of November 2001, Moody’s had Enron rated at Baa1. This is three notices above a non-investment grade rating (Ba1 for Moody’s and BB+ for S&P). Currently Moody’s and S&P have GE’s long term debt rated Baa1/BBB+. In the bond market, however, GE bonds are trading almost at junk bond yields.

…click on the above link to read the rest of the article…

Stock Market Crash: The Dow Has Fallen Nearly 2,500 Points And FAANG Stocks Have Lost A TRILLION Dollars In Value

November 21, 2018

Stock Market Crash: The Dow Has Fallen Nearly 2,500 Points And FAANG Stocks Have Lost A TRILLION Dollars In Value

Thanksgiving week was not supposed to be like this. Normally things are slow in the days leading up to Thanksgiving as investors prepare to gorge themselves with turkey and stuffing as they gather with family and friends. But this year the stock market is crashing, and Wall Street is in panic mode. On Tuesday, the Dow Jones Industrial Average closed at 24,465.64, which is nearly 2,500 points lower than the all-time high of 26,951.81 that was set in early October. But as I noted yesterday, what has been happening to tech stocks is even more dramatic. Each one of the FAANG stocks is now down by more than 20 percent, and they have combined to lose more than a trillion dollars in value. We haven’t seen anything like this since the financial crisis of 2008, and at this point all of Wall Street’s gains for 2018 have been completely wiped out.

Fear is a very powerful motivator, and right now a lot of investors are feverishly getting out of the market because they are afraid of losing their paper profits.

One analyst is describing what is going on as a rush for the exits…

“The highways will be crowded this evening as the Thanksgiving rush will begin in earnest, but this morning investors are rushing for the exits,” Paul Hickey, co-founder of Bespoke Investment Group, wrote to clients on Tuesday.

But for many tech investors, the truth is that the cattle have already left the barn.

Just check out how much market capitalization the “big five” have already lost. The following numbers come from CNBC…

Facebook: $253 billion
Amazon: $280 billion
Apple: $253 billion
Netflix: $67 billion
Alphabet: $164 billion

…click on the above link to read the rest of the article…

How The Bubbles In Stocks And Corporate Bonds Will Burst

November 18, 2018

How The Bubbles In Stocks And Corporate Bonds Will Burst

As someone who has been warning heavily about dangerous bubbles in U.S. corporate bonds and stocks, people often ask me how and when I foresee these bubbles bursting. Here’s what I wrote a few months ago:

To put it simply, the U.S. corporate debt bubble will likely burst due to tightening monetary conditions, including rising interest rates. Loose monetary conditions are what created the corporate debt bubble in the first place, so the ending of those conditions will end the corporate debt bubble. Falling corporate bond prices and higher corporate bond yields will cause stock buybacks to come to a screeching halt, which will also pop the stock market bubble, creating a downward spiral. There are extreme consequences from central bank market-meddling and we are about to learn this lesson once again.

Interestingly, Zero Hedge tweeted a chart today of the LQD iShares Investment Grade Corporate Bond ETF saying that it was “about to break 7 year support: below it, the buybacks end.” That chart resonated with me, because it echos my warnings from a few months ago. I decided to recreate this chart with my own commentary on it. The 110 to 115 support zone is the key line in the sand to watch. If LQD closes below this zone in a convincing manner, it would likely foreshadow an even more powerful bond and stock market bust ahead.

Thanks to ultra-low corporate bond yields, U.S. corporations have engaged in a borrowing binge since the Global Financial Crisis. Total outstanding non-financial U.S. corporate debt is up by an incredible $2.5 trillion or 40 percent since its 2008 peak, which was already a precariously high level to begin with.

U.S. corporate debt is now at an all-time high of over 45% of GDP, which is even worse than the levels reached during the dot-com bubble and U.S. housing and credit bubble:

…click on the above link to read the rest of the article…

This Wasn’t Supposed To Happen…

November 13, 2018

This Wasn’t Supposed To Happen…

We have definitely deviated from the script. According to virtually all of the “experts”, the stock market was not supposed to keep plummeting in November. This was supposed to be the month when the market calmed down and things returned to normal. But instead, November is starting to look a whole lot like October, and many investors are really starting to freak out. U.S. stocks declined for a third day in a row on Monday, and all post-election gains have now been completely wiped out. The Dow Jones Industrial Average lost another 602 points, and all of these large daily losses are really starting to add up. It may still be a bit too early to call this a “major financial crisis”, but if stock prices keep plunging like this it won’t be too long before all hell starts breaking loose on Wall Street.

Goldman Sachs, GE and California utility stocks were some of the biggest losers on Monday, but it was Apple that made the biggest news…

Investors grew concerned after Wells Fargo analysts identified Apple as the unnamed customer that optical communications company Lumentum Holdings said was significantly reducing orders. The news sent Apple’s stock down 5 percent for the day. Lumentum shares plunged almost 33 percent.

Shares in other major tech stocks fell. Advanced Micro Devices gave up 9.51 percent, while Nvidia fell 7.84 percent. Micron Technology lost 4.27 percent. Banks and consumer-focused companies, and media and communications stocks also took heavy losses.

All along, tech stocks had been leading the bull market on the way up, but now things have completely shifted.

In recent weeks tech stocks have been absolutely cratering, and several of the biggest names are now officially in bear market territory. The following summary comes from Wolf Richter…

…click on the above link to read the rest of the article…

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