Why we believe that you need to be a medium-term market timer, to do well in all markets. A lesson from history http://puzzlefinancialadvice.com.au/2021/Core/Static_Asset_Allocation_long_term_buy_and_hold_strategies_often_fail_Why_is_that_210202.pdf
Puzzle Financial Advice
Jeremy Grantham 27/2/2012 "Believe in history. History repeats. All bubbles break. Be patient and focus on the long-term. Wait for the good cards."
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The coming asset price crash.
This web page for clients will be updated from time to time as extra material comes to hand.
10/3/21 I have a growing sense that a major US share market crash is coming - and that this will become part of a set of major asset price crashes around the world.
Why do I hold this view?
First, let us look at what are the "normal" preconditions for a crash.
There are usually a number of prerequisites for a major crash in share markets.
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A major crash usually happens at the end of a major secular bull market.
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At such times, investor optimism is at an extreme.
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Because investor optimism is at an extreme, market valuations are at an extreme - and hence gearing into markets tends to be fairly extreme.
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In a full asset price bubble, One of the final indicators is that the markets go into a speculative frenzy stage often accelerating markets to new peaks.
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When there is a private debt bubble extreme, this historically has also been linked to extreme prices and valuations in share (and property) markets.
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A summary of the current extremes of the above factors may be found here. http://puzzlefinancialadvice.com.au/2019/Core/Historic_extremes_The_long_list_we_are_currently_experiencing_190509_long.pdf
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Such historic extremes suggest an asset price crash and economic crisis of potentially historic magnitude. And if you wish to get a sense of how big past extremes have been, you can see some of these on this web page https://www.puzzlefinancialadvice.com/financial-security
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Almost necessarily, this next major crash will result in the busting of the biggest private debt bubble that has occurred in the last 200 years .... possibly the biggest private debt bubble ever.
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Ray Dalio has studied the debt bubble crashes over the last 400-years or so, and so has some grim warnings about how this debt bubble might be resolved are pretty scary in my view. The last debt bubble crash that the Anglosphere (Eg USA, UK, Canada, Australia) has experienced was post 1929, and that is one of many debt bubbles that Ray Dalio has examined closely. It will be useful for us to explore more of Ray's writings on this subject.
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The above-indicators tell us a crash (or major bear market) is going to happen, but they do not tell us when.
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Super-enthusiasm / speculative fever. Or at least, the only one of the above indicators that tells anything about timing of a crash is "speculative fever" as Jeremy Grantham explains ” ( https://www.youtube.com/watch?v=RYfmRTyl56w 22/Jan/2021 ), 10:00-10:30 “When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years.”
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But even Grantham's comment does not give a precise forecast. That said, Grantham's comment (together with my extremely high regard for Grantham's knowledge about speculative bubbles) would make it a very high probability of the major crash commencing before mid 2021. This is a very important piece of information in my view.
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Acceleration of a trend. Ever since I joined his newsletter service nearly 20 years ago, David Fuller has regularly has warned that "acceleration of a trend is an ending signal of unknown duration". And since the November 2020 US presidential election, we have definitely has seen acceleration upwards in a number of trends like Nasdaq, Bitcoin, GameStop, SPACs etc. So by this David Fuller measure, we are in an end-phase of a long bull market that began at the bottom of the Global Financial Crisis.
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Rising interest rates.
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Gabelli Mathers compiled the following chart, which reflects on the historical linkage between rising US cash rates and a US share market crash or economic crisis. See chart at Appendix A below.
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In this cycle, the US Fed (and developed world central banks more broadly) have anchored cash rates at zero or near-thereto. Therefore, the interest-rate indicator that is likely to be the key wrecker (if that is what triggers it) would almost certainly be rising bond yields. And clearly this indicator is flashing a major warning signal now https://www.puzzlefinancialadvice.com/single-post/rising-us-10-year-bond-yields-to-cause-big-tech-to-peak See Jon Pain Newsletter 7/March/2021 for more discussion on this.
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So what can help us narrow down the timing of the crash commencing more precisely? There are 2 main things that I also look to, to gain greater confidence of a crash being underway (i.e. having commenced)
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Historically, I have found that key opinion leaders often will tell you when it is happening.
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some of the analysts, some of my research services and some other opinion leaders give clear warnings that the crash has commenced. That said, I do not think that any one particular source should be relied on absolutely
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Ultimately, the marker of the crash having commenced has to be able to be seen in the charts - there is no other way.
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There will be a break of the 200-day moving average ..... but I would like to be picking the crash well before that because:-
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at the very least, by the time the 200-day moving average has been broken, the market has already fallen quite some distance and.
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in 1987, by the time the All Ordinaries Index broke the 200-day moving average, the market was already in free-fall, and so you would have missed getting out before the crash if that was your only indicator.
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So you need to be looking at changes in the consistency of the up-trend to give you a warning.
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And to a degree you need to be looking at "commonality of markets" eg some markets have significant degrees of commonality
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Gold and Silver and other precious metals often have similarities in their charts, and so the charts of one can often tell you something about an other.
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In 1987, the growing bear market in the US S&P500 was a good early warning of the coming crash in the All Ordinaries.
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Is it useful to summarise some of the extreme's in valuations right now?
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Historic extremes summary.
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Note: 5000-year lows in interest rates implies 5000-year highs in bond prices.
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https://www.businessinsider.com.au/interest-rates-5000-year-history-2017-9?r=US&IR=T
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And very glibly, most other asset classes are priced using a discounted cash flow valuation with interest rates determining the discount factor. Therefore, you should expect that when interest rates are at 5000-year lows, those asset classes that are priced using a discount factor based on official interest rates, will be at historic extreme valuations - which they currently are.
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This is a key part of why a historic extreme asset price crash could now be ahead of us.
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John Hussman estimated 12 year annual returns from a "conventional" portfolio asset mix - the worst in 100 years including the Great Depression. See appendix D below.
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Professor Robert Shiller's chart of cyclically adjusted price/earning ratios for the S&P500. 1880-now. By this measure the US share market is more expensive (on broad averages) than at any time over the last 140 years with the exception of the 2000 dot com bubble. The Shiller Cyclically Adjusted P/E Ratio (CAPE) is one of the inputs that John Hussman uses in his calculations of estimated future 12 year annual returns.
Who are some of those warning that the market will crash soon - but not saying that the crash is under way yet?
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Jeremy Grantham. eg January 22 interview whose link is above or this 26 Feb 2021 interview. "GameStop to Tesla: investor Jeremy Grantham on 'crazy' markets" https://www.youtube.com/watch?v=Y_yRgMgBis0
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EWI - eg March 2021 forecast
Now, let us start documenting some of warning signs that we can see in front of us now.
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Jon Pain 7/3/2021 - a good summary of what is happening in markets from a broad macro perspective
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"In the meantime capital markets are experiencing a dislocation which unsettles those who live in the world of neat and elegant linear extrapolation. The dislocation is being driven by a rupturing in inflationary expectations which is then sending shock waves through the global capital markets. Financial assets that have been driven higher by the powerful, and linear, extrapolation of low inflation are now facing unfamiliar headwinds. Unfamiliarity then engenders a sense of uncertainty, which in turn leads to higher volatility. All of this leads to the rapid-fire recalibration of relative valuations that we have seen over the past several weeks."
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"Today, we have something that pretty much everyone agrees has massive significance, namely the U.S Treasury market, which is experiencing some pretty violent convulsions. This suggests, does it not, that we will see shockwaves that cascade across the global capital markets? What am I trying to say? The most important market in the world is the U.S Treasury market. What happens in the U.S Treasury market has enormous significance for the pricing of all global capital markets. In fact I would go so far as to say that the ‘shape’ of the U.S Treasury yield curve has the capacity to shape and define, and price, the global financial landscape. I cannot put it more strongly than that."
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Speculative leaders falling in price 22/May/21
The sharemarket crunch has begun, warns Grantham (afr.com) 3/Jun/21
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A fall in the most speculative corners of the US sharemarket threatens to presage a broad drop in stock prices as investors begin to question lofty market valuations, veteran investor Jeremy Grantham has warned.
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The famed value investor has pointed to a decline in US tech stocks and a painful fall for special purpose acquisition companies (or SPACs) over the past few months as evidence that equity investors are beginning to sour on record high share prices.
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The comments come as US stocks trade at record highs, fuelled by easy central bank policy that has pushed sharemarkets from New York to Sydney and Mumbai to new highs this year.
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“The Nasdaq peaked quite a long time ago,” Mr Grantham said, speaking at the Morningstar Australia conference on Wednesday. “My guess is ... maybe in a few months the termites might get to the rest of the market,” he said.
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“The developed world [equity market] is merely overpriced, no big deal, but the US is heroically overpriced,” he said.
Please listen to AT LEAST the first 4 minutes 15 seconds of this youtube clip.
https://www.youtube.com/watch?v=c13O6Amn1lQ
If possible, please listen to the entire 26minutes of this clip.
The Bull Market: A Bubble of “Epic Proportions” [2021]
Jul 3, 2021
We’ll be joined by legendary value investor Jeremy Grantham, Co-Founder of the global investment management firm, GMO, Grantham is known for his prescient calls about market extremes and game-changing turning points. I will add that being far out of consensus is never popular. He saw the tech stock bubble inflating in 1997, three years before it actually burst. It was an early call that cost GMO half of their asset allocation book of business at the time. In the late 2000’s he warned of the developing subprime mortgage and credit bubble and came close to calling the actual 2008 bull market peak. He then called the market bottom nearly to the day in March of 2009. When Grantham appeared on WEALTHTRACK in 2018 he was predicting a possible market melt-up, a powerful late-stage two to three-year-long market rally before an inevitable decline. He got the melt-up right, even when figuring in the brief, 2020 pandemic induced bear market. And of course, the bull continues to this day. The U.S. stock market had an impressive first half of the year. The S&P 500 gained 14.4% to close at 4297.5, it’s 34th record close for the year. Grantham will explain why he is calling this a bubble of epic proportions (He days that is now a substantially bigger bubble[s] than in 1929 and 2000) that and suggest ways that investors can handle it.
Latest updates from Jeremy Grantham. 9/Feb/2022
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‘Nearly certain’: Jeremy Grantham calls ‘super bubble’ in stocks 21/Jan/2022
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Jeremy Grantham has an even scarier warning 27/Jan/2022
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Let the Wild Rumpus Begin 20/Jan/22
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GMO's Grantham Says Fed Can't Stop Stock Crash 21/Jan/22 (Video interview)
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Appendix A. Historically, rising cash rates have been what has triggered an economic crisis or asset price crash
Appendix B. Hussman's estimated 12year annual return
4/Feb/2021 John Hussman (who I have high regard for) posted this chart of estimated 12-year annual nominal returns from that date with a "conventional" mix of assets. Would you be happy with an average annual investment return of -2.15%pa over the next 12 years? This is a worse average annual return than the previous extreme that included the 89% fall in US shares 1929-1932. That is what happens when valuations are driven to extreme levels. https://twitter.com/hussmanjp/status/1357070919555035138?s=27
Appendix C. High share valuation since 1927 - Hussman
18/Mar/2021 https://twitter.com/hussmanjp/status/1372270702888386567
Wall Street: "We are all driving prices up now, in anticipation of someone driving prices up later, in response to strong economic data that all of us expect, and every single one of us is already positioned for."
Appendix D. Another perspective on US share market valuations.
17/Sept/2021 https://www.advisorperspectives.com/dshort/updates/2021/09/08/is-the-market-still-overvalued Note: One of the closest things to a law of physics that exists in investment market is that over the medium-to-long-term, there is (almost always) something approximating a reversion to the norm - after a period of historic extremes. And now there are many historic extremes from a 170 year perspective. http://puzzlefinancialadvice.com.au/2019/Core/Historic_extremes_The_long_list_we_are_currently_experiencing_190509_long.pdf
Appendix E. US Real House prices now exceeds house bubble peak in 2006.
Appendix F. US shares earning yield indicate that US shares are extremely expensive
The Fed Minutes That Shook the World by John Authers January 6, 2022
"Returning to the U.S., how expensive are stocks really? If we take the earnings yield (the inverse of the price/earnings ratio) and subtract the current rate of inflation, we find that it has just dropped below -3% for the first time:
Bianco has published this series going back 70 years, in an exercise revealing that real earnings yields never stay this low for long. This implies that soon enough, either earnings yields will rise (and share prices fall), or inflation will increase. The critical point is that a lot of money is still riding on the notion that this dose of inflation will prove to be short-lived or, as we used to say, transitory:
