Since 1880, Shiller's cyclically adjusted P/E ratio has only been at higher valuations once before ... in 2000 in the Dot com bubble. Following that bubble, the US share price index fell by 60% in real terms to the bottom in March 2009.
The only other US share price bubble that has approached these levels (only 3% lower) was the peak in 1929, when there was a very large US debt bubble like now. After that 1929 peak the broad US share index fell 89% over the following 3 years.
So, there is no doubt that with US shares, we are seeing an extreme event of major historical significance. Ignore this at your peril.
Grantham is saying the same thing (i.e. has the same macro assessment), but looking at the market internals data. He starts off this way:
'I find myself in an interesting place for an investor from the value school. I recognize on one hand that this is one of the highest-priced markets in US history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. The data on the high price of the market is clean and factual. We can be as certain as we ever get in stock market analysis that the current price is exceptionally high. In contrast, my judgment on the melt-up is based on a mish-mash of statistical and psychological factors based on earlier eras, each one very different, so that much of the information available is not easily comparable. It also leans very heavily on a few US examples. Yet, strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing. Whether you will also, dear reader, remains to be seen. In any case, my task in this note is to present the evidence, both statistical and touchy-feely, as clearly as I can.'
The data pointing to a melt-up in US equities instead of meltdown that Grantham enumerates are:
Momentum: Bubbles end in a euphoric rapid acceleration phase. And Grantham only sees a modest acceleration of price in the last six months.
Narrowing: Bubbles end with a narrow leadership as people pile into a select number of shares. He calls this the “essence of an escalating euphoria”. We don’t see this yet either. “The advance-decline line is clearly not delivering a threatening message yet.”
Side bubbles: Equity bubbles don’t form in vacuum. You have a widespread mania that manifests itself in other asset classes. According to Grantham, we don’t see the levels of mania elsewhere that corroborate a true melt-up. He notes US house prices at 2 standard deviations above mean and says this is not enough to corroborate melt-up. He also mentions cryptocurrencies. My view: this is the weakest of his arguments because 2 standard deviations in housing and a mania in cryptocurrencies are definitely examples of a more widespread mania.
Valuation: Extreme valuation is a necessary pre-condition for a bubble bursting. But it is not a signal on when the bubble will burst, Grantham says. Calling the top (or shorting high-flyers) during the melt-up phase is very tricky.
Republican President: I reckon he’s being tongue in cheek here, but he notes that manias seem to end when a Republican President is in office!
I'm busy working on my blog posts. Watch this space!