'The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble' - GMO

[BJJ_GUY]

I'm not seeing ALL rainbows and unicorns since 2009. Maybe I'm missing something.

I think there is a lot of talking past each other going on.

On one hand, no one is disputing the fact that the market has had some steep drawdowns since 2009. The bull market has not been a straight line upward. And, yes, literal definitions allow someone to say there was a bear market, or a correction. As a result, one might then say something like "how can we still be in the same market cycle when we experienced these correction/bear periods?"

On the other hand, folks talking about a continued cycle (as I have) are referring to index stock market valuations. While there have been drawdowns in price, the valuations have remained materially higher than historical median valuations (and I'm talking about more than CAPE; this is a pretty universal understanding across various valuation methods).

Seems like the two camps in here are kind of debating different things. Just my observation, for what that's worth

[stocknoob4111]

Thanks for sharing. I partially share your sentiment. Would you mind sharing how you're staying fully invested but prepared for Dot Com 2.0? Are you tilting away from tech or holding a lot of non-stocks? Or just mentally preparing yourself?

My portfolio is 90/10, given current valuations I think it's prudent to be mentally ready for a multi year drawdown. If it does not happen then great, otherwise it's not going to take you by surprise.

[corn18]

I'm not seeing ALL rainbows and unicorns since 2009. Maybe I'm missing something.

I think there is a lot of talking past each other going on.

On one hand, no one is disputing the fact that the market has had some steep drawdowns since 2009. The bull market has not been a straight line upward. And, yes, literal definitions allow someone to say there was a bear market, or a correction. As a result, one might then say something like "how can we still be in the same market cycle when we experienced these correction/bear periods?"

On the other hand, folks talking about a continued cycle (as I have) are referring to index stock market valuations. While there have been drawdowns in price, the valuations have remained materially higher than historical median valuations (and I'm talking about more than CAPE; this is a pretty universal understanding across various valuation methods).

Seems like the two camps in here are kind of debating different things. Just my observation, for what that's worth

What else is there besides CAPE?

1929 and 2000 look a lot scarier than 2021.

Shiller PE Ratio

[j sleazy]

Here is the SP500 since 1950 with the mean trend line. Doesn't look too bubbly to me.

Yikes! It definitely feels a lot bubblier!

I to use lines to analyze macro economic trends

[BJJ_GUY]

I'm not seeing ALL rainbows and unicorns since 2009. Maybe I'm missing something.

I think there is a lot of talking past each other going on.

On one hand, no one is disputing the fact that the market has had some steep drawdowns since 2009. The bull market has not been a straight line upward. And, yes, literal definitions allow someone to say there was a bear market, or a correction. As a result, one might then say something like "how can we still be in the same market cycle when we experienced these correction/bear periods?"

On the other hand, folks talking about a continued cycle (as I have) are referring to index stock market valuations. While there have been drawdowns in price, the valuations have remained materially higher than historical median valuations (and I'm talking about more than CAPE; this is a pretty universal understanding across various valuation methods).

Seems like the two camps in here are kind of debating different things. Just my observation, for what that's worth

What else is there besides CAPE?

1929 and 2000 look a lot scarier than 2021.

What is that graph you just shared?

Other methods commonly used would be Price/Revenues, Market Cap/GDP, or even using the cyclically adjusted CAPE Ratio but margin-adjusting the earnings (since there is such high variability that isn't accounted for).

All of these also have a stronger linear relationship with the corresponding 7-12 year market returns. But regardless, just the flaws exposed in the denominator of (highly variable) earnings based valuation ratios provide the logic to at least use 1-2 other methods.

[corn18]

Shiller PE ratio

[QuestioningWanderer]

Could someone explain to me the rationale behind the emphasized part of this statement from the article or point to relevant resources? Thanks!

The one reality that you can never change is that a higher-priced asset will [always - OP] produce a lower return than a lower-priced asset.

The more money has gone into an asset the less money there is leftover to go into it.

What does this mean? If you buy a stock for $100, that means the seller of that stock now has $100 in cash. There is no change in the amount of uninvested money as a result

Yes, but the seller wants to do something else with the money.

[BJJ_GUY]

Could someone explain to me the rationale behind the emphasized part of this statement from the article or point to relevant resources? Thanks!

The one reality that you can never change is that a higher-priced asset will [always - OP] produce a lower return than a lower-priced asset.

The more money has gone into an asset the less money there is leftover to go into it.

What does this mean? If you buy a stock for $100, that means the seller of that stock now has $100 in cash. There is no change in the amount of uninvested money as a result

Yes, but the seller wants to do something else with the money.

How do you know what the seller wants to do with the proceeds of a sale? There's a good chance someone who sold the original stock is going to turnaround and buy a different stock. Either way, fundamentally, and factually, more buying does not result in less available capital because for each buyer there is a seller.

Perhaps I'm misunderstanding what you were trying to say. If so, I'd be curious to understand

[selters]

The current bull market is less than a year old. Not a good sign that the very first sentence is wrong.

Why is the quantitative indicator "bull market" any more useful than other quantitative indicators? Bogleheads frown upon quantitative indicators used by technical analysts, but still use the term as if it has any degree of significance.

[BJJ_GUY]

People can agree or disagree whether or not we are in a bubble...but I think everyone can agree that stocks are expensive as ever and that this is partly due to low interest rates, and TINA.

Disagree, your statement is only true if you are considering a mostly US stock portfolio. There are just as low or lower interest rates in Europe and Japan yet valuations are 30-50% lower over there than in the US, and compared to their historical averages valuations are not anywhere near all time highs. Yet this interest rate argument gets repeated over and over. In emerging markets valuations are half those in the US, with interest rates not much higher in many of those countries.

And if you tilt to value internationally there's a pretty strong argument that the majority of ex-US value stocks are on the cheap side, in relative and absolute terms, particularly in emerging markets. That's personally what I do. I certainly haven't heard anyone hear arguing recently that emerging markets, Europe, or Japanese stocks are expensive, or that value stocks worldwide are expensive, though I might have missed it. Most of the focus around here in on US stocks here for whatever reason. I guess they are the winner of the most recent decade's beauty contest and get most of the attention.

I appreciate you pointing out the misunderstanding regarding low interest rates warranting higher valuations. This does not account for the fact that low rates tend to correspond with low growth expectations (and other cyclical relationships that would bring down the growth side of the equation).

As for the focus on US stocks, you're right, the focus tends to be US stocks - and there are more attractively priced markets elsewhere. But to be fair, when the debate is about the markets being overvalued people do tend to think SPX instead of MSCI ACW Index. S&P 500 is even more misleading because the traditionally labeled growth sectors have driven US equity performance and consequently gained substantial market share. This change has also occurred in the global stock market where US tech names have gained substantial market share, though at lower absolute % levels.

But when the biggest stocks have extremely high valuations that continue to expand, at the same time the market share of the US stock index (or world index), this means the average valuations we're all debating are increasingly conversations being influenced by a certain segment of stocks.

[LFS1234]

The more money has gone into an asset the less money there is leftover to go into it.

What does this mean? If you buy a stock for $100, that means the seller of that stock now has $100 in cash. There is no change in the amount of uninvested money as a result

True, but there is a reduction in the amount of money that is available from willing buyers to be put into the asset in question.

There are only three reasons to sell a stock: the seller needs the money for something else, the seller believes the stock no longer represents adequate value, or the seller is diversifying out of a concentrated position. In none of these cases would the seller reinvest the proceeds of the sale back into what just was sold.

In cases where a stock has skyrocketed, a seller might be selling for $1,000,000 stock which originally had been purchased for some tiny fraction of that. The proceeds of the stock sale will be spent on something else. The purchaser(s) on the other hand have decided to scrounge up quite a large sum of money for one of two reasons: they believe that the stock will continue to appreciate, or they are forced to buy for some reason (e.g. boss's orders, customer pressure, applicable investment policy, or applicable regulations).

In big run-ups, it is often the case that many of the selling stockholders know the company well, have an understanding of valuation, and believe it to be overvalued; while many of the new buyers are momentum players buying mainly because it is going up. At some point the momentum buyers run out of money, the momentum stops, and there are no buyers partly because there is no good reason to buy, and partly because the astronomical amount of cash needed to buy the stock at recent prices simply isn't available to purchase the stock being put up for sale.

Regarding Grantham's letters: I think they're always good reads. GMO's 7-year forecasts are based on assumptions which are shared with his readers, regarding regression to mean historical valuation parameters and also regarding inflation. One can appreciate GMO's work while arriving at different conclusions due to other views regarding those basic assumptions. Lots of wisdom is shared by people with whom one does not necessarily completely agree.

[mrekvy491]

Enjoyed the read, and I also do feel like things are getting a bit crazy.

I see world indices moving like a small cap stock too often. The endless new influx of (probably retail) money to the growth stocks also seem almost Ponzi-like.

Not so sure what I can do, but yes, it does feel bubbly. Won't be surprised to see the market taking a big hit.

[lostdog]

We go from the March bottom fear to bubble talk.

Humans are silly creatures.

"No one knows nothing". -Jack Bogle

[Nicolas]

That bull market ended in March 2020, we’re in a new bull market now, not even one year old.

[000]

That bull market ended in March 2020, we’re in a new bull market now, not even one year old.

The pedant has arrived.

[lostdog]

That bull market ended in March 2020, we’re in a new bull market now, not even one year old.

+1

[dont_know_mind]

What I find most objectionable about Grantham is his insinuation that market cycles are predictable.
That he's seen it all before and once they become over-valued, they're destined to mean revert and he's gotten it right in the past.
This is not nearly humble enough, because we don't know.
I like Bogle's thinking better, in one of his interviews on youtube (in 2014):
https://www.youtube.com/watch?v=k6ra5POdsYg
He says that all bear markets are different.
2000 was different to 2008 (which was different to 2020). Anyone who says they've seen it all before is BSing.

Just to screw up the value crowd, I think it would be funny if the SP500 CAPE peaked at 60 or so. Really, Grantham offers no advice with the mean reversion/market timing strategy other than to hold onto the toilet seat, because you'll be right in the long term. New investors are not aware of the risk in that if they elect to market-time, the market may well peak much above what they thought was possible and they may end up capitulating/deploying their market timing cash at the relative top, which is they will buy high, sell low, which is what they were trying to avoid. Doh!

No one knows except after the fact whether valuations are justified or not. I remember talking to a woman who sold out of NYC real estate in 1998 as she thought it was over-priced. When I spoke to her recently (2020, post Covid), she was still waiting for it to mean revert, back to 300k. The current market value of a comparable place is 2M. I thought, yep, good luck. Same applies to the SP500, some people still think it will mean revert back to 1000 sometime in the future. Maybe it will for them. Hopefuly, they have a reasonable plan that covers all likely scenarios.

[dont_know_mind]

That bull market ended in March 2020, we’re in a new bull market now, not even one year old.

The pedant has arrived.

The counterpoint to Grantham's arguments are:
1.In terms of excess capacity and under-utilization of resources ( as measured by unemployment and resource prices), this appears to have reset.
2. As monetary conditions are arguably looser than 2000 and the Fed has said that they will keep interest rates low until inflation overshoots the target range, why would valuations not surpass the previous peak in 2000 ?

I am not saying that Grantham is right or that the counter-point is correct but it's not obvious to me that Grantham is right.

[Anon9001]

Looks like my home bias is going to pay off well if GMO is correct. I live in EM country.

[000]

it's not obvious to me that Grantham is right.

Oh I certainly agree with you on that. And I don't think completely sitting out bubbles is the best strategy. Better to ride em up and rebalance I think.

[willthrill81]

People can agree or disagree whether or not we are in a bubble...but I think everyone can agree that stocks are expensive as ever and that this is partly due to low interest rates, and TINA.

Disagree, your statement is only true if you are considering a mostly US stock portfolio. There are just as low or lower interest rates in Europe and Japan yet valuations are 30-50% lower over there than in the US, and compared to their historical averages valuations are not anywhere near all time highs. Yet this interest rate argument gets repeated over and over. In emerging markets valuations are half those in the US, with interest rates not much higher in many of those countries.

And if you tilt to value internationally there's a pretty strong argument that the majority of ex-US value stocks are on the cheap side, in relative and absolute terms, particularly in emerging markets. That's personally what I do. I certainly haven't heard anyone hear arguing recently that emerging markets, Europe, or Japanese stocks are expensive, or that value stocks worldwide are expensive, though I might have missed it. Most of the focus around here in on US stocks here for whatever reason. I guess they are the winner of the most recent decade's beauty contest and get most of the attention.

I appreciate you pointing out the misunderstanding regarding low interest rates warranting higher valuations. This does not account for the fact that low rates tend to correspond with low growth expectations (and other cyclical relationships that would bring down the growth side of the equation).

Lowering interest rates over the last ~40 years seem to correspond pretty well with the rise in valuations. CAPE reached its lowest levels since the Great Depression in the early 1980s, when the Fed funds rate was pushing 20%, and both have moving mostly inversely to each other ever since. Maybe that's just correlation and not causation, but it stands to reason that stock valuations should be lower when T-bills are paying 16% instead of nearly zero.

[JBTX]

it's not obvious to me that Grantham is right.

Oh I certainly agree with you on that. And I don't think completely sitting out bubbles is the best strategy. Better to ride em up and rebalance I think.

I always enjoy reading Grantham. He presents a credible and plausible case. Note I didn't say "probable", because that is impossible to ascertain.

People like to dogpile on him, but I read him, and take what he says seriously. That doesn't mean I do exactly what he says. But he helps me evaluate the risk involved, which does inform what I do.

While he has been in the wrong side of the bull market for most of the last decade, he wasn't saying we were in an extreme bubble, like he is saying now. And he has been pretty good about calling bubbles, even though at times he is years too early.

His downfall is his inability to predict fed policy and interest rates. He has always had less than kind words for the fed, but hasn't been able to predict the impact of falling rates on stocks. However, with rates very low, it isn't likely he will make that error again, because rates just can't go much lower.

My best guess would we will still see a run up and inflation in multiples before things come crashing back down. That could be months or years. But he could be right in that it will be sooner rather than later.