JEremy Grantham’s warning that stock prices are heading for a steep fall is just part of the financial calendar in the new year, critics say. On this occasion, however, the British co-founder of Boston-based fund manager GMO and much-loved watcher of stock market bubbles, may have been right.
Admittedly, “Let the Wild Rumpus Begin” was a terrific title for Grantham’s article last week: a rumpus is pretty much what we see, at least if we look at the United States, where the Nasdaq, very technological, has lost 16% since the beginning. of January. It was hit so hard on Monday that even Britain’s FTSE 100 index, a decidedly non-tech collection of stocks, was forced to react to the apparent shift in investor sentiment. The Footsie lost 187 points, or 2.6%, although a possible Russian invasion of Ukraine was also in play.
Grantham’s thesis is that US equities are in a ‘super bubble’, an update from last year’s ‘epic bubble’ diagnosis, and that the US has only experienced three other extreme events. of this type over the past 100 years – the Wall Street Crash of 1929, the dotcom mania of the turn of the millennium, and the housing market frenzy of 2006.
He reviewed his checklist of a late-stage bubble, of which “the most important and difficult to define” is “the tricky feature of crazy investor behavior.” In that regard, he has some hard-to-argue examples: the cheerfulness of the stock of memes from a year ago; dogecoin, a parody cryptocurrency, reaching a value of $90 billion “because Elon Musk kept joking about it”; and shares of car rental company Hertz soared because the company announced it would order Teslas.
These episodes are now over, Grantham believes, and we are in the “vampire phase” of the bull market. Share prices defied Covid, the end of quantitative easing and the promise of higher rates but, “just when you start to think the thing is completely immortal, it ends up, and maybe a little anticlimatically, tip over and die”.
This is strong stuff and there are, of course, counter-arguments. Overall, corporate earnings are not collapsing. Easing the Omicron variant could shift Western consumers away from consuming goods and towards spending on services, which could ease current inflation concerns. The end of the era of ultra-accommodative monetary conditions could still be gradual. On the other hand, one should also remember Grantham’s warning a year ago that big bull markets can go down when conditions are still favorable – they just have to be “subtly less favorable than they look”. ‘were yesterday’.
Therein lies the debate over whether we are seeing the removal of some inflated extreme overvaluations in corners of the US tech market – think Netflix and Peloton last week – or the start of a broader decline. stock markets, fueled by inflationary concerns. in energy and food. Grantham’s argument, mind you, is not just that US stocks are overvalued; it also includes US homes (“at the highest family income multiple ever”) and bonds. It’s the simultaneous nature that he says makes bubbles so dangerous.
He’s not always right, but he’s a serious student of the markets who called the dotcom and the crashes of 2006-08 with impressive precision. It is worth listening to. Ukraine aside, the debate he describes is exactly the one investors are currently obsessed with. The proof of his thesis was long in coming.
The stakes are high for Unilever
Unilever, up 7%, defied the gloom by continuing to be a one-company information machine. The latest development is Nelson Peltz, a formidable American activist investor at Trian Partners, taking a stake, the FT reported.
The consumer goods industry is territory Peltz knows well from campaigns at Procter & Gamble and Mondelez. The hard part is guessing what he might want – there’s got to be something there. The possibilities range from a breakup, that is, the sale of Unilever’s food division, to a simple request for the company to better manage its current operations. Either way, “the fox now appears to be inside the coop,” as Jefferies analyst Martin Deboo put it.
An open question, however, is whether the fox will want a seat on the board. Peltz got that job at P&G. To put it mildly, it wouldn’t be Unilever’s usual style to offer a board position to an aggressive outsider. Allowing the activist to force a vote on the issue would be risky, however. In their current mindset, shareholders may give the wrong answer.