Tags: Jeremy Grantham | Stocks | Market | Bubble

Jeremy Grantham: This Is The Indian Summer Before the Markets Fall

By    |   Tuesday, 22 Jul 2014 02:31 PM

The usually gloomy Jeremy Grantham is outright optimistic for the moment. In his latest quarterly newsletter, he says a stock market crash is not imminent, even if the bubble is still inflating.

The long-time hedge fund manager from Grantham, Mayo, Van Otterloo & Co., who refers to himself as a “value-driven bear,” probably surprises himself when he says the current economy still looks like a young one early in its life cycle.

In fact, he expects to see all previous mergers and acquisitions deal records broken over the next year or two because of low interest rates and high profit margins.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

Grantham is sticking by his recent prediction that the S&P 500 must hit a level of at least 2,250 or higher before the ultimate downdraft begins.

“If I were a potential deal maker I would be licking my lips at an economy that seems to have enough slack to keep going for a few years,” Grantham said.

He said that “perhaps the single best reason to suspect that a severe market decline is not imminent is the early-cycle look that the economy has.”

Grantham said there are such massive reserves of labor available that a 2 percent increase in labor participation rates is possible, and there is also plenty of room for a pickup in capital spending — both of them hallmarks of a young economic recovery.

The loose monetary regime perpetuated by Fed Chair Janet Yellen is also bound to keep markets hot, at least for the time being, in his estimation.

“In early July, Janet Yellen made an admirably clear statement that she is sticking faithfully to the Greenspan-Bernanke policy of extreme moral hazard,” Grantham said.

“She will not use interest rates to head off or curtail any asset bubbles encouraged by the extremely low rates that might appear. And history is clear: very low rates absolutely will encourage extreme speculation.”

At MarketWatch, columnist Brett Arends noted if the S&P 500 hits at least 2,250 as Grantham predicts, the comparable level for the Dow Jones industrials would be the very round number of 20,000.

“You can bet that such a rise would kill off any remaining bears, leaving the stock market bulls in total command. We’re not far off now. Who dares be bearish these days, with the Dow above 17,000 and all the lights apparently green?” Arends wrote.

But he said most objective measures show overvaluation is a big overhang now.

“According to the best available data, U.S. stocks today are either overvalued, very overvalued, or wildly overvalued when you look at a whole range of other measures—such as when compared with company revenues, or dividends, or net assets, or earnings, or even the national economy.”

The only choice of scenarios Arends sees is thus: either stocks are overvalued or this time things are different.

As history shows, when investors believe the latter, they usually end up with the former in spades.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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The usually gloomy Jeremy Grantham is outright optimistic for the moment. In his latest quarterly newsletter, he says a stock market crash is not imminent, even if the bubble is still inflating.
Jeremy Grantham, Stocks, Market, Bubble
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2014-31-22
Tuesday, 22 Jul 2014 02:31 PM
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