Juggling Dynamite

Sixty-year market veteran and co-founder of Boston-based GMO did a lengthy interview with John Authers for Bloomberg this week.  It’s worth a read here.  I include some highlights and charts below:

“The last 12 months have been a classic finale to an 11-year bull market,” Grantham said. “Checking all the necessary boxes of a speculative peak, the U.S. market was entitled historically to start unravelling any time after January this year.”

…It’s particularly dangerous now because the bond, stock and real estate markets are all inflated together, Grantham added, noting that even commodity prices are surging.

“That trifecta-and-a-half has never happened before anywhere — the closest before was Japan in 1989,” he said. “The consequences for the economy were dire and neither land nor stocks have yet returned to their 1989 peaks!”

…On the subject of liquidity, which bulls have argued is a reason why there’s more room to rally, Grantham said although the rate of increase in M2 is extremely high, its growth has declined in recent weeks at the fastest rate ever recorded, from about 18% year-over-year to 12% (see chart).

…For the great bubbles by scale and significance, we also noticed that they all accelerated late in the game and had psychological measures that could not be missed by ordinary investors. (Economists are a different matter.) The data, like today, is always clear, just uncommercial and inconvenient for the investment industry and often psychologically impossible to see for many individuals.”

Grantham points out that the tech-centric NASDAQ Index (shown below in black)  doubled in 1999 before turning down in March of 2000 while the broader market (in red) held up for another quarter before breaking down.

He sees something potentially similar in how SPACs, cryptocurrencies and some other high fliers have dived since March 2021, while broad markets have moved sideways.

Global capital is all in with record leverage on growth and inflation bets.  But is the consensus confident, or have they just stopped thinking?

Not only are households holding their highest exposure to equities since the March 2000 secular peak.  Global fund managers are also holding record-long allocations in pro-inflation commodities, materials, banks, industrials and other global equities with below-average allocations to rare deflation-defensive positions like cash, bonds and utilities (z-scores shown below courtesy of B of A: zero denotes the historical mean).
Just as emergency liquidity weakened the greenback from March 2020 to January 2021 and helped boost import and asset prices (aka inflation), the opposite also applies, and the dollar index has quietly not made a new low in nearly six months.

While monetary and fiscal funds have drowned the financial system, transmission through the real economy has failed because the cash flows are temporary, and bank loans, leases and wages have not been revived.  Lance Roberts explains this well in The coming dollar rally:

Currently, there is no argument money supply has exploded without a corresponding increase in economic output. If there were, bank loans and monetary velocity would be on the rise. Unfortunately, such isn’t the case currently.

As shown below, after a year of literally doing the historic most, both monetary and fiscal stimuli are now contracting as central banks “reverse repo” ROE-suppressing excess cash from banks and governments struggle to agree on even bigger deficit spending.

The trouble with free money is that beneficiaries often expect more, and this typically ends in disappointment on all sides.  Desensitized by a year of emergency help, less support will weigh heavy on risk markets in the months ahead.

Perhaps this is why Treasury Bonds have been rising again since March, stocks have moved sideways since April, and sentiment tokens like cryptocurrencies have halved.

This presentation is well worth the 40-minute investment.

The prices of the things we need to live — food, fuel, housing…pretty much EVERYTHING have suddenly exploded higher this year.

After decades of relative price stability, are we about to see the return of crushing inflation like we suffered through in the 1970s?

We invited Lacy Hunt, one of the world’s top experts on the inflation/deflation debate to speak at the recent Wealthion conference held in early June…we’re sharing that very important presentation with you here.