Juggling Dynamite

Market cycle veteran and GMO co-founder Jeremy Grantham’s latest letter is a must-read in full. See Waiting for the Last Dance.  The Hazards of Asset Allocation in a Late-stage Major Bubble.  Here’s the executive summary:

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

In the inevitable implosion, Grantham explains that few professional or individual investors will manage to duck the carnage and capitalize on clearance sales because doing so requires ‘missing out’ before the crash:

The combination of timing uncertainty and rapidly accelerating regret on the part of clients means that the career and business risk of fighting the bubble is too great for large commercial enterprises. They can never put their full weight behind bearish advice even if the P/E goes to 65x as it did in Japan… So, don’t wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. For them it is a horribly non-commercial bet. Perhaps it is for anyone. Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding. It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. This is why you have always had bullish advice in a bubble and always will.

Dr. Scott Gottlieb warned that vaccinating Americans against Covid is more critical than ever, especially as the new South Africa variant appears to inhibit antibody drugs. Here is a direct video link.

It’s been three weeks since people started getting vaccinated in North America.  BMO economists look at the numbers to date in Vaccinations: State of Play and point out that even for the countries that started early, like the US, and the UK, reaching 60% of the population by the end of September will require an increase in the current vaccination rate per week by between 3 and 4 times the current pace.

Canada has been even slower off the mark, currently running at less than one-quarter of the per capita rates seen in the U.S. and Britain, and needs to step up the pace by a factor of 13.5 to around 550,000 vaccinations per week to reach the federal government’s goal of 60% of the population being immunized by the end of September.   The slower the immunization rate, the slower the economic recovery expected:

This is of course a significant issue for the outlook for health care, but also for the timeline on re-opening activity and, thus, for individual livelihoods. Some of the sluggish pace may simply reflect teething pains that might get smoothed in the weeks ahead; if not, current robust expectations for activity later this year may soon see some serious scaling back.