We Would Exploit a Grantham/Dent Spring Crash

In this year’s Note 3 of The Kelly Letter, sent to subscribers on January 17, I wrote about Jeremy Grantham’s bearish call: At the beginning of the year, he wrote that we’re in a “real humdinger” of a stock bubble that will burst in spring.

The co-founder of Boston-based asset management firm Grantham, Mayo & van Otterloo (GMO) ignored the usual valuation argument and said, “A bubble peaks when you reach almost unbearable levels of ecstasy.” He believes the US stock market swims in froth on froth, and that the only safe place to hide is cheaper foreign markets.

I wrote: “If you and I could vote on this, here’s what we’d request: Another bang-up quarter to nosebleed heights at the beginning of April, followed by Grantham’s crash in late spring or early summer. This would have all three of our plans selling again on April 5, boosting buying power to take advantage of burst-bubble buy signals in July and October.”

Last week, Harry S. Dent Jr. threw in his lot with Grantham.

Dent is an infamous contrarian, almost always dour—and usually wrong. When he’s right it’s generally by repeating wrong calls until eventually they come true, at which point he says he was right. Examples of this include Japan’s 1989 bubble burst and the dot com crash.

His new book is What to Do When the Bubble Pops: Personal and Business Strategies for the Coming Economic Winter. It rails agains Federal Reserve stimulus, claiming that “the Fed cannot keep the bubble from popping much longer…” The Fed wins almost every headbutt with Dent; it repeated the tradition after his book came out last April 21. The S&P 500 has risen 45% since then.

In an interview with ThinkAdvisor published last week, Dent said by phone from his base in San Juan, Puerto Rico that this is “the riskiest market since 1929. The difference is that ’29 wasn’t as global. … This may be the biggest bubble crash ever—stocks, commodities, real estate. The next crash is the initiation of the next big [economic] downturn, which will be much worse than the one in 2008-2009.

“It will likely come by the end of June, probably sooner. The S&P falls to 2,100—lower than the March 2020 low—and that would be a 47% to 48% drop from recent highs, though it may go to 4,000 first.”

You’ve read for most of this year that bonds will crash as interest rates rise. Dent is a rare bear who disagrees. He thinks long-term Treasuries are the place to hide:

“…what’s better than sleeping with 30-year Treasury bonds—the safest investment in the reserve currency of a country that’s in big trouble—but not as much as Europe and Japan are in and nowhere near as much as China is in. We’re in the best house in a bad neighborhood.

“[The 30-year Treasury bond will] fall to half a percent and maybe zero. It will expand your money 30%, 40%, 50%, while stocks are crashing 70%, 80%, 90%, [along with real estate and commodities]. Everything is going to default. Cash will preserve your money. The 30-year Treasury will magnify your money.”

Bears are usually wrong, but if Grantham and Dent got lucky this time it would favor our predefined quarterly trading schedule. Dent’s call also affirms our longstanding policy of keeping buying power in bonds rather than cash.

Conclusion: We would exploit a Grantham/Dent spring crash.

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