Jeremy Grantham Knows Nothing

I have followed Jeremy Grantham this year since Note 3 sent January 17, not because he’s more accurate than other z-vals but because he’s an industry darling, one of the big kahunas everybody loves to quote because he’s considered a really smart guy.

But smarts don’t count in zero-validity environments. Experience doesn’t accrue to a higher level of efficacy as it does in positive-validity environments, where something learned last year can improve performance this year. Examples of positive-validity environments include heart surgery, carpentry, and aeronautics. There’s a reason older surgeons, carpenters, and pilots are usually better than younger ones. By contrast, in the coin toss landscapes of stock-market and political forecasting, experience matters not.

Nonetheless, Grantham, who is a co-founder of Boston-based asset management firm Grantham, Mayo & van Otterloo (GMO), has earned a permanent seat on the smart-guy list, which implies that his view carries more weight than others, and too many investors have taken this to heart. When Grantham growls a warning, I hear from readers more than I would like.

To offset this misplaced reverence for what is ultimately another coin tosser, I am following Grantham’s latest zero-validity forecast, his January warning. It was already wrong in calling for a spring crash. He has since updated the forecast date and now calls for an autumn crash.

Last week, Reuters called Grantham “a certified bubble-ologist, fascinated by how and why bubbles emerge.” The news service referred to Grantham’s January warning, but rather than noting that it was already wrong it wrote: “Six months later, the stock market is starting to show some cracks.”

In an interview published Tuesday, headlined “Bubbles, bubbles everywhere: Jeremy Grantham on the bust ahead,” Grantham told Reuters:

“Looking at most measures, the market is more expensive than in 2000, which was more expensive than anything that preceded it. My favorite metric is price-to-sales: What you find is that even the cheapest parts of the market are way more expensive than in 2000.”

He doubled down on changing the date of his crash forecast from spring to autumn:

“A bust might take a few more months, and, in fact, I hope it does, because it will give us the opportunity to warn more people. The probabilities are that this will go into the fall: The stimulus, the economic recovery, and vaccinations have all allowed this thing to go on a few months longer than I would have initially guessed.”

Points for honesty, I suppose, but only in fessing up to whiffing the first date. On the more important issue of forecasting helping nobody at all, he remains an active noisemaker. Note that calling him out on this is not akin to saying he’s not smart, dismissing his credentials, or even questioning his logic. It is merely a reminder that nobody, no matter how venerated or how old, can forecast the stock market.

He hints at this: “Bubbles are unbelievably easy to see; it’s knowing when the bust will come that is trickier.”

Full stop. That knowing when the bust will come is everything. If it can’t be known, then the seeing of a bubble was merely conjecture and ultimately irrelevant. Does anybody mind a bubble that doesn’t go bust? In Years Two and Three of such a bubble, would anybody be happy to have gone to the sidelines in Year One because Grantham had no trouble seeing the bubble? Of course not. His above statement is a rephrasing of the following well-known aphorisms:

  • He forecasted nine of the last three crashes.
  • He’s never wrong, just early.

In other words, such imprecise musings are useless to allocators of capital. He went on to tie such a general comment to our current era:

“You see it when the markets are on the front pages instead of the financial pages, when the news is full of stories of people getting cheated, when new coins are being created every month.”

Well, that could be scary except that he said basically the same thing in January. Since then, the markets have not been on the front pages, Finra cracked down on Robinhood, and Bitcoin fell 46% from its April high. I’m not sure that Robinhood is what Grantham had in mind when referring to “people getting cheated,” but its being brought to bear by regulators indicates a system under scrutiny for fairness.

When it comes to identifying in advance what might prick the bubble, Grantham is at a loss. Or, rather, he reaches into the same grab-bag of warnings that are so evergreen as to be meaningless, along the lines of saying next year could be tough because bad things occasionally happen. True, but that’s not a usable forecast. Here’s Grantham’s version:

“What pricks the bubble could be a virus problem, it could be an inflation problem, or it could be the most important category of all, which is everything else that is unexpected. One of 20 different things that you haven’t even thought of will come out of the woodwork, and you had no idea it was even there.”

In other words, Grantham doesn’t know what or when. He has a general idea that the market has been going up and will one day go down, but did you need a big kahuna to tell you that?

The market presents a historical profile that obviates the need to guess. It exhibits rising action two-thirds of the time, falling one-third, and the best thing to do in the falling third is buy so that you benefit more in the subsequent repeat of the rising two-thirds. That’s the whole story. It’s forever complicated by narration and prognostication, but that’s the whole story. Nobody can time any of it. Luckily, the history of our plans shows timing to be unnecessary. Proper reaction is all you need.

While Grantham and others have been guessing when and where the market will go next, our plans have been preparing. In aggregate, they’ve used price strength to build buying power. Despite a generous holding of bonds, they’ve kept ahead of the S&P 500 this year. When lower prices finally present themselves, as they do one-third of the time, we’ll buy them.

You know the saying that hindsight is 20/20? That’s why we use it. The only metrics that guide us are price changes already on the books. We never dabble in future-guessing, and maybe Grantham should consider doing the investing public a similar courtesy. If he knows he doesn’t know when the bust will come, why does he keep pretending he does know?

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  1. Victor
    Posted July 29, 2021 at 11:54 am | Permalink

    Thank you, Jason.

  2. RJM Consulting
    Posted July 28, 2021 at 11:34 pm | Permalink

    “Does anybody mind a bubble that doesn’t go bust?” Well, yes.

    This is the foundation of MMT: for so long as the Fed has air in its lungs, that bubble will keep growing.
    The problem is timing, as it ever was. Dollar losing its reserve currency status, increased wealth inequality that reaches a destabilization point, climate change finally reaching the halls of the rating agencies forcing a drastic reset.

    The market has been in “postponement” mode for a long time. Making hay while the sun shines is sensible, but that “1/3 of the time” its in retreat often happens at a speed for which your reallocation methods will not be sufficiently timely.

    Do you not think that a 20pct or 30pct mark down of the 65 year old subscriber’s portfolio is a risk worth avoiding? Buying again after the “correction” may do very little for the retiree who is depending on that portfolio’s value, should it be collateralizing some borrowing (that may become a heavier burden as a result).

    And that’s only assuming a correction. Looking at the debt levels across the globe, and the negative real rates of interest, suggests a deflation (and an asset reset) of much greater magnitude, at least as a possible risk.

    Even without leverage, the market is (to my mind), primarily a casino.


    • Posted July 29, 2021 at 10:26 am | Permalink

      Ah, RJM. Still stuck on the sidelines, I see. That might be impressive if you had gone there at recent price peaks, but you and I both know you’ve spent most of the past 13 years there. Subprime was your PTSD.

      All right. I’ll respond to you the way I always do when you send me a reprise of the doubt you voiced today. I will do it not for your benefit, because I believe you to be permanently lost to headlines and invalidated pundits, but for the benefit of other investors who visit my site to find a better, more profitable and less stressful approach to stock-market profits.

      Here goes:

      How do you know the market is in postponement mode? Permabears have said so for years, while investors committed to a system of price reaction have profited greatly.

      The Fed was supposedly out of ammunition after dot com and again after subprime, yet here we are, much higher in price with a Fed looking and sounding confident. Who’s to say they don’t have five or ten more rounds of stimulus in them?

      The dollar is nowhere close to losing its reserve currency status–another decades-old permabear canard. The SDR basket of currencies never caught on, and nobody can name a single sovereign currency ready to take over. There is no alternative to the dollar, therefore the dollar will not lose its status in the near term.

      National debt and global debt–other permabear favorites that have not mattered yet in the 35+ years we’ve heard they would create a catastrophe.

      You are told these things matter, and you believe they should matter, but so far they have not mattered. “But just you wait,” you might think, and have written to me in so many words. Fine, except that investors have awaited accurate permabear forecasts for decades. An investing lifetime comprises only about three decades, so thanks to permabear warnings, some investors have missed out on a lifetime of stock profit.

      As for a retiree’s use of my system, they enter a reduced allocation as they approach and then enter retirement. A bear market would cause a drawdown in their stock allocation, but deep into retirement their base allocation to stocks is only 20%. They would have plenty of buying power to pounce on the low prices and benefit from the ensuing recovery–and a system that guides them to do so, which is more useful than pundits advising them to hide because of, oh, I don’t know: the market being in postponement, the Fed being out of bullets, the dollar losing its reserve currency status, and national debt, perhaps?

      From the above, you might conclude that I’m bullish, but this is wrong.

      I don’t see the market in the traditional bull/bear terms, and think that the framework does a disservice to investors. The stock market merely fluctuates, and my system is indifferent as to where we are in the fluctuation. It reacts to all price movement, both up and down, and is currently prepared to take advantage of a price decline. We’ve hoped that the likes of Grantham could get it right one of these months, but the months, quarters, and years go by. We make money; permabears don’t.

      How many times over the years have you written something like your latest comment to me? Why do you not notice that my system keeps working while the pundits who speak to you are usually wrong? I know you hope to tell me you told me so one of these years, but even then it won’t mean anything because my system will be busy buying whatever coincidental price decline you believe vindicates your lifelong skepticism.


  3. Dave
    Posted July 28, 2021 at 11:23 pm | Permalink

    Jason, I’ve been at this for over 20 years – you speak a lot of good sense and there is plenty in this note. Coin tossers is what they are. David Stockman is another.

    Amazing how many commentators can be consistently wrong yet still get asked (+paid) for their analysis. Now that’s a skill I would like to learn.

  4. Anonymous
    Posted July 28, 2021 at 9:41 pm | Permalink

    Jason that’s telling him off👍

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