According to Jeremy Grantham, the co-founder and chief investment strategist of asset manager Grantham Mayo Van Otterloo, “we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market.”
Grantham’s view is that a melt-up or end phase of a bubble is likely within the next six months to two years. He thinks there’s over a 50% likelihood of this happening.
“I recognize on one hand that this is one of the highest-priced markets in U.S. history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market,” Grantham writes in the latest GMO Viewpoints, “Bracing Yourself for a Possible Near-Term Melt-Up.”
If there is a melt-up, then the odds of a subsequent bubble break or meltdown are “very, very high,” Grantham says, predicting over a 90% chance of this.
He adds that if there is a market decline following a melt-up, it is quite likely to be a decline of some 50%.
“If such a decline takes place, I believe the market is very likely (over 2:1) to bounce back up way over the pre-1998 level … but likely a bit below the average trend of the last 20 years, as the trend slowly works its way back toward the old normal on my ‘Not with a Bang but a Whimper’ flight path,” Grantham writes.
Among the factors Grantham considers are the acceleration of price, the euphoria in today’s markets, and what Grantham calls “touchy-feely measures of market excess.”
According to Grantham, the data on the high price of the market is clean and factual.
“We can be as certain as we ever get in stock market analysis that the current price is exceptionally high,” he writes.
However, he also notes that the classic examples of bubbles bursting are not just characterized by higher-than-average prices.
“Price alone seems to me now to be by no means a sufficient sign of an impending bubble break,” he writes. “Among other factors, indicators of extremes of euphoria seem much more important than price.”
In Grantham’s opinion signs of euphoria have finally begun to pick up in the last two or three months.
Grantham then examines whether the “more touchy-feely measures of market excess” are also falling into place.
“We know we’re not there yet, but we can perhaps see some early movement: increasing vindictiveness to the bears for costing investors money; the crazy Bitcoins of the world (this is a true, crazy mini-bubble of its own I expect …); and Amazon and the other handful of current heroes — here and globally — taking over more of the press coverage and a growing percentage of total market gains,” Grantham writes.
Other items worth mentioning are IPO windows and new record highs for corporate deals, according to Grantham.
“We can have a satisfactory melt-up without them, but still one or the other is likely and both together are quite possible,” he writes. “I believe their presence would make a spectacular bust that much more likely.”
Grantham says that the “increasingly optimistic tone” of press and TV coverage is also important.
“Finally, my favorite advice once again: Keep an eye on what the TVs at lunchtime eateries are showing,” he writes. “When most have talking heads yammering about Amazon, Tencent and Bitcoin and not Patriot replays — just as late 1999 featured the latest in Pets.com — we are probably down to the last few months.”
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