Borrowing liberally from 20-20 hindsight, today’s stock market rally was foreseeable. The most bearish of seasonality is waning. Stocks were short term oversold. The world stock market (VT) traded back and forth in this range for weeks back in April and May, inviting technical resistance.
Less remarked upon is that the dollar, short term overbought, is correcting lower. While stocks “up” 1.20% as I write grab all the Wall Street media headlines, gold is up 0.61%, copper 1.99%, and silver and platinum respectively 2.57% & 1.78%. Oil is up 0.47%.
What’s good news for Wall Street is bad news for the rest suffering from inflation. It’s not happy news for bond holders either, as even in lower dollars the broad treasury market (GOVT), which more typically trades counter to the dollar, is off 0.37%.
So far at least, it’s just one day. I remain persuaded the major trend for stocks is lower, although this rally could easily outlive the day. My bearish sentiment has a bit too much company for near term comfort.
The week as a whole was a wild ride to nowhere, with VT closing a scant 16 bp below last week. The bond market cataclysm continued, with GOVT down by 122 bp. Gold lost ground to strong dollar, with IAU off 102 bp.
Jeremy Grantham recently did an interview with Bloomberg and offered his opinions on how things are going in the market.
He expect the S&P 500 to drop to maybe 3,000 or so at which point he said that it would probably be worth buying. My understanding of his statement is that it’s not so much that the S&P 500 would be inexpensive (I don’t think it’d even hit “normal” pricing) so much as Federal Reserve intervention would prevent the completion of a proper, full mean reversion. That said, he said he would not be surprised if the S&P 500 fell to about 2,000.
Grantham also spoke a bit about how high inflation will deflate the stock market bubble without the nominal number changing all that much. Part of the discussion with the interviewer suggests that this type of deflation of a bubble is less likely to cause a panic as people lose purchasing power without seeing it.
At the end of the interview, Grantham is asked which one of three assets (gold, Bitcoin, or cash on deposit) he would hold for 10 years. Grantham, somewhat surprisingly, says gold. He calls Bitcoin “an elaborate scam” and he expresses his discomfort with holding gold. I get the impression that Grantham is similar to Warren Buffett with regard to his opinion of gold. However, his not selecting cash on deposit suggests to me that he views interest rates are still far below the rate of inflation and will stay that way for essentially a decade.
But Grantham’s views are not much different from here, I don’t think. He feels that this current bear market is going to take years to grind down. We are currently in the tail end of Year Two.
The interview with Grantham starts 10 minutes from the start of the podcast.
https://omny.fm/shows/merryn-talks-money/jeremy-grantham-says-no-one-should-invest-in-the-u
Thanks Milton. Grantham may not be always right, but he’s always worth paying attention to. The part about the stock market zig-zagging sideways in nominal terms while being a real bear reminds me of the 1966-1982 episode. Yield may be all you collect for years. Yet even that stretch had some harrowing cyclical bear markets along the way.
Grantham’s choice of gold for the next ten years in spite of his lack of enthusiasm may mostly reflect the limited menu. Had “emerging markets value” stocks been on the list (having been called out on GMO’s seven year outlook charts for about as long), he’d likely have chosen them.
FWIW I think 2024 could be a real sh!tstorm. Not necessarily even just market wise, but financially, economically, politically and socially. Based partly on the setup we’re already seeing (epic bond market crash, surging yields, spiraling deficits, social and political animus, war, etc), but also the cyclical setup. 4-8-16 year cycles. An election year in which no matter the outcome, some people are going to be very unhappy. 16 years from 2008, 8 years from 2016, 4 years from 2020, the first and last being especially memorable.
>Grantham’s choice of gold for the next ten years in spite of his lack of enthusiasm may mostly reflect the limited menu.
Oh, absolutely. If Grantham could put his money into anything he wanted, he almost certainly would have selected emerging market value stocks (6.3% compounded real return over the next seven years per GMO’s most recent 7-year asset forecast) or green/environmental venture capital. I just thought it was interesting, assuming I understand what “cash on deposit” means, that he selected gold over “cash on deposit” which I assumed meant something close to the 5.5% one can get from Treasury Bills.
I see a lot of elements of utter catastrophe, too, and part of me wonders if Grantham is keeping is true opinion close to his chest because of how bad his real opinion is. We have a real estate bubble far larger than the one in the 2000s and the stock market is at nosebleed valuations on par or worse than the dot-com bubble. Congress has given up any semblance of fiscal responsibility and is blatantly squandering money on the most outrageous things and this bodes very badly for the Treasury market.
A massive stock market bubble and a massive real estate bubble (although not as pricey as Japan’s) are in play in the U.S. Japan had a few lost decades and my personal feeling is that the U.S. has already undergone two lost decades due to its failure to enact proper policy in the wake of the dot-com bust and it doubled down in the wake of the housing bubble crash and kind of doubled down again due to the COVID crash.
There’s a part of me that wants to ditch every USD I have for gold or Norwegian krone things are looking so bad. I cannot imagine someone like Grantham not seeing how dangerous the whole situation is.
For sure … TBills at current yields would ordinarily be tough competition for gold in my portfolio; ten years isn’t that long in gold cycles. But the Fed can put those fat yields on a crash diet at any time, and the pressure to monetize debt and levitate stocks will be immense, so the prospect of locking in for a decade doesn’t look so hot.
A lot of the blame for these obese deficits lies at the feet of the Fed. It tempted politicians with ultra-cheap borrowing along with everybody else. Especially Yellen. The GFC was well in the rear view mirror but the GFC policy just kept on going. It was as if you went to the doctor for appendicitis and were given an appendectomy every week for ten years. And if she were worth a damn as TSec she’d be in her boss’s ear daily about deficits. Trump era policy was good as far as deregulation and the retreat from globalism go, but the TCJA was a disaster and his hectoring the Fed for lower rates embarrassing. Blow out deficits for tax cuts for the world’s biggest and richest corporations. Then the Biden admin brought back aggressive globalism and even more shocking deficits. And this is with unemployment near multi-decade lows. What happens when the recession hits?
So yeah … gold looks pretty appealing here. I’m still fully allocated to stocks and bonds in income accounts (with stocks skewed ex-US), but capital accounts are mostly TBills, gold and other commodities.
what interested me in yesterday’s action is that rates went up but stocks did too. just one day’s action, of course, but it looked like a “no landing,” off-to-the-races belief system taking hold.
The “no landing” notion is dying hard. Possibly a convulsion of doubt as the markets work their way through soft landing on the way to hard. The seasonal and technical setup likely left markets ripe for it.
Still, I’d have expected the bond market to participate too. Especially given the dollar was down. Maybe that’s still out there … if not it’s hard to imagine stocks getting more than a passing bounce out of it.