Jeremy Jeremy quite contrary, how does your garden grow?
Well, like Mary from the nursery rhyme, quite well, Jeremy Grantham’s version of silver bells and cockle shells is a company that had $118 Billion dollars of assets under management in 2015.
So what is the connection between a nursery rhyme and investing? Well if you have ever really listened to a nursery rhyme and made an investment at the wrong time they are both terrifying.
Jeremy Grantham is one of the great predictors of economic movement, in fact his investment firm GMO has created formulas to predict investment bubbles and has identified superbubbles. Oh and yes, in case you were wondering superbubbles are as terrifying as the worst of the nursery rhymes, like “rock a bye baby”
So what is Jeremy’s investment strategy? Jeremy is a contrarian, which is a strategy of investing that goes against the market sentiment, and in my opinion the only real direction you should be going in if you are a shares investor, when the market is going up, sell, and when the market is down, buy.
So what is a bubble and what makes a superbubble?
Back in 2019 I wrote an article titled “Diamond Tiaras and the New Great Recession” where I spoke about the last 48 recessions from 1785 to 2009 and the predictability of these through the ebb and flow of the markets.
Now superbubbles are a class of their own as they require many contributing factors and we have only ever had four in total. The first was during the great depression in 1930 due to just about everything going wrong in all markets, lack of money supply, the Smoot-Hawley Tariff; government policies, bank failures and straight up panic. The next one involved the equities markets in 1972 due to economic stagnation and inflation. Then again in 2000 due to the dot com bubble and the decline of economic activity in developed countries. And one more occurred in the property market in 2009 due to low interest rates, easy credit and insufficient credit policy.
So what is Jeremy seeing as a precursor to a superbubble?
Right now we are seeing a bull market (shares going up up and away) but in the NASDAQ over 40% of all shares are down 50% from their high. This is an incredibly rare occurrence and was seen in 1929, 1972, 2000 and right now in 2022.
Reflecting back to the article I wrote in 2019 and the predictability of recessions. It is evident that the timelines between them become predictably shorter. The same is looking true for super bubbles, 43 years, 28 years and now possibly 22 years, the maths is starting to line up for Jeremy’s prediction.
So what is everyone else doing? The big investment firms are not jumping out of the market, and why would they? It is still a bull market, but what we are seeing is that they are getting their money into the strong performers and big institutions, away from the new entrants. It looks like they are ready to ride the market out the back door.
There are a lot of factors to be considered in the United States right now, inflation is on the rise due to a lack of global industrial production, the printing of money and investment into financial assets by the government and the employment wage rate is stagnating.
Jeremy has suggested not investing in American companies but instead looking at foreign markets, which is an interesting position to take, so let’s look at these other markets.
This is a great indicator of what I have been saying for a while now, the global economy is reaching a fractionalised independence, we are not all tied to the same boat. Sure, we are in the same ocean but the tides are definitely affecting us differently.
Russia is at war and China has closed its financial borders. If you had asked me to predict what this would have meant for the global economy even 3 years ago, I would have said to invest in potatoes and buy a cow.
Look at the effect, not much by comparative standards. I feel the global pandemic was our global economic saviour, … I know I know, masks suck and being stuck at home watching Netflix sucked.
But seriously, look at what it did for the evolving countries of the world. Governments actively promoted investment into their own countries, industrial production was focused within borders and not out; the world also became connected in a faster way with the global adaptation of online services such as Zoom. Some emerging countries are starting to thrive from the bottom up as there are more opportunities focused on growth at home and not big business abroad.
Another great example is Australia where the property trend is in a cycle of 10 years at the moment, five years of good three of stagnation two of bad. At the current cycle they are at the start of year two of the growth cycle. Not to mention that the Olympics of 2032 will be held in Brisbane, so the amount of foreign investment into the country will keep feeding this property trend, which is the stability backbone of every economic policy.
And in stark contrast to the US, employment is at a historical low and wage growth on the ground has seen an increase of 17% to 20% (these wage numbers I am speaking of from my experience and not as government statistics as of yet. However I employ people in multiple industries from hospitality, allied health, financial services, legal, sales to administration. It is the hardest time in the last 20 years that I have been employing people to hire, so if you have a resume and a pulse send it in!)
Crypto and Tokenised assets
Well we can’t have an article about a superbubble and not have anything to say about what in my opinion, is the greatest liquidity market of all time.….. Gang, I don’t even know where to begin with this mixed bag of emotions. Just like fairy tales, they can be terrifying and they can lull you to sleep at night.
To be serious though and bring this area into context with the market, I actually think it has become in most instances, a market apart. Yes, it started out as a dark place and was booed and hissed at by any self-respecting fund manager (If you read back through quite a lot of my articles you will find some of that shade coming from this humble author also).
However we have passed the point of a fad, this is now a true financial market. Sure, it is still in its infancy, but like any red headed step child it is here to stay and we have grown to love it (I come from a long line of gingers so I am allowed to say that, soz mum x).
And what a market it is, will it be a Dot Com bubble? Well, I think so, yes, it has to settle down. There is so much money in that market without regulation and terms such as “rug pull” are so commonplace that it is just par for the course. For the uninitiated, a rug pull is when a fake crypto coin is created for the sole purpose of inflating and then pulling all the funds out at a high. Just so you know, if you do that in a regulated market you are most likely going to jail. And when the purchase of techno artwork is so prolific that anyone at all with a computer program can create a piece of artwork and sell it (sorry Picasso) well yes, there has to be a bubble at some point so that the market relaxes and finds its proper place in the world.
But will all these funds in that market affect the global economy? .. probably not as much as the world might think. The majority of the funds in the blockchain space are what we call new money and new entrants, its kids from 16 to adults up to 38 who have historically not invested into true asset classes. When the bubble bursts we are not talking families out on the streets and people cued for the bread line, we will be seeing some singed fingers and lessons learnt and most likely anyone invested in avocados will see their stock price diminish.
What do the financial masters of our time have to say about the current state of the market?
Well Jeremy is promoting investment in the big players if you are staying on the NASDAQ. If not, he is suggesting to look at the broader global market and these emerging countries or other strong performing economies.
OK, let’s have a look at the man that makes me go all “fan girl” The Oracle of Omaha himself Mr Warren Buffett. Now if you have not been a long-time reader of my literature Warren Buffett is one of my greatest influences. This is the man who has given away $41 Billion dollars to charity and his company Berkshire Hathaway has a current share price today of $529,000 USD per share.
What is Warren saying about the market? Well not a lot and in his recent yearly letter to investors he is surprisingly saying little about the market, except that there are no good opportunities at the moment and is holding $140 billion in cash reserves. Now if history has told us anything, it is that the Oracle of Omaha knows when to pull his money from the market before a crash. Warren’s strategy is value investing, he prefers to own a company or a good portion of a company where his voice can be heard. That he is not “seeing much opportunity” is a little on the terrifying side because when we take into account Jeremys superbubble philosophy and we can see that 40% of the NASDAQ is down 50% from its high that is where my spidey sense starts to tingle. If the oracle cant find value in a market where it’s down that low, that might tell us that the current low is still the high. This brings us back to Warren holding over 20% of his cash in reserve which historically means he is getting ready for a fall in the market.
The Bottom Line
So if you were not confused about the market before you read this then there is a good chance you are now haha, not my intention.
Whilst there is no need to panic and hastily sell everything, it’s important to do one’s own research. In fact, if you look back at an article I wrote in 2019 “Don’t Panic” before the Australian property dip, I articulated the warning signs that these major players were indicating to us. No one is going to come right out and tell you to sell up and where to invest, what you need to do is look at who the market movers are and what are their actions. Educating yourself is the best way to stay ahead of the curve.
I want to finish with something we’ve spoken about before that Jeremy himself maintains the importance of and that is diversification. He openly states that more diversification is better than less, which is 100% on the money as it limits risk exposure. If you haven’t already, be sure to read our FOXI Media blog Diversifying Your Portfolio: The Squid Game Approach as it will teach you the best steps to mitigate risk.
Good investing my friends, and my only advice is to be careful of lullabies, they sound sweet but pay attention to the words.
See you on the bubble,