Jeremy Grantham on the hustings again:
A few points:
- Roughly speaking, I agree with Grantham. Especially on growth stocks.
- But, this is a very unusual circumstance in-so-far-as the principles of capitalism have themselves been suspended. As such, the support to the bubble is more than just “rising sentiment”. It is real and fundamental to the extent that all markets are now centrally controlled, particularly yields. For instance, all previous stock bubbles popped within the context of rising interest rates: the nineties deregulatioan bubble, 2000 tech bubble and GFC bubble. If rates were to rise today then I 100% agree that the bubble would pop tomorrow.
- This is, of course, a kind of sentiment – faith in policymakers – but that is also, to some extent justified. Central banks have changed their reaction functions to allow for more inflation. Fiscal authorities have not, so far, overdone it. China is already normalising with a huge deflationary impulse building for next year.
- So, at this stage, it does not look like an inflation outbreak of sufficient magnitude is building to pop the bubble (notwithstanding base effects are about to boost it and may cause tactical stock dispepsia). Nor is that to say that the half-complete MMT revolution won’t do it under Biden. The evidence is just not in yet.
- One final point. Grantham’s major bubble target is US growth stocks. These are absolutely crazy. Doubtless, he will be proven right about the bursting to come on this front. But he can still right on that and the overall cycle not be derailed as rising inflation triggers a great value rotation that rides a successful vaccine rollout with an economic boom attached.
All of that said, we are dancing close to the door too. Policy error and vaccine mutation are real risks.
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