Why Jeremy Grantham is right and wrong on “the bubble”

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Livewire has a terrific and lengthy interview with Jeremy Grantham that offers six major points:

  1. Value outperforms growth when inflation rises
  2. Career risk prevents most financial professional from acting on bubbles
  3. The 100-year downtrend in commodity prices is well and truly broken. Expect resources to be scarcer from here on
  4. This is not a simple case of overvaluation that can be easily dismissed. This is a bubble, and it’s serious
  5. Inflation hedges and commodities look attractive, US equities and residential housing looks very risky
  6. Time is short, the end could be just months away. Read the full thing to see what to expect as we get closer to the ‘pop’.

My responses.

  1. Yes.
  2. Yes.
  3. Yes and no. Rising EMs and Western MMT can deliver ongoing demand but there is no structural shortage of any commodity that I follow. Moreover, the coming cycle with US growth leading and Chinese growth lagging is not good for commodities. It is bad.
  4. Yes.
  5. Meh. Why would you, on one hand, argue we’re in a bubble that’s on the verge of popping and, on the other, argue for inflation hedges? If you think it’s going to bust then you need deflation hedges. Unless you reckon that a massive market bust will not hurt growth, which is not the case. Commodities do not “look attractive”. China is tightening aggressively on its construction sectors. This is the key driver of demand for metals. This disconnect is eerily similar to Grantham’s declaration of the same thesis in 2011 just before a historic commodities crash.
  6.  Yes. Various bubbles are bursting. Crypto, SPAC, profitless tech. The US is richly valued and housing is running away again. But the ongoing bust depends upon more inflation. As China tightens and the US slows, commodities will deflate again as supply-side blockages ease. Later in 2022, as the US economy grows out of COVID distortions and its labour market tightens on Biden stimulus, I expect US inflation to resume a higher path than before COVID. But not a particularly threatening one. Deflationary forces are still strong. Thus gauging when today’s everything bubble is going to burst is no simple matter. No bubble I have ever seen burst before interest rates jumped into it.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.