Jeremy Grantham: ‘This time seems very, very different’

From Justin Brill, Editor, Stansberry Digest:

‘This time seems very, very different’…

Oh boy… One of the world’s best-known value investors has apparently “thrown in the towel.”

Jeremy Grantham is the founder and chief strategist of top money-management firm GMO. He has made some big calls on both sides of the market – including calling the bottom in stocks in 2009 – but he’s best-known for his bearish warnings.

He famously predicted the bubble in Japanese assets in the early 1990s… the bubble in technology stocks in the late 1990s… and even the bubble in U.S. housing a decade ago.

As recently as two years ago, Grantham was starting to get cautious about stretched valuations in U.S. stocks. As we noted in the June 25, 2015 Digest

In a speech at the Morningstar Investment Conference in Chicago yesterday, Grantham said many stock valuation indicators are approaching “bubble land,” but he’s not getting bearish yet. “No bubble has ever broken until individuals pour money into the market,” he said, noting that many investors pulled money out of the market following the financial crisis and are still avoiding stocks today.

Grantham also pointed out that the last round of Federal Reserve rate hikes from 2004 to 2006 didn’t end the bull market in stocks.

While he believes the market is headed higher, he did admit it was becoming more difficult to find good places to invest today.

Since then, valuations have continued to rise…

In fact, by several measures U.S. stocks are now more expensive than any other time outside of the dot-com bubble.

Surely, Grantham has only become more concerned today, right? Not exactly. As the Financial Times reported on Thursday… 

“I’ve dedicated my life to financial bubbles, and I don’t think it is a bubble,” he told the Financial Times. “This is the broadest market of all time… That is not the nature of a bubble”…

He laid out the case for why “this time seems very, very different” in his quarterly letter to investors, pointing out that despite some wild swings in recent decades… U.S. price-to-earnings have averaged over 23 times since 1997, compared with nearly 14 times in the preceding decades, when he started his career.

Most notably, Grantham has apparently abandoned one of his core beliefs…

That is, his long-held stance that market values always “revert to the mean” eventually. More from the article…

“A dedicated value investor like me eats, breathes and dreams mean reversion. It’s very hard to see when the world has changed,” he said. “But my job description is to think about markets and not to be a member of a cult”…

Arguing that this time is different, and valuation metrics have climbed to a long-term new average, is near sacrilege for many value investors…

Mr. Grantham admits his new tone gets “groans from fellow value investors” where it has “rattled a lot of cages”, but argued that previously dependable rules have to be re-examined and some even cast aside, given that the “world has changed.”

In simple terms, Grantham says globalization, increasingly “monopolistic” U.S. companies, and super-low interest rates have pushed corporate profit margins above their long-term average. This in turn has pushed valuations to new highs.

This is likely true. However, Grantham argues these trends are likely to continue for years or even decades… meaning valuations will remain high – or even move much higher – indefinitely.

Now, Grantham may be right…

U.S. stocks – particularly tech stocks – are getting a little frothy. But we don’t yet see all the telltale signs that accompany the peak of a speculative bubble.

Stocks could continue higher… And valuations could become even more extreme. As regular Digest readers know, this is exactly what our colleague Steve Sjuggerud has predicted with his “Melt Up” thesis.

But we’ll happily take the other side of his “mean reversion” bet. We suspect history will prove this time isn’t really different after all… And expensive markets will eventually become cheap again, just as they always have.

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