CNBC Discussion On Grantham’s Bubble Thesis

Barry,
I agree that when liquidity is one of the major factors propelling
assets to the sky, one should be concerned. It is amazing as to how many
Economic indicators are close to (the brink of) recessionary levels.
I point in my blog several unique charts supporting this.
Take a look in:
wrahal.blogspot.com

On the frame above, where it says “CNBC Alert: 17 of 30 DOW stocks higher”… It should be flashing red, not a cool green.

Grantham is the money manager for Dick Cheney.
Any comments on that?

http://articles.news.aol.com/business/_a/cheneys-fund-manager-attacks–cheney/20070205135409990002

Barry, you might be interested to know that the MIT and NBER economist R.J. Caballero argues that speculative bubbles are inevitable in a world with global asset shortages:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=947587

I thought Barry was in the Housing Bubble camp?? Did I hear him right when he said he never believed housing was in a bubble??? Did CNBC dub that in???

No housing bubble, Mr. Ritholtz?

The incredible price appreciation/inflation aside, I don’t think you can have the kind of maniacal investor psychology that we’ve witnessed in real estate and say that there was/is not a bubble.

I agree with Mr. Grantham: we’re witnessing a worldwide bubble in almost everything fueled by easy money and credit.

After the stock market and real estate bubbble, I thought we were all bubbled out. What could possibly be inflated subsequently? I think we have the answer now: credit. Combined with the magic of securitization, it seems credit has become the next bubble which is now fueling everything.

Barry calls housing an extended asset class.

MAS, I insist, let me know what you think of Jeremy’s asset allocation judgement in this interview of 11/3/03:

http://online.barrons.com/article/SB10676442876415600.html?mod=b_
this_weeks_magazine_main

Just got back from Las Vegas. Stayed at The Venetian and visited a high priced gallery there in the shopping area. The owner had to close his South Florida store and was moving the inventory to his Vegas store. He said it has been a “horrible” spring for him AND the other merchants in the area. By the way, he isn’t any Wal-Mart. He sells carved jade and ivory, bronzes, etc. Average prices in the $5K – $25K range.

Personally, I think this one small snapshot for the future. Prudent investors watch for this kind of stuff. Just some food for thought…

Carl Quintanilla asked a very good question today on the CNBC segment. I’ll paraphrase it: “Wouldn’t it seem reasonable to just assume that maybe Grantham, a value investor, is looking around at a market at 13,000 that’s just continuing to go up, and needs to come up with something to say to justify the fact that things aren’t going his way?”

Let’s examine the logic of that observation by Carl.

Grantham has written his opinions in a quarterly letter to his clients… to his customers that pay him for his intellectual services.

Carl’s question, while reasonable to ask, implies at least the potential that Grantham might choose to be disingenuous with his customers rather than face a reality already known to him. In other words, it implies that Grantham might knowingly deprive his customers of opportunity merely for the purpose of being right by his own definition. It would be as though an angry parent, who after understanding he was punishing a child for illogical reasons, decided to continue to punish the child because of a further and more illogical w-i-l-l-f-u-l-n-e-s-s.

Readers of this blog who believe Barringo is a willful pessimist just don’t understand him… and they haven’t read him in context.

Readers of Eclectic on this blog may remember that I have described willfulness as being a quite different but related emotion to the abstract expression of optimism. By that I mean that optimism has a sign, in the sense of a mathematical valence; it can be positive (+) or negative (-), as can pessimism have the same opposite signs.

When either optimism or pessimism are drawn from o-b-j-e-c-t-i-v-i-t-y, they are capable of changing signs according to changing interpretations of the facts.

However, willfulness can never change its sign. With willfulness, the human psychological attitude is one of making a foregone conclusion… as in: I am on the train and the journey is predestined to be completed by my willfulness, and thus there is no need to evaluate any facts during the journey.

Such persons can never get off the train, and they’ll interpret any attempt to influence them to do so as being pessimism for its own sake, when in fact they are demonstrating optimism merely for its own sake, as expressed in illogical willfulness instead when faced with even overwhelming facts related to risks.

In my opinion it’s the human psychological basis that supports Grantham’s observation, quoted here from Mr. Mauldin’s recent entire reproduction of Grantham’s letter in Mr. Mauldin’s “Outside The Box” piece dated 30 April 2007 (found here):

http://www.investorsinsight.com

It’s Everywhere, In Everything: The First Truly Global Bubble (Observations following a 6-week Round-the-World Trip)
by Jeremy Grantham

“In the real world, unfortunately, even if you believed it [‘it,’ meaning: supposing that you are a money manager and believe customers would be better off in cash] with every fiber in your body, you could only have a little cash on the margin because the career risk or business risk of moving more would be unsupportable.” End quote – [bracketed text my addition for clarity]

So, Carl, here Grantham seems to be giving us a better description of possibly what a disingenuous act could be, one done even with the possession of the intellectual skill and knowledge required to understand it is disingenuous.

No, Carl… I think Grantham, Russell and Buffett are all cut from the same cloth. None of them would recommend a person play Russian Roulette for a million bucks, even though the odds favor the player… and when a successful player came back to them and waved the mil in their faces, they’d not spend a lot of time looking for a reason to justify their ‘failed’ recommendations.
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On to you, MAS (San Diego):

You’ve already linked the article about comments from Grantham from approximately May, 2005, so I won’t reproduce the link, but here are three entire paragraphs reproduced from it, from which you selected your partial quote. I have double-bracketed the entire passage, although the single brackets are not mine:

[[‘The key point in the U.S.,’ Grantham emphasizes, ‘is that in the recent three-year stock market decline, all the stock market wealth lost by the median family holding stocks was more than offset by a 21% advance in house prices. This favorable circumstance seems extremely unlikely to recur [next] time. The inevitable 30% to 40% decline in U.S. stock prices necessary to get to fair value, accompanied by flat to down housing prices, will pose substantially greater risks for consumer spending than last time.

‘The ‘best’ reasonably likely outcome in the U.S.,’ the bubble-tracker concludes, ‘is that a moderate stock market decline in the next two years… could be accompanied by up to one more year of average house prices rising, for the U.S. housing market has lagged the other countries and has some good potential for catch-up in certain regional markets…

‘But by this time next year,’ Grantham warns, ‘time would really seem to be running out for our U.S. housing semi-bubble. It also seems likely that by then the housing markets in England and Australia will have completely run out of steam.’]] end quoting. I must observe that the punctuation regarding quotations in this passage is a bit confusing.
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I have several observations to make:

-Grantham was in good company expressing concern about the housing industry in 2005. Alan Greenspan had more-or-less begun the first serious Fed criticism of the excesses of the derivatives-based mortgage industry by that time, albeit Greenspan was less critical then than Bernanke has become recently… and for good reason if you’ll read his recent public speeches and testimony (see the Fed’s site). You can also read evidence that the Fed has lost the ability to control risk leverage in the article: “OUTER LIMITS – ‘As Funds Leverage Up, Fears of Reckoning Rise – Fed and SEC Question Wall Street on Policies: ‘A Mockery’ of Margin” by Randall Smith and Susan Pulliam, WSJ – April 30, 2007, page one.

-Grantham wrote that it was unlikely for the next downturn in equity market wealth to correspond with what he himself termed, the “favorable circumstances” of it being offset by a corresponding increase in real estate equity wealth in the same magnitude that had been experienced over the previous 3 years until that present time. He further indicated a downturn in the stock market was likely within 2 years (that period is about now lapsing). Well, he was quite wrong, since the stock market has rocketed up, and, too, cracks in housing did not get the full attention of investors, regulators and Congress until after a slightly longer period of time than, as he expressed it, “by this time next year,” meaning by approximately mid-2006.

-Okay, so he underestimated the stock market – my guess is he’s well aware of it, but his observations about housing are just off by a few months, and it is in my opinion quite true that were the stock market to decline, the already boosted real estate market wouldn’t have the same capacity to offset it again in the same way, if at all. The real wildcard in this dilemma would occur should housing worsen considerably, because it has a much greater capacity to reduce aggregate wealth effects in the economy… as well as a greater capacity to hinder consumer and investor sentiment.

Winston,

Are you implying that the letter dubya stands for willfulness?
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Don’t you forget now that I place very little economic consequences in what political party rules.

However, I do agree with your particular notion, but enjoy it while it lasts dear fellow… I’m not about politics on The Big Pic.

Barry, thought you’d enjoy this on leverage, from the Boston Globe:

http://www.boston.com/business/articles/2007/05/01/private_equity_debt_bubble?mode=PF

DavidB, per you:

“Liquidity propelling assets is not so much the danger. Where the danger comes in is when the velocity changes. When the CB’s of the world all decide to shut off the presses at the same time THAT is when you should worry.” end quote.
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I’m gonna have to disagree with you DavidB. It’s not when velocity changes. It’s when the perception of liquidity changes.

You either haven’t read my theories on perceived liquidity substitution or you don’t agree with them. Let me be so bold as to say I described it all… right on this blog. No macroeconomic theorist, professional or amateur, had ever done that before, here or anywhere.

My grandfather worked for 75 cents a day in a sawmill during the Depression, and he was paid with token that had to be cashed at the company store.

The banks were ankle deep in money, but the ones having barely survived the depression in a solvent state were reluctant to cooperate with the Fed’s easing of reserve requirements, and consumers were also reluctant to borrow, regardless of rates, because there was no confidence in cap-ex for generating the profits to pay it back.

That’s the reason rates were as low as 4/10s of 1% during the Great Depression, and it’s very possibly the reason we have a reduction in domestic cap-ex, even with high consumer demand.

That is the real dilemma of the Fed… it’s what Mr. Greenspan termed the “conundrum.”

Since you’ve stated that the problem was liquidity during those times… I’m gonna have to pull you over and ask you to prove it.

Driver’s license if you please?……

http://tinyurl.com/3bgqx4