CNBC Discussion On Grantham’s Bubble Thesis

As per our earlier discussion, here is the CNBC conversation on Grantham’s bubble issue.

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  1. MAS (San Diego) commented on Apr 30

    Here is a link to what Jeremy thought in May 2005:

    Asset Bubbles

    ‘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…


  2. will rahal commented on Apr 30

    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:

  3. Samuel commented on Apr 30

    I think we have a debt bubble. Similar to prior to 1929.

    Also congrats to Barry for looking like one of the few informed people i see on CNBC.

  4. mhm commented on Apr 30

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

  5. matt m. commented on Apr 30

    J. Grantham has proven to be an outstanding manager over his career, and has been properly allocated overseas over the last run. Though the U.S. markets have been strong the past few years, they are a clear relative strength laggard when compared to the rest of the world.
    The trouble people get themselves in is holding up any trader’s opinion as gospel ie. “See Jeremy G. agrees with me so I must be right.” The only right thing in the world is the market. Everything else is opinion and conjecture which is worthless. Up 20%…down 20%…the market is right because it is reality.

  6. Bluzer commented on Apr 30

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

    Even a broken clock is right a couple of times a day.

  7. Flic commented on Apr 30

    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???

  8. Bluzer commented on Apr 30

    Did I hear Barry say that housing is NOT a bubble simply because houses have atleast some intrinsic value? Didn’t Sun Microsystems and Lucent Technologies have intrinsic values? Didn’t tulips, during their fifteen minutes of fame, have some intrinsic value too?

  9. Mark commented on Apr 30

    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.

  10. Winston Munn commented on Apr 30

    Whether bubble or not I suppose is in how one defines bubble. If the underlying value is nil, then the entire upward move is based on speculation that it will some day have value; however, if a company that has a history of making money is beseiged by speculation, driving its stock higher, is it a true bubble or is it is Greenspan’s “getting a little frothy at the top”? Well, O.K. maybe a hell of a LOT frothy, but is it a true bubble?

    You know, if you look at a bubble there isn’t anything inside but air.

  11. Owen commented on Apr 30

    MAS & Barry,

    Grantham is worth listening to, he was 2 years too early on the effects on stocks of the “black hole” of credit creation in this Barron’s 11/3/03 interview, but he was dead on with respect to emerging markets, commodities, the dollar & small caps.

    The black hole is closer than you think in San Diego.

  12. MAS (San Diego) commented on Apr 30

    I don’t have a subscription to Barrons Online, so I can’t see the full text of the article.

    I’m not disagreeing with Jeremy, I just thought the May 2005 link was relevant to the thread.

  13. Dan (Texas) commented on Apr 30

    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…

  14. Bluzer commented on May 1

    Guess Barry’s decided to stop digging and make a couple of bucks of Amazon instead. Good work if you can get it.

  15. Eclectic commented on May 1

    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):

    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.

    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.

    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.

  16. Winston Munn commented on May 1

    Another good read, Eclectic. But it seems to me when you say: “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”
    I can’t help but picturing in my mind a certain U.S. presidential administration.

  17. Eclectic commented on May 1


    Are you implying that the letter dubya stands for willfulness?

    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.

  18. elsombrero commented on May 1

    Well done, Barry. It was a surprisingly respectful interview for CNBC, which usually cuts off or ridicules anyone who questions the prevailing Bubble logic.

  19. DavidB commented on May 2

    It’s Everywhere, In Everything: The First Truly Global Bubble

    With 2/3 – or some ridiculous number like that – of the world living on less that $1 per day is certainly isn’t in third world WAGES!

    I agree that when liquidity is one of the major factors propelling
    assets to the sky, one should be concerned.


    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.

    As long as they are keeping us at the same relative velocity things should continue.

    The depression happened(according to Freidman) when the fed stopped printing

    It’s not the falling that does the damage, it is the abrupt stop at the end that kills you

  20. Eclectic commented on May 2

    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.

    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?……

  21. DavidB commented on May 6

    As I already stated eclectic it was Friedman who stated it and I have read that Bernanke agreed with him in a speech around the time of his death. Here is a reference:

    In Monetary History of the United States he argues that the Great Depression was caused by monetary contraction, which was consequence of poor policy making and continuous crisis in banking system.

    Which is found here

    Here is Bernanke’s view of money supply and the Great Depression

    And to go completely full circle here is the Misian point of view

    I will admit I did not read the full text of Bernanke’s article I only skimmed it because yes, I do have a life and I try not to make central bankers part of it more than absolutely necessary. They already control the rest of it

    As for not picking up on your comments in this area it goes again to the long winded and 4th dimensional nature of most of your comments. If you could keep it concise and closer to planet earth I’d probably read them more closely. Nothing personal but I don’t come here to think too deeply, only to read up on facts. My brain works hard enough in this life without having to figure out what you are alluding to most of the time. I’m not here to be entertained by people’s writing so often I’ll skip and skim many people here. Once again it’s nothing personal. It’s a time crunch thing

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