Hussman Questions Grantham's "Melt-Up" Thesis

Value investor Jeremy Grantham suggests "Bracing Yourself for a Possible Near-Term Melt-Up".

Grantham's 13-page synopsis Bracing Yourself for a Possible Near-Term Melt-Up suggests the bubble will burst and the consequences devastating, just not yet.

His key reasons center around an expected 3.5 year window that is typical of other bubbles coupled with advance decline ratios and acceleration that have not yet turned.

Acceleration

Classic Bubble

Advance-Decline

S&P 1997-2001

​Summary Grantham Guesses ("Absolutely Personal Views")

  • A melt-up or end-phase of a bubble within the next 6 months to 2 years is likely, i.e., over 50%.
  • If there is a melt-up, then the odds of a subsequent bubble break or melt-down are very, very high, i.e., over 90%.
  • If there is a market decline following a melt-up, it is quite likely to be a decline of some 50%.
  • If such a decline takes place, I believe the market is very likely (over 2:1) to bounce back up way over the pre 1998 level of 15x, but likely a bit below the average trend of the last 20 years, as the trend slowly works its way back toward the old normal on my “Not with a Bang but a Whimper” flight path.

"If if the bubble ends in the way I expect it will, then the structural stress may well help the decline become, in technical terms, a real humdinger.​"

​According to Grantham "The advance-decline line is clearly not delivering a threatening message yet."

Advance-decline refers to the number of shares increasing in price minus the number of shares declining in price.

Hussman's Take

Note that we are "only" into month 22 whereas Grantham expects 36-42.

Hussman is correct that acceleration is readily apparent.

Replies to Hussman

Blow-Off Top

Have we met the sufficient conditions or is another year of investor euphoria coming?

People are still making excuses "the market is cheap".

But it has to be that way for bubbles to form.

Mike "Mish" Shedlock

Comments (33)
No. 1-25
Greggg
Greggg

Notice how quickly the South Sea Stock Bubble corrected itself without the benefit of algos and the Plunge Protection Team.

Deucalion
Deucalion

A man of Grantham's gravitas, I am surprised to see, would commit oneself to the the ultimately futile act of future prediction. If its a bubble, then so be it. If not, so be it.

Sechel
Sechel

i can only imagine the Fed response to a significant market meltdown. it won't be pretty. we can add asset price supporter of last resort to the list of fed responsibilities

Roger_Ramjet
Roger_Ramjet

As a former portfolio manager investing institutional money there was a cardinal rule that you never, ever telegraphed bearishness or a market downturn to your investors. Why? Your assets under management (AUM) would take a big hit. You could be right, but you would rather have the market take away your AUM rather than a client. At your bearish worst, you would simply say that “over the "long term" we expect stocks to generate an 8% to 10% annual return”.
I note that in several 2016 articles Grantham was managing $120 billion and expected the market to make a major decline after the 2016 election. In recent articles it states that Grantham is now managing $77 billion. That’s a pretty large drawdown of AUM in a year where stocks rallied sharply.
My cynical view is that Mr. Grantham’s “melt up” narrative is more about stemming the slide in AUM. But in this market, he could be entirely right.

JonSellers
JonSellers

The market hasn't hit it's vertical phase yet. Plenty more upside.