Veteran value investor Jeremy Grantham put a missive up on his firm’s website yesterday outlining his view that we won’t see an imminent end to the US bull market. He expects a melt-up, not a meltdown. But Grantham goes on to say that we will see an asset bubble implosion in 2019, with as much as 50% downside. Some thoughts below

My macro view

Before I get into Grantham’s piece, let me say that a lot of what he is saying mirrors what I am saying from a macro perspective. First, you need to see an economic catalyst for a bear market. I’m not talking about flash crashes or even the infamous 1987 crash. Longer term-bear markets are the result of faltering earnings, that in turn result from widespread macro-economic slowing. And right now, the global economy is booming. No recession, no bear market

But when you look at some of the other macro indicators, nothing is showing signs of economic fatigue yet. Curve inversion is the recession signal and the yield curve is flat, not inverted. The Fed is still hiking interest rates, whereas recessions occur after the Fed has ended its rate hike train. Jobless claims are still falling when a recession is preceded by or coincident with rising jobless claims. And money supply growth is still chugging along. Nowcast economic models show 3% growth. And the ISM manufacturing index is not just strong but unusually strong regarding new orders, its forward-looking subindex. From where I sit, all of this bodes well economically. There is no macro case for recession, and therefore, no macro case for a bear market— just the opposite.

Grantham’s thesis

Grantham is saying the same thing, but looking at the market internals data. He starts off this way:

I find myself in an interesting position for an investor from the value school. I recognize on one hand that this is one of the highest-priced markets in US history. On the other hand, as a historian of the great equity bubbles, I also recognize that we are currently showing signs of entering the blow-off or melt-up phase of this very long bull market. The data on the high price of the market is clean and factual. We can be as certain as we ever get in stock market analysis that the current price is exceptionally high. In contrast, my judgment on the melt-up is based on a mish-mash of statistical and psychological factors based on previous eras, each one very different, so that much of the information available is not easily comparable. It also leans very heavily on a few US examples. Yet, strangely, I find the less statistical data more compelling in this bubble context than the simple fact of overpricing. Whether you will also, dear reader, remains to be seen. In any case, my task in this note is to present the evidence, both statistical and touchy-feely, as clearly as I can.