Dick Cheney’s banker sees world bubble
Be extra careful about where you store your personal equity, people! And if you're not, Jeremy Grantham says you're going to get fucked. You've heard this sort of thing before on this board- mostly from James, before he left- but I'll say it again, stay away from markets that have been feeding off of exuberance, instead of bulletproof fundamentals, because they're going to be especially vulnerable to what Jeremy's referring too.
Dick Cheney’s banker sees world bubble
Jeremy Grantham believes everything — art, infrastructure, land, forestry, junk bonds, mundane blue chips — is going through an exponential phase and will eventually burst dramatically
By William Pesek
05/03/07 "Wall Street Journal" -- -- You’d expect someone whom the famously dour Dick Cheney entrusts with millions of his dollars might have a gloomy view of the world. Jeremy Grantham does indeed.
“From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips—it’s bubble time,” he writes in Grantham, Mayo, Van Otterloo & Co.’s latest quarterly letter titled “The First Truly Global Bubble”.
Grantham, 68, is chairman of the Boston-based company that, according to financial disclosure reports, in 2005 managed as much as $6.1 million (Rs2,501 crore) for US Vice-President Cheney. And if his own recent actions are any guide, he’s quite the multitasker.
The money manager is a critic of the US energy policies for which Cheney bears considerable responsibility. In February, Grantham donated $23.6 million to Imperial College London to establish an institute on climate change.
Perhaps these multitasking skills helped Grantham make one of the gutsiest market calls in recent memory: That pretty much every asset class, everywhere, is in the midst of a bubble.
It would be comforting if we could dismiss such negativity. After all, isn’t the Dow Jones Industrial Average climbing to all time highs at a time when Japan and Europe are growing, China, India and much of the rest of Asia boom and all’s well in the global financial system?
Sure, and that’s just what worries Grantham. He points to the US in the late 1990s and Japan in the late 1980s—periods when investors thought asset rallies would continue indefinitely. “Most bubbles, like Internet stocks and Japanese land, go through an exponential phase before breaking, usually short in time, but dramatic in extent,” Grantham argues, and he has a point
Bubbles generally require two dynamics: the perception of near-perfect economic conditions and an abundance of cheap credit. The Bank of Japan left its overnight lending rate at 0.5% last week, giving traders a green light to put on more “yen-carry trades.”
Borrowing cheaply in yen and moving those funds into higher-returning assets overseas has been a one-way bet and markets have little reason to think that’ll change. China’s unprecedented buildup of currency reserves—$1 trillion and counting—also may constitute a bubble of sorts.
The amount of liquidity zooming around the globe has Grantham wondering if risk is really as negligible as many investors seem to think. “Sustained strong fundamentals and sustained easy credit go one better: they allow for continued reinforcement,” Grantham argues.
Looked at from that perspective, perhaps China’s wacky stock rally isn’t so disconnected from the world after all. Modern history offers few better examples of a Ponzi scheme than Chinese shares. The CSI 300 Index, which tracks yuan-denominated A shares listed on the Shanghai and Shenzhen stock exchanges, gained 75% already this year and has tripled in the past 12 months.
In that time, China’s fundamentals changed little. It’s still growing faster than 10%; officials in Beijing still can’t figure out how to slow things down; a lack of transparency still makes it hard to know what’s going on in corporate boardrooms; and Asia’s No. 2 economy still faces risks of overheating, pollution, social unrest and trade wars.
All that’s changed is the amount of attention paid to Chinese stocks, creating a gold rush. It’s akin to the media attention lavished on dot-com day traders in the late 1990s. Newcomers armed with get-rich-quick dreams, not economic realities, are propelling shares higher.
A similar dynamic may be playing out across the global economy. Everyone, as Nouriel Roubini, chairman of Roubini Global Economics in New York, has been warning, is reading about how great things are and throwing caution to the wind.
It’s more titillating to read about hedge fund managers making over $1 billion a year than about global imbalances. What makes today’s global financial boom different is that it really is, well, different. Past bubbles came amid lofty claims of new eras. In the 1980s, the new era featured a Japanese business model many said couldn’t go wrong. In the 1990s, the US was awash with similar hubris.
“This time, everyone, everywhere is reinforcing one another,” Grantham argues. “Wherever you travel, you hear it confirmed that ‘they don’t make any more land,’ and that ‘with these growth rates and low interest rates, equity markets can keep rising,’ and ‘private equity will continue to drive the markets.’ To say the least, there has never been anything like the uniformity of this reinforcement.”
Markets’ success in withstanding September’s $6.6 billion implosion of Amaranth Advisors LLC and more recent turmoil among subprime mortgage lenders prompted talk of another new era. This latest one seems centered on China producing infinite amounts of cheap labour, US deficits being sustainable, major economies growing in sync and deep, diversified markets being able to multitask whatever comes their way.
The trouble, Grantham says, is that the bursting of this bubble “will be across all countries and all assets, with the probable exception of high-grade bonds. Risk premiums in particular will widen. Since no similar global event has occurred before, the stresses to the system are likely to be unexpected.”
Good luck multitasking that.
" deactivated lasers with my dick "
Posing with conviction
I don't think JamieJames will appreciate his views being taken out of context. He is very specific about certain aspects of the trading culture, not the whole thing.
It's way too complex for me to chime in. I'd be interested to hear what some of the other "pros" have to say like Harps and so on. People who's asses are on the line every day in this business.
Has Morningstar been alarmist of late? This is a wire article on Bloomberg. Looks to me like journalistic tripe to create an interesting story that will get people talking and drive traffic to their site.
Grantham stole some of those statements line by line from another guy. I have read those exact statements elsewhere before.
Here is the reality.
What happens when everyone decides to sell???
Over supply and under demand.
That is when it ends.
It's a very broad statement about the world economy, and like many forecasts, it's based largely on speculation. You can call it tripe, but I call it entertainment, along with a good opportunity to question yourself, and where you've put your money.
Originally Posted by heisenberg
I think you mistook my reference to some of the points James has made. I did not claim that his opinions on specific markets supported what Jeremy was saying; I implied that if Jeremy were correct, then the markets that James has already lectured us about are in deep trouble, as he's done a good job at making the case for a near-term correction in those markets, as it is. That's not taking his views "out of context", because the conclusions he drew from them remain *unchanged*, nor have I attempted to support any additional conclusions with them. Taking him out of context would be claiming that Jeremy's warned us about something that James had already pointed out, or something to that effect; whereas I was reinforcing James's conclusions with what Jeremy was saying. Did I tell anyone to run away from everything but high-grade bonds?
Adam, it'd be funny if your line-by-line claim were true. I can tell you that many people have been saying things like this long before- guys like Marc Farber- I just got a kick out of hearing it from "Dick Cheney's banker". Several months ago I read about what was in "Dick Cheney's portfolio", which was heavily protected against inflation through bonds, so this is in tune with that. I haven't verified any of this, however. Doesn't matter to me. I'll still happily day trade energy/metal stocks, taking advantage of all the volatility, until it all comes down.