Is It Really “Different This Time?”
“Value investors have bored momentum investors for decades by trotting out the axiom that the four most dangerous words are, “This time is different.” For 2017 I would like, however, to add to this warning: ‘Conversely, it can be very dangerous indeed to assume that things are never different.'”
–Jeremy Grantham, “This Time Seems Very, Very Different“; 1Q2017 GMO Quarterly Letter.
NOW I’m nervous.
When motor-mouthed cheerleaders like Jim Cramer hype the stock market, I ignore them.
But, when famous contrarians and cool-headed senior statesmen like GMO’s Jeremy Grantham (he’s the “G”) tacitly concede that today’s historically lofty stock prices may not be so stretched after all . . . I start to sweat (and think about taking profits).
It all comes down to what you mean by “historical.”
Inflection Point: 1997
In Grantham’s view, stocks became unmoored from historical trends starting in the late 1990’s.
Here’s his run-down of everything that’s changed since then:
“Two of the three most important inputs in markets — average P/E ratios and profit margins — are very different [and] in the same direction, upwards. As is well-known, short rates have never been at such low levels in history as they were last year. Come to think of it, the population growth rate is also very, very different. As is the aging profile of our population. And the degree of income inequality. So, too the extent of globalization and indicators of monopoly in the U.S. Also the extended period of below-trend GDP growth and productivity almost everywhere but particularly in the developed world. And serious climate change issues that may be understated in countries like the U.S., the UK, and Australia . . . And finally, the modus operandi of the Federal Reserve and its allies is very different in its 22-year persistent effort to work the highs and lows of the rate cycle lower and lower.
One might ask here, ‘Is there anything that really matters in investing that is not different?'”
–Jeremy Grantham, “This Time Seems Very, Very Different“; 1Q2017 GMO Quarterly Letter.
Grantham’s takeaway?
Stocks are likely to levitate much longer than market analysts (and value investors like Grantham) have previously forecast.
All of which — at least for this observer — is just a little too evocative of another famous stock market pronouncement.
Namely, the complacent assurance by Yale economist Irving Fisher that “stock prices have reached what looks like a permanently high plateau.”
The timing?
Early October, 1929.
See also, “Contrarian Call on a Famous Contrarian“; “Jeremy Grantham for Federal Reserve Chair”; “Jeremy Grantham, Black Holes & Brexit“; “Grantham: “Let’s Get On With Whatever’s Next'”; and “Jeremy Grantham on How Much Gold to Own.
