Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Jeremy Grantham Puts a Number on Market Exuberance
Transcript
- Lucas: Jeremy Grantham said this week that the current U.S. stock market is the most expensive in American history. That's a strong claim from someone who called the dot-com peak and the 2008 housing top. Luna: He's been bearish for years though. What makes this time different? Lucas: Fair point. Grantham has been warning about overvaluation since at least 2013. But he's not just saying 'stocks are high.' He's pointing to a specific metric — the Buffett Indicator, which is total market cap divided by GDP. As of mid-June, he says it's around 195 percent. Luna: And for context, where was it in 2000? Lucas: About 140 percent. So we're well above the dot-com peak. The only time it was higher was maybe late 2021, around 200 percent, just before the 2022 correction. Grantham's argument is that valuations have rarely been this stretched without a significant drawdown following. Luna: But the economy looks pretty solid right now. Real GDP growth annualized at 2.1 percent, the yield curve is only slightly inverted — 31 basis points between the 10-year and 2-year. Doesn't that justify some premium? Lucas: It does, and Grantham admits that. He's not calling for an imminent crash. But he's saying that historically, when the Buffett Indicator gets this high, the subsequent ten-year returns have been poor. Single-digit or even negative. And with the S&P 500 at 7,354, we're pricing in a lot of future perfection. Luna: I want to talk about the timing problem. Grantham has been early before. He warned about Japan in 1989, got the timing right. But in 1998, he warned about U.S. overvaluation two years before the peak. How does an investor use this without missing out? Lucas: That's the million-dollar question. One approach is to take it as a signal to reduce risk, not to exit. Trim positions that have run up the most, increase cash or bonds. The 10-year Treasury at 4.4 percent actually offers a real yield now, which hasn't been true for most of the past decade. Luna: Yeah, you can get 4.4 percent risk-free. That's a legitimate alternative to overpriced stocks. Lucas: Exactly. And the VIX at 18.41, up 6.5 percent in five days, suggests the market is starting to price in some anxiety. It's not panic — 18 is still low — but it's moving in the direction of caution. Luna: I also wonder about the composition of the Buffett Indicator. A lot of that market cap is in a handful of mega-cap tech stocks. If you're in small caps, the Russell 2000 is basically flat over the past year. The overvaluation isn't uniform. Lucas: That's a crucial nuance. Grantham's point is about the aggregate. But if you're a value investor, you might find bargains in sectors that haven't participated in the rally. Energy, financials, some healthcare. The key is to be selective and not just buy the index blindly. Luna: So what's your takeaway for someone listening? Should they sell everything? Lucas: No, definitely not. But I'd say this: if you've been thinking about rebalancing, or you have a concentrated position in something that's doubled, this is a good moment to take some chips off the table. Grantham is 86 years old, he's seen every cycle. Being early is not being wrong if you have a long enough horizon. Luna: It's also a reminder that markets go through cycles. This bull market has been running for a while. The question is whether we're in the late innings or the ninth inning. Lucas: And nobody knows that. But Grantham's track record means you should at least listen. You don't have to agree, but ignore him at your own risk. Luna: And if listeners want more deep dives like this, we do want to mention that the show is ad-free and listener-supported. A couple of dollars a month genuinely makes a difference — buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that helps us keep these conversations going without commercial breaks. Appreciate anyone who's able to chip in. Luna: So back to valuations — do you think Grantham's warning will be more prescient than his 2013 calls? Lucas: I think it's different this time because the macro backdrop is more fragile. We have the Fed signaling possible rate hikes — Kashkari said he expects one this year. That's a headwind for high-multiple stocks. And with the Buffett Indicator at 195 percent, there's less margin for error. Luna: But what about the argument that low interest rates justify higher multiples? Even at 4.4 percent, the 10-year is still historically low compared to the 80s. Lucas: That argument has some merit, but it's weakening. If the 10-year goes to 5 percent, the equity risk premium shrinks. And Grantham would say that the Buffett Indicator already accounts for low rates, because GDP growth is also lower. The ratio is still extreme. Luna: One thing I keep coming back to is that Grantham's firm GMO has a seven-year forecast that shows negative real returns for U.S. large caps. That's a pretty stark view. Lucas: Yeah, they project something like minus 3 percent annualized for the next seven years. International value stocks, on the other hand, they see as attractive. So it's not a blanket bear case — it's a rotation case. Luna: Which is actually actionable. If you believe Grantham, you underweight U.S. large caps and overweight emerging markets or value. Lucas: Right. And that's what makes this episode different from just a doom and gloom headline. There's a constructive takeaway: diversify, don't chase, and keep some powder dry for when the drawdown comes. Luna: Because at some point, the VIX will spike again. And that's when you want to be buying. Lucas: Exactly. And with the VIX at 18.41, it's not pricing in crisis yet. But it's creeping up. The time to prepare is now, not when it's at 40.