Moneycontrol Pro Weekender | Bubble Trouble 

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Dear Reader,

Jeremy Grantham, GMO’s chief investment strategist, has been warning for years about a bubble building up in the markets. In his latest missive, titled ‘Let The Wild Rumpus Begin’, he has upped it to a ‘superbubble’. The other superbubbles he lists are the Crash of 1929, the Japanese collapse in 1989, the Dotcom Crash of 2000, and the Global Financial Crisis. Grantham says that in the US, there are now simultaneous asset bubbles in housing, equities and bonds while commodities too are overpriced--- he calls them the “three and a half bubbles”.

Grantham warns, “The final feature of the great superbubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the blue chip market rises. This occurred in 1929, in 2000, and it is occurring now. A plausible reason for this effect would be that experienced professionals who know that the market is dangerously overpriced yet feel for commercial reasons they must keep dancing prefer at least to dance off the cliff with safer stocks. This is why at the end of the great bubbles it seems as if the confidence termites attack the most speculative and vulnerable first and work their way up, sometimes quite slowly, to the blue chips.” Note that in the US, while the speculative stocks have nosedived, the US Russell 2000 stock index has wiped out all 2021 gains and is back in 2020 territory. For those who want the full flavour of Grantham’s brilliant thesis, the original is here.

For the present, though, the comforting consensus is growth will take care of the problems. The Bank of America survey of global fund managers found that growth optimism trumps rate hike fears. This has been supported by the peaking of the Omicron wave, as seen from our Herd Immunity Tracker and the focus has now shifted to living with the virus.

The OECD’s composite leading indicators, however, show that growth has peaked in some economies, although the US and India are exceptions. This FT story (free to read for Moneycontrol Pro subscribers) says that emerging markets are starting a quiet comeback.

But back home, there are still some concerns about growth, especially about consumption, as our Economic Recovery Tracker points out. Muted domestic demand has taken a toll on the Bajaj Auto Q3 results. The Hindustan Unilever management too has said consumption demand is flat in urban markets and fell in rural areas. HUL was also in the news because of its parent’s bid for GSK, about which we wrote here and here.

Not everybody is worried about demand, though. The UltraTech management says the soft patch in Q3 is behind them. Asian Paints’ volume growth in the decorative segment is good. Overseas demand continues to be very strong. And then of course, there’s always the hope that things will change for the better, as Tarang Jain, Chairman and Managing Director, Varroc, told us. Companies such as Max Healthcare are even going in for capital expenditure.

With the forthcoming Union Budget on mind, we did a series of chart-based stories on its background, covering trends in subsidies, infrastructure spending, the tax to GDP ratio, tobacco and railway stocks and corporate taxes. Given the gaping holes in our healthcare system exposed by the pandemic, we wrote about how the Budget presents an opportunity for course correction.

High commodity and raw material prices -- the half bubble mentioned in Grantham’s letter -- led to margins being crimped in a wide range of industries. High cotton prices played spoilsport with yarn mills’ bottom lines. High input prices also squeezed margins in the Q3 results of Rallis India, Shakti Pumps, Tata Metaliks and Bhansali Engineering.

Even if growth holds up, the question is: growth at what price? That is why we advised investors that JSW Energy is an unattractive bet now, given the huge outperformance of its stock. We said that despite its sterling performance, Bajaj Finance’s valuations call for caution. And while Saregama’s December quarter performance was music to our ears, we recommended that investors wait for a better entry point. Similarly, we recommended a buy on dips strategy for L&T Technology Services, L&T Infotech, and Metro Brands. And while we said cost structure is a key differentiator for IT stocks, we also liked HCL Tech’s and HDFC Bank’s valuations.

This week, our eclectic bouquet of offerings included musings on inequality, capitalism and stocks; Microsoft’s acquisition of Activision, which moved us sufficiently to write about it again here; a newly minted edtech unicorn; the charging challenge to EVs; SME IPOs; why the AGS Transact Technologies IPO has more than meets the eye; Tech Mahindra’s CTC acquisition; and on Jubilant FoodWorks.

The Eastern Window looked at Indo-Chinese rivalry in the Maldives. We looked at the reasons for the fall in cryptocurrency values, at cryptocurrency thefts and in our Crypto Learn section, we explained DeFis. We had a couple of stories on start-ups, one on the Metaverse and its opportunities, while our Algo Rhythm section told investors how to go about preparing a high level requirement document for developers.

But to get back to Grantham’s interesting bubble thesis --one of its chief attractions is his superb writing. He is in excellent company. The notorious South Sea Bubble in the early eighteenth century lured several literary figures into its clutches. They included Jonathan Swift, author of ‘Gulliver’s Travels’, who wrote rather plaintively:

‘Ye wise philosophers, explain

What magic makes our money rise,

When dropt into the Southern main;

Or do these jugglers cheat our eyes?’

But perhaps, the moral of the story was best pointed out by Daniel Defoe, the author of ‘Robinson Crusoe’, who wrote, “I might give the late South Sea calamity for an example in which the longest heads were most overreached, not so much by the wit or cunning of those they had to deal with as by the secret promptings of their own avarice.”

Cheers,

Manas Chakravarty