Markets are ready to rock and roll again
Abraham George Market Musings
Jeremy Grantham is in his 80s and is the famous co-founder and chief investment strategist of Grantham, Mayo & van Otterloo known to most people in the investment industry as GMO. I have been reading the GMO’s quarterly letters for decades and it provides insights into macro investing and Grantham’s take on major cyclical turns. In the wider scheme of things, Grantham has had a terrific record on major turns in the markets. He is a hardcore value investor.
At the beginning of last year, Grantham put out a video interview stating that the markets are at the cusp of a major crash. He said that the state of affairs was so dire that it was the fourth time in the last hundred years such a situation has happened. He went further to say that his scenario will play out in a couple of months and not in a few years.
It is more than a year since he made that prediction but the S&P 500 has risen almost 27%. Well, many checked back with Jeremy again if he had changed his mind. Not one bit. He still believes US stocks are in a superbubble and we can see something similar to what happened in the 1920s.
What must have gone wrong with Jeremy’s predictions so far? My hunch is that people like Grantham, Buffett and Munger who are industry veterans and have had great success in the markets have either not fully adjusted to the new digital economy or have been relatively slow to adjust to it. Think of Berkshire Hathaway. Buffett did not buy into Apple in the 80s 90s or even 2000s. He bought into it only between 2016 and 2018. Apple now makes up more than 50% of Berkshire Hathaway’s listed equity portfolio. If it were not for its single investment in Apple where would Berkshire Hathaway’s performance be?
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The scalability of digital companies at times is not easy for us to comprehend. It will be interesting to see why an e-commerce and digital company like Amazon is investing into brick and mortar and why a brick and mortar company like Walmart is investing heavily into e-commerce and even metaverse and NFTs.
It is very important for us to understand these ever-changing phenomena are happening at faster clips than before which has ripple effects on many other macro events. From nowhere, the crypto markets sprang up to become a $3 trillion market cap and keep falling back to half its value in no time. You may not want to invest in cryptos as you don’t see any intrinsic value. Fair enough. But the love of Bitcoin is clearly affecting the price of gold. All the gold enthusiasts looking for 2500 and 3000 gold for the last two years have still not understood this.
So it is important for us to be very close to the overall market and develop a holistic approach in understanding the underlying sentiment of the market which I think is more important than the fundamental and technical setup of the individual markets.
Instead of making predictions on the markets, it is important to understand the current setup and go with it unless you are proven wrong.
For months we have been debating on the Fed policies going forward. This created a certain amount of uncertainty in the markets and there have been considerable position adjustments. I think we are over with that now. The consensus has moved to five hikes for 2022 starting March. This is almost priced in. Since last Friday the market has caught a bid and the S&P 500 and the Dow have now closed back above their respective 200 day moving averages.
The economy remains on a path to do above-trend growth this year with a strong jobs market. Wage inflation is what we will have to worry about this year and that will further add to better consumption. Consumer and company balance sheets remain strong. The tailwinds of the $6 trillion of new money created in the past two years are still being played out.
The Fed will not want to rock the boat but will continue a monthly or bi-monthly raise of 25 basis points which the market will be prepared for now. There is a lot of money on the sidelines to enter the equity markets. I think the next few months should be good for the markets.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.