We have simultaneous bubbles across all major asset classes. He estimates wealth losses could total $35 Trillion should valuations return to two-thirds of the way to historical norms.
Jeremy Grantham co-founder of GMO investments
What does Mr. Grantham mean by two thirds of the way to norms? One of Bob Farrell’s 10 market rules is that all averages eventually revert to the mean or average. The last time the Dow Industrials touched their 200 month moving average MA was during the sub-prime melt down in 2009. That level was below 10,000. From its present level of 34,715 a two-thirds loss would put it at 11,455. The current 200 month MA is 17,469 about half the DJIA level now.
But the eye-popping returns have been in the NASD. In the 2000-2002 melt down it fell from 5,000 to about 1,500, a loss of 70% or about Grantham’s 2/3. As of Friday the NASD trades at 13,768. Its 200 month MA is at 5,020. A tenet of social mood is that past events are unremembered and that fits the scenario now. In 2009 the NASD fell below 2,000. The NASD is already down 10% just this month from its high. Only 15% of the NASD stocks now trade over their 50 day MA. Now that the selling has started in the FANG stocks, this the bottom is literally dropping out. The NYFANG index has dropped from 8,000 in November to 6,836 Thursday.
For those that scoff at such bear markets consider what happened Thursday after the market closed. COVID darling Peloton dropped 24% after announcing it was pausing production of its bikes. Netflix fell 19% after reporting 8.3 million new subscribers. In a bear market, all news is bearish.
We have repeatedly warned in this space that the internals, breadth or overall participation, was much weaker than the new highs would indicate. All indexes have made their final highs between early November and this January.
The good news for the Permian Basin is that energy prices seem to want to vault over the recent highs of $84. We need a weekly close over $84.50. Crude trades Friday at $84.91 so that could happen today.
The correction in natural gas was larger than I expected. It dropped from $4.75 to $3.65. Friday prices have edged up to $3.90. It needs a daily close over $3.95 to get going again, that could happen.
The wild card is whether Putin will stage as Team Biden put is this week, a minor incursion to the Ukraine. As the Ukraine President noted in response, there is nothing minor in the deaths of his citizens.
Such action would surely boost the price of oil and gas theorizing that Russia would cut back on EU natural gas to throttle any attempts at armed opposition.
