Hussman Questions Grantham's "Melt-Up" Thesis

Value investor Jeremy Grantham suggests "Bracing Yourself for a Possible Near-Term Melt-Up".

Grantham's 13-page synopsis Bracing Yourself for a Possible Near-Term Melt-Up suggests the bubble will burst and the consequences devastating, just not yet.

His key reasons center around an expected 3.5 year window that is typical of other bubbles coupled with advance decline ratios and acceleration that have not yet turned.


Classic Bubble


S&P 1997-2001

​Summary Grantham Guesses ("Absolutely Personal Views")

  • A melt-up or end-phase of a bubble within the next 6 months to 2 years is likely, i.e., over 50%.
  • If there is a melt-up, then the odds of a subsequent bubble break or melt-down are very, very high, i.e., over 90%.
  • If there is a market decline following a melt-up, it is quite likely to be a decline of some 50%.
  • If such a decline takes place, I believe the market is very likely (over 2:1) to bounce back up way over the pre 1998 level of 15x, but likely a bit below the average trend of the last 20 years, as the trend slowly works its way back toward the old normal on my “Not with a Bang but a Whimper” flight path.

"If if the bubble ends in the way I expect it will, then the structural stress may well help the decline become, in technical terms, a real humdinger.​"

​According to Grantham "The advance-decline line is clearly not delivering a threatening message yet."

Advance-decline refers to the number of shares increasing in price minus the number of shares declining in price.

Hussman's Take

Note that we are "only" into month 22 whereas Grantham expects 36-42.

Hussman is correct that acceleration is readily apparent.

Replies to Hussman

Blow-Off Top

Have we met the sufficient conditions or is another year of investor euphoria coming?

People are still making excuses "the market is cheap".

But it has to be that way for bubbles to form.

Mike "Mish" Shedlock

Realist. Fuzzy logic. Not knowing the future means no choices are any better than the other, therefore mathematically rebalancing would make no difference. Reason for rebalancing is risk related. I still say rebalancing is for puss*.

I actually have a question i specifically want to ask to you, if you wish to assist.

Using gold isn't necessarily a really good basis for S&P 500 valuation either, as the "spike" peaking in 2000 was definitely large, and historically expensive, but much of that on the S&P/gold chart was due to that being a bottom in gold prices as well -- Brown's Bottom. As well, much of the lack of bounce in the S&P/Gold chart was due to a gold buying panic, not anything having to do with the dollar or the S&P.

This information is useful, but must be taken into consideration along with everything else. Using margin adjusted P/E tells a different story, as do several other reliable indicators of subsequent return.

The big fallacy is thinking of gold as a proxy for dollar weakness, when it's nothing of the sort. The dollar and gold are related, to be sure, but their movement is not necessarily correlated. Put the dollar index chart next to a chart of gold prices and you'll see little correlation. Gold doesn't measure dollar weakness, it measures fear, and the two are very different things. We had a weakened dollar 1987-1990 and the gold price went down, as I wouldn't describe those years as being exactly "fearful". Likewise, gold spiked during the second half of the "rising dollar", which was one of the largest spikes in the dollar's index value.

Gold is gold and dollars are dollars, and gold has many uses today (as collateral, as an investment, etc) that aren't related to money, and those drive the price of gold, as well as the dwindling physical supply and the exploding paper gold market, in addition to basic fear psychology. Those are complex factors and thus the priced-in-gold chart, while pretty, isn't close to the whole story.

"Zero Hedge saying BTFD, is not short or bearish." Id like you to line up the articles that say just that and post them here, from 2010. I would then like you to line up the articles that say the world is coming to an end. ZH barely touts BFTD, it touts the world is coming to an end. The very author of this blog touted recession for years and finally went dark on that idea.

Oh, by the way, gold is going to 5000 and Bitcoin is going to zero.......

Because John Hussman's predictions have always proved to be correct...

Repeat after me, there is no speculative bubble, this market action is almost entirely rationally determined by the excessive global monetary bubble. When capital flows switch then something will happen. The US is a third world hot money destination, soon to be a third world energy exporting nation. If you are speculating in this market you are in bad company you won't recognize the turn. Forget sentiment, a river of money is running over the banks, and it recedes the same way.

Mish, I currently am in gold/silver and miners. I've stayed out of stocks (much to my dismay), would this be time to buy index funds with trailing stops (10%?), or stay away?

You can make a lot of money off a bubble if you can time it right. Sell at the top, then buy at the bottom when there's blood in the streets.

"Mish, I currently am in gold/silver and miners. I've stayed out of stocks (much to my dismay), would this be time to buy index funds with trailing stops (10%?), or stay away?" Hi John H:
My track record is such that even I would not ask me. But no, I am not buying indices here and I would advise against it. Like Hussman, I have not timed this remotely accurately.

Jeremy Grantham, who is credited with calling the 2000 and 2008 downturns has only added to market enthusiasm by informing us last Wednesday to be prepared for the possibility of a near-term “melt-up” but that is only part of the story. The negative part contained in Grantham's note that many seemed to discount were his feeling that this is one of the highest-priced markets in U.S. history and "this would likely set the stage for a burst bubble and a stock-market meltdown in the future." more below.