During his recent interview on The Investor’s Podcast, Jeremy Grantham explained why the first interest rate cut is when the second half of the pain will start. Here’s an excerpt from the interview:
Grantham: People make a big mistake to average bull markets and bear markets, that is not about that. This is about something quite singular and different that happens on rare occasions in the Great Bubbles.
The two and a half Sigma ultimate euphoria episodes, it’s like a phase change. People go from fairly sensible behavior in an ordinary bull market to absolutely crazy as it could be in these great bubbles and throw the rest of the data away and look at the bubbles, and the data is clear.
First of all, they’re always easy to spot, and it is always claimed that they are not, but they stand out in terms of the data on the market, like a Himalayan peak out of the plane.
Two and a half standard deviation events of the kind that occur every 50-100 years. These are not hard to spot. In 1929, you had to try to miss it. In 2000, Lord knows you had to try.
It went to 35 times earnings, beating everyone on the head with a hammer. The housing bubble was even bigger than that. The US housing bubble in ’06, that was a three sigma.
That was literally over a hundred-year event. It had never happened before. Most unlikely, it took the undivided attention of Greenspan and Bernanke, pushing and pushing interest rates down to finally get the entire US housing market to go into Warp Drive simultaneously.
Famously, it had been diversified before that it would bubble in Florida, crash in Chicago, and so on. So it never happened until it got their undivided attention.
And so just concentrate on these few. They always have a recession, and when they want to take their time, they really take their time.
Most of the decline in these great bear markets only happens after the first interest rate cut. So you tell me when the first interest rate cut is, and I will tell you when the second half of the pain is going to start.
And it would be unlikely from a historical point of view that this was not run, this financial stock market event would not run deep into next year. And that’s what it looks like.
It’s not hurrying, but let me bring up another point on your chart. We have forgotten to adjust inflation because we haven’t had inflation for 20 years. In the old days, all data like this. Everything you read in the Economist, et cetera, was always inflation adjusted. We have had, for example, over 10% inflation.
The market isn’t down 15%, the market is down 25. In the housing bubble, there was no inflation. In 2000, there was no inflation. You can’t compare this one with 10% inflation with that one that had a couple.
And 25% is a pretty decent down payment on this bear market I would say. The passage of time against a market that has a trend line and in an economy that has inflation, the passage of time is pretty painful if you even stay flat, you are losing money at a decent speed and people have forgotten that.
You can listen to the entire discussion here:
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