Grantham sees some clear parallels as well as differences between today and the tech bubble 20 years ago. Back in those days, a plethora of dot.com stocks like Pets.com were poster children for speculative excess.
Now it’s the SPACs (Special Purpose Acquisition Companies). The problem is that “SPACs are much bigger” and are “able to sidestep the SEC prohibition on selling daydreams,” Grantham argues. “We’re looking at something that’s going exponential.”
The market at least seems to be waking up to the problem. The average SPAC, Grantham says, is already down 25% and at least a few have swooned by 50% or more.
But in 2000, there was no bubble in the bond or housing markets. With that previous bubble largely confined to the tech sector, it was finite and there “were places to hide.” Eventually, the terrorist attacks of September 11 and the accounting scandals at Enron and Worldcom would spark a broader sell-off in 2002, but most non-tech stocks recovered fairly quickly in 2003.
This time the entire equity market is historically expensive by most metrics. “Don’t tell me it’s just the top decile,” Grantham says.
If one measures the equity universe by price-to-sales ratios and slices it into ten deciles, every single decile is selling at its all-time high. In recent weeks, even the top decile reached its 2000 peak and many high flyers at the turn of the millennium had little in the way of revenues.
That’s one of many reasons Grantham is confident that value will outperform growth in the next decade. In reality, however, value stocks have performed reasonably well for the last decade—until they are contrasted with their growth-stock counterparts that went vertical.
In one scenario that Grantham considers plausible, value stocks grind higher slowly but massively outperform their growth counterparts, which tumble by something like 50%. In an extended interview yesterday, Grantham also said there could be a wipeout across the board. In that rosy case, a 2,000 target on the S&P could also materialize, representing the third decline of 50% in this young century.
Another scenario that won’t happen is the one growth stock managers holding tech shares they know are overvalued pray for—namely, that the Amazons, Twilios and others, go sideways for the next decade. That “would be lovely for them,” Grantham says.
In every era of overpriced stocks going back to Nifty Fifty of the early 1970s, “There have been a lot of people who say we will resolve this by going sideways. That has never happened.”
The bottom line, Grantham says, is that economists know “next to nothing” that is useful about stocks. The school of rational expectations has “misled” investors for most of the last 70 years. Investing just isn’t a rational activity—it’s a behavioral one.