Page 30 - Investment Advisor December 2022/January 2023

COVER STORY

“One of those features is the bear mar-
ket rally after the initial derating stage of
the decline but before the economy has
clearly begun to deteriorate, as it always
has when superbubbles burst. This in all
three previous cases recovered over half
the market’s initial losses, luring unwary
investors back just in time for the market
to turn down again, only more viciously,
and the economy to weaken,” he said.
“This summer’s rally has so far per-
fectly fit the pattern,” Grantham added.
“The U.S. stock market remains very
expensive and an increase in inflation like
the one this year has always hurt mul-
tiples, although more slowly than normal this time. But now the The puke point marks the moment when stockholders who
fundamentals have also started to deteriorate enormously and can be shaken out are indeed shaken out, he explains in his
surprisingly: between COVID in China, war in Europe, food and latest Insight report. ”They’ve regurgitated their last equity
energy crises, record fiscal tightening and more, the outlook is and swear never to buy another one. … That’s when the bear
far grimmer than could have been foreseen in January,” he said. market bottom is reached and a new bull market commences,”
The current bubble features the most dangerous mix of Shilling said.
superbubble factors in modern times, with housing, stocks “There are many signs that the puke point lies far ahead,”
and bonds all “critically historically overvalued at the end he added. “Some of those who earlier denied the possibility
of last year” and the economy confronting an inflation surge of a recession now say that if it occurs, it will be mild and it is
and interest rate shock, the type that “have always cast a long already discounted in lower stock prices. They believe the Fed
growth-suppressing shadow,” Grantham said. will cut interest rates next year, and we agree — but only after
“If the bear market has already ended, the parallels with the central bank realizes it has precipitated a recession.”
the three other U.S. superbubbles — so far so strangely in While his firm released the commentary in late July, the
line — would be completely broken. This is always possible,” economist referenced it in a tweet in August, saying, “I don’t
he wrote. But “these few epic events” seem to have their own need the reported two straight quarters of negative real #GDP
rules, he said. to tell me the US #economy is already in, or at least close to, a
“If history repeats, the play will once again be a business downturn.”
Tragedy. We must hope this time for a minor one,” In the report, he said: “Hopes that the bear market
Grantham said, mentioning in a footnote that in stocks has largely anticipated a recession are no
“2000 was minor, 1972 major and 1929, of doubt premature. Stock devotees are far from
course, horrific.” reaching the puke point and capitulating.”
The market has been in a “true super- Shilling wrote that he foresees a 2022–
bubble” for some time, and it’s important 2023 recession of average length and
to remember that bubbles in developed depth, but that risks to the economy are
markets have always “broken back to on the downside. He cited liquidation of
trend,” he said. “The higher they go, there- excess retail inventories, abetted by con-
fore, the further they have to fall.” sumer retrenchment, and a likely drop in
The Dow Jones Industrial Average housing activity among the negatives.
fell more than 1,000 points on Aug. 26 after Stocks rallied in June as concerns about the
Federal Reserve Chairman Jerome Powell indi- Fed’s rate-raising campaign and potential reces-
cated the central bank would maintain a hawkish stance sion were countered by better-than-expected corporate
on raising interest rates to tame inflation. earnings, some positive economic data and declining gasoline
prices, Shilling explained.
If a recession is in the cards, it’s shaping up to be an unusual
The stock market’s “puke point” — the bear market bottom — one, he wrote. High inflation persists, economic growth has Powell: Al Drago/Bloomberg
doesn’t seem imminent, economist Gary Shilling suggested in weakened, the housing outlook appears bleak, consumers feel
a report this summer, writing that it’s premature to conclude blue, and the yield curve has inverted — a sure recession signal
investors have already priced in a recession. historically, he noted.

28 INVESTMENT ADVISOR DECEMBER 2022/JANUARY 2023 | ThinkAdvisor.com