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.

Acceleration

Classic Bubble?

Advance-Decline

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

My friend @michaellebowitz asked about Grantham’s “melt up” thesis. No question this is that, but blowoff phase more likely ending than beginning. My own immediate outlook still neutral, monitoring internals, w/safety net for tail-risk given ~3 fold overvaluation (see my latest). pic.twitter.com/8DnUJLI3iy

— John P. Hussman (@hussmanjp) January 5, 2018