Grantham’s mea culpa

GMO founder and investing legend Jeremy Grantham's career has been defined by his prescient calls on the three great bubbles of recent decades – the housing and credit bubble that preceded the global financial crash, the technology bubble of the late 1990s, and the Japanese equity bubble that burst in 1989. Last week, however, the great train-wreck spotter admitted he got it badly wrong in relation to the bursting of the commodities bubble.

In 2005, Grantham said the huge spike in oil prices represented a genuine paradigm shift rather than a bubble.

A passionate environmentalist, Grantham warned in 2011 high commodity prices were here to stay due to scarcity and Chinese demand.

He was wrong, as he admitted in last week’s GMO quarterly letter; it was just another market mispricing.

Grantham has been commended for his mea culpa, but he stopped short of saying his green beliefs coloured his outlook. Is this plausible? In 1999, Grantham pointed to 28 major bubbles and noted the score: “Mean Reversion, 28; Paradigm Shift, Nil!” The commodities bubble was the only instance where he bought into the hype, proving once again that ideology and investing are a bad mix.

What would a Trump win mean for stocks?

The odds on a Donald Trump US presidency have shortened lately, prompting increased speculation as to what a Trump victory would mean for stock markets.

Common sense suggests investors would not fancy a president who talks of China "raping" the US with its trade policies, who says markets are in a "big, fat, juicy bubble", who insists on deporting 11 million undocumented migrants, and who has talked about the US defaulting on its debt as if it is little different to one of his failed casino ventures.

Nevertheless, some commentators think otherwise. Thomas Lee of Fundstrat Global Advisors says Trump would establish a pro-business environment that would boost stocks, while Oppenheimer's John Stoltzfus says Trump would "enact policies that reflect his ability to successfully negotiate with people".

Some note Trump’s primary victories in recent months have coincided with sizable market gains; others are busy predicting what sectors would gain or lose from a Trump presidency; agnostics suggest it makes little difference who will win, arguing that politicians’ impact on markets is overstated.

The notion that investors would cheer a Trump victory is fanciful, to say the least. Similarly, the agnostic argument is true in most cases, but not here. Markets hate uncertainty; Trump’s evidence-free prognostications and casual abandonment of policies is not an appealing recipe for investors seeking to price in risk.

Investors remain sanguine only because a Trump victory remains unlikely; should that change, markets would surely get very nervy indeed.

Volatility remains subdued

Stocks have pulled back over the last fortnight but volatility remains subdued, with the Vix, or fear index, hovering around the 14 level. Not only is that half the level recorded at February’s market bottom (28), it’s well below the Vix’s historical average (20).

Low Vix readings invariably prompt accusations of market complacency, as evidenced by the old adage that when the VIX is high, it’s time to buy; when the VIX is low, it’s time to go.

It’s a misguided thesis, however. While very high Vix readings often denote short-lived market panics, low Vix readings can persist for years. Indeed, the Vix was lower than today during much of 2013-2014. Secondly, actual market volatility has been much lower than that suggested by the Vix; far from indicating complacency, Vix traders have been consistently overestimating market volatility in recent weeks.

Stocks may well suffer another attack of the heebie- jeebies, but the idea low Vix readings invariably represent the proverbial calm before the storm is just another market myth.

Gartman’s guessing game on oil

If you’re going to forecast, forecast often; you’re a guru if you get it right, and no one cares if you’re wrong.

Take veteran US newsletter writer Dennis Gartman, who was on CNBC last week talking about the outlook for crude oil prices.

Gartman, who changes his mind with bewildering frequency, said last October he was as bullish as he’d ever been on oil. Prices then collapsed, leading Gartman to say in late January that oil wouldn’t trade above $44 in his lifetime.

Crude topped $46 last week. Undeterred, Gartman says it’s now time to buy oil.

You couldn’t make it up.

Red spells danger for investors

Investors get spooked by the colour red, according to a new study.

Researchers, noting the colour has long been associated with danger, conducted three experiments where financial losses were communicated in red, black or blue. In the first two experiments, investors shown the red font became more risk averse, less likely to be positive towards financial assets and more pessimistic about future stock market prices.

The effect was not found in the third experiment, however. Why? The participants were colour-blind.

See http://goo.gl/idwPO3.