Jeremy Grantham, a wise old investor with an excellent record in calling time on wild stock market exuberance, picked his moment well this week to warn that a “fully fledged epic bubble” had formed on Wall Street. On cue, world share prices hit all-time highs as investors seemingly looked beyond the pandemic and decided everything was about to go very right.
Hopes for a Democratic clean sweep of US Congress were priced up before Senate election results in Georgia were even confirmed. The talk now is of great “reflation” trade – serious US government spending to stimulate economic growth, coupled with a pleasant level of inflation (but not enough to panic the Federal Reserve).
Even the FTSE 100, the ugly duckling of international stock market indices during the pandemic and Brexit, joined the party. The UK’s blue-chip UK index rose 3.5%, or 230 points, on Wednesday as its previously unloved collection of banks and oil companies came into focus.
Banks love the whiff of higher long-term interest rates; and life for the oil majors is easier with a barrel of Brent fetching more than $50. The FTSE 100 has gained an astonishing 20% since early November, just before Pfizer and BioNTech’s big vaccine announcement.
So what’s Grantham’s complaint? The co-founder of the Boston-based investment manager GMO has a few: “Extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour.” He likens the mood to the South Sea bubble, the Wall Street crash of 1929 and the turn-of-the-millennium dotcom mania.
To be clear, Grantham’s eyes are mainly on US markets, and many of his examples of excess relate to US tech valuations, especially Tesla, and the boom in listings on Wall Street last year of “blank cheque” special acquisition companies. But his broad thesis should still be noted: it is that, counterintuitively, the broad rollout of vaccines may be the moment that investors are forced to rethink.
“Market participants will breathe a sigh of relief, look around, and immediately realise that the economy is still in poor shape, stimulus will shortly be cut back with the end of the Covid crisis, and values are absurd,” he says. Put another way: “Great bull markets typically turn down when the market conditions are very favourable, just subtly less favourable than they were yesterday.”
It’s a point of view – and clearly not the popular one currently. But Grantham is a serious student of markets. Investors’ tone does feel bizarrely excitable.
Beware tales from Hipgnosis adviser’s musical youth
“I bought my first Neil Young album aged seven,” said Merck Mercuriadis, as music publisher Hipgnosis, the FTSE 250 royalty fund he advises, bought 50% of the songwriter’s back catalogue. He had a similar line on Monday when Hipgnosis acquired the super-producer Jimmy Iovine’s catalogue of worldwide producer royalties. Mercuriadis said he noticed Iovine’s prolific output “while barely in my teens”.
These charming tales tend to obscure the complete absence of financial details in Hipgnosis’s deal-making announcements. How much is the fund paying Young? Investors are not allowed to know because the great man doesn’t want to say, apparently
All one can deduce is that the price of royalties is generally rising. Hipgnosis’s “blended acquisition multiple” on its entire catalogue of rights, which now runs to about 60,000 songs, was 14.7 times “historical annual net income” at the last count in December. It used to be 12.8 times.
At what point do prices become too frothy? A hard-headed commercial analysis might be useful for Hignosis’s investors rather than tales from Mercuriadis’s musical youth. He is, after all, planning to ask them for another £1bn to continue the acquisition spree – and, presumably, hoping to continue to collect the 0.8% annual advisory fee that goes to his privately owned management firm.
New BBC chair’s links to Philip Green may raise a few eyebrows
Richard Sharp, lined up by the government as the next chair of the BBC, is usually described as Rishi Sunak’s former boss when both men worked at Goldman Sachs. But having a future chancellor as an underling was hardly the most noteworthy moment of Sharp’s time at the US investment bank.
Retail watchers will recall that Sharp, as head of Goldman’s European private equity fund, was the banker who was prepared to back Sir Philip Green’s attempt to buy Marks & Spencer in 2004. The bid was abandoned, but Sharp had agreed to bankroll Green’s takeover vehicle to the tune of £800m and sat at the table with him during negotiations.
A past association with Green does not adorn a CV in the way that it once did, to put it mildly. How fortunate that Sunak’s brief spell at Goldman is now deemed more interesting.
