Six Impossible Things Before Breakfast – GMO White Paper

I believe the markets are behaving like the White Queen. In order to make sense of today’s pricing, you need to believe in six impossible (okay, I’ll admit some of them are just very improbable as opposed to impossible) things.


1. Secular stagnation is permanent and rates will stay low forever. As we have argued at length elsewhere, secular stagnation is a policy choice and we could exit it reasonably quickly by implementing appropriate policies.

2. The  discount  rate  for  equities  depends  on  cash  rates.  This  is  nothing  more  than  a  belief. It has no foundation in data and not a scrap of evidence exists that supports this hypothesis.

3. Growth  rates  and  discount  rates  are  independent.  This  is  a  very  questionable  assumption.  If,  as  I  believe,  it  is  false,  then  it  makes  the  “Hell”  outcome  Ben  has discussed  in  previous  Quarterly  Letters  less  likely,  unless  the  first  two  beliefs  hold

4. Corporates carry out buybacks ad nauseum, raising EPS growth despite low economic growth. This  would  imply  rising  leverage,  which  is  already  close  to  all-time  highs. Remember Minsky: Stability begets instability.

5. Corporate cash piles make the world a safer place. Cash levels aren’t high by historic standards, and valuations are extreme even when cash is fully accounted for.

6. The “Hell” scenario is the most probable outcome. This requires “this time is different” to be true and, unlike Jeremy Grantham, I am not yet ready to assign this exceptionally useful rule of thumb to the waste bin of history. Put another way, Hell requires that stock prices have reached a “permanently high plateau,” and I’m not about to embrace that statement.

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