According to the article, Grantham says that the crash will occur at
S&P 2250. Since the S&P is currently at 2100, this means that
the crash could occur after a 7% increase.
I don't believe that it's possible to make such a specific prediction.
You can say that the stock market is in a bubble, but the exact time a
crash will occur depends on a triggering event and the public mood,
and these are not easily predicted.
Nonetheless, I use a much simpler methodology for looking at this and
I wanted to see how it compares.
One way is to look at the S&P 500 P/E index which is now very close to
21.
In the recent past it's been around 18, which means that the bubble
really is expanding rapidly. (As you all know, the historical P/E is
14, and it's expected to fall to the 5-6 range after the crash,
bringing the DJIA down to the 3000 level.)
The other way is to do a very simple exponential growth curve fitting
to the DJIA, which I plot on the following page:
** DJIA Historical Page
** http://www.generationaldynamics.com/pg/ ... i.djia.htm
On that page, the important value is the "% of trend" column. That
number should be around 100%, meaning that the DJIA is at its
historical trend value. Below 100%, and stocks are underpriced; above
100%, and they're overpriced; significantly above 100%, stocks are in
a bubble.
So we can look at the "% of trend" value at various times:
03-Sep-1929 255% [Peak of 1929 bubble]
08-Jul-1933 24% [Trough of Great Depression]
11-Feb-1966 125% [Post-Depression peak until the 1990s]
10-Aug-1982 46% [End of long decline that began in 1966]
25-Aug-1987 128% [False panic of 1987 - 58 yrs after 1929]
14-Jan-2000 314% [peak of 2000 tech bubble]
09-Oct-2007 267% [peak of 2007 credit/real estate bubble]
30-Apr-2015 238% [current]
If increase the current value by 7%, which is the amount that Grantham
is predicting, we get 255%, which is the value at the peak of the 1929
bubble. (Perhaps that's how Grantham got his value, probably arriving
at it by a much more circuitous route, to justify his 7-digit salary.)
So I would agree that the crash could occur when the trend value
is AROUND 255%, but we can see that it went higher in 2007, and
much higher in 2000. The exactly timing will probably be affected
by an exogenous event, and that could happen before or after the
trend value reaches 255%.
By the way, the DJIA is currently around 18000, so a 7% increase would
bring it to 19260.
Another by the way: I read a column by a "respected analyst" today who
says that stock values "normally" increase by 7-8% a year. This is a
lie. Historically, the increase is 4.5% a year, including inflation.