I recalled a recent conversation with a client while listening to an excellent, wide-ranging interview with investing legend Jeremy Grantham last week. 

Note: While I didn’t agree with all (but I did most) of Jeremy’s points, I believe he’ll ultimately, and once again (he has quite the history of accurately identifying such conditions), be proven correct with regard to the bubbliness (the eventual outcome) of present equity market conditions.

Our client, while 100% sympathetic to our presently cautious narrative (he’s also been around most of modern history’s blocks and has a good memory), found himself — his good memory notwithstanding — bewildered by the bullishness he’s hearing and reading as he keeps tabs on Wall Street sentiment.

Here’s from the Grantham interview:

Bloomberg’s Erik Schatzker: What’s the incentive for public traded asset managers, firms with trillions in assets, to test clients’ patience if the outcome might not be known for years?

Grantham: This is the easiest question of the day, they have no incentive. It makes no commercial sense at all for them to attempt to warn clients of impending doom, ever. It is terrible business to blow the whistle on a major bull market if you’re a commercial enterprise. You make your money by having the bubble keep going.

Which is, in essence, how I responded to my client’s bewilderment: Wall Street has needs to be perpetually bullish on stocks. After all, stocks — IPOs, brokerage accounts, capturing bid/ask spreads, investment banking, etc., — is what Wall Street does. No way you’ll find “the street” (players in the aggregate) talking down, or walking back, any bullish narrative…

Yes, I suppose from an assets under management perspective, late-stage stock market bubbles can indeed be dangerous for firms that exist to invest other peoples’ money. 

Well, that is, for firms that do the deep work, assess the risk, and — in the interest of protecting their clients’ fortunes — hedge, and diversify away from the bullish market grain when conditions demand it.

Like I said (in defense of another investing legend, Ray Dalio) in my January 2020 blog post subtitled The Secret to Beating the Market:

“Hedge fund manager Colm O’shea — while being interviewed for Hedge Fund Market Wizards — said, words to the effect, that toward the end of a bull market the smart money loses assets under management as it begins to adjust to evolving (and deteriorating) general conditions.

The “dumb money”, the perennial bulls, thus captures those fleeing “smart-money” assets as it continues to buy as the market melts higher — in the face of waning fundamentals.

Ultimately, when the inevitable collapse occurs, the forever-bulls wail on that no one could’ve seen it coming, but, as O’shea suggested, that was clearly not the case for those who did the work.”