Close Close
ThinkAdvisor
Bloomberg photo of GMO's Jeremy Grantham

Portfolio > Economy & Markets > Economic Trends

Jeremy Grantham: ‘Superbubble’ Yet to Burst in ‘Epic Finale’

By Dinah Wisenberg Brin

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • The current superbubble features a dangerous mix: cross-asset overvaluation, commodity shock and a hawkish Fed, Grantham says.
  • This summer's bear market rally fits the superbubble pattern, he says.
  • If historical patterns repeat, he writes, the market could be in for a tragedy.

The stock market’s current “superbubble” has yet to burst, renowned investment strategist and forecaster Jeremy Grantham suggested in an opinion piece, warning investors that a financial “tragedy” may be in the offing.

Grantham, co-founder of the asset manager GMO, made the comments on his firm’s website Wednesday as U.S. equities experienced the fourth day straight day in a major sell-off.

GMO’s Grantham: 9 Market Predictions for Advisors, Investors

Economic Trends

“The current superbubble features an unprecedentedly dangerous mix of cross-asset overvaluation (with bonds, housing and stocks all critically overpriced and now rapidly losing momentum), commodity shock, and Fed hawkishness,” he wrote. “Each cycle is different and unique — but every historical parallel suggests that the worst is yet to come.”

Grantham, known for accurately calling past market bubbles, cited parallels between current market conditions and those of the three previous superbubbles in 1929, 1972 and 2000, saying the current one appears to have paused between its third and final acts.

“Prepare for an epic finale,” he cautioned investors.

Superbubbles, unlike other market phenomena, are among the most important events in an investor’s career and have clear features in common, Grantham wrote.

“One of those features is the bear market rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst. This in all three previous cases recovered over half the market’s initial losses, luring unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken,” he said.

“This summer’s rally has so far perfectly fit the pattern,” Grantham added.

“The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: between COVID in China, war in Europe, food and energy crises, record fiscal tightening and more, the outlook is far grimmer than could have been foreseen in January,” he said.

“Longer term, a broad and permanent food and resource shortage is threatening, all made worse by accelerating climate damage.”

The current bubble features the most dangerous mix of superbubble factors in modern times, with housing, stocks and bonds all “critically historically overvalued at the end of last year” and the economy confronting an inflation surge and interest rate shock, the type that ”have always cast a long growth-suppressing shadow,” Grantham said.

“If the bear market has already ended, the parallels with the three other U.S. superbubbles — so far so strangely in line — would be completely broken. This is always possible,” he wrote. But “these few epic events” seem to have their own rules, he said.

“If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one,” Grantham said, mentioning in a footnote that “2000 was minor, 1972 major and 1929, of course, horrific.”

The market has been in a “true superbubble” for some time, and it’s important to remember that bubbles in developed markets have always “broken back to trend,” he said. “The higher they go, therefore, the further they have to fall.”

The Dow Jones Industrial Average fell more than 1,000 points Friday after Federal Reserve Chairman Jerome Powell indicated the central bank would maintain a hawkish stance on raising interest rates to tame inflation; the Dow had sold off another 900 points this week as of midday Thursday.

Dinah Wisenberg Brin

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.