Jeremy Grantham, the celebrated investor, warned about the “super bubble” and said it has yet to explode even after the turbulence in the US stock market this year.
Grantham, 83, is the co-founder of GMO LLC, an investment and asset management company based out of Boston. He is known for calling out the market bubbles. On Wednesday, he said the current surge in the equities from mid-June to mid-August perfectly fits the bear market pattern. Rallies are common after sharp declines initially in a typical bear market before the economy deteriorates further.
Grantham anticipates more trouble ahead because of overvalued stocks and bonds combined with commodity and housing shocks and Federal Reserve Hawkins.
At the start of the year, Grantham had predicted that benchmark stocks would collapse by almost 50% to a historic low. In early June, the S&P 500 index fell by around 25% from its peak in January before rising again in the next two months.
The US equities are tumbling again, with Wednesday’s fall marking the fourth consecutive day of decline. Among others, prominent strategists like Mike Wilson of Morgan Stanley have cautioned investors that the market has not yet bottomed out.
Grantham, in an interview, said it was nonsense for people to say it’s a new bull market when there was a typical bear market rally the other day.
Choppy Ride
According to Grantham, super bubble collapse happens in several stages. First, it will have a setback like the one in the first half of this year, and then a slight rally takes place. The fundamentals finally cause the breakdown, and the market reaches its bottom.
Grantham is famous for identifying and profiting from bubbles in the late 1980s in Japan. Later he made money from tech stocks at the start of the century and during the 2008 financial crisis in US housing. He made other bearish predictions, either too early or wrong.
This time he pointed to short-term problems such as China’s continuing Covid issues, Russia’s invasion of Ukraine’s effect on Europe, and fiscal tightening. The rising inflation drove the decline in stocks in the first half. At the same time, the lower profit margins of corporates are expected to cause the next round of declines.
Grantham bet they will experience a tough time economically and financially before it gets washed from the system. Grantham said he was unsure if the market would get out of hand like in the 30s, get contained well like in the 2000s, or remain in between.
