Co-Founder of Boston asset manager GMO – Jeremy Grantham – has a proven track record when it comes to forecasting bubbles, most notably having anticipated: Japan’s asset price bubble in the 1980s, the dot-com bubble of the late 90s, and even the US housing market crisis prior to 2008. So when someone like Jeremy Grantham is warning us about a “super bubble” that’s on the precipice of popping, it might be worth paying attention.
Despite all the downturns and market routs we’ve already witnessed throughout 2021/2022, the famed 83-year-old investor predicts the “worst has yet to come.” In a research note published earlier this week titled ‘Entering The Super Bubble’s Final Act,’ Grantham explained how a “dangerous mix” of overvaluation across several asset classes, commodity shock, and hawkishness from the Federal Reserve could spell trouble.
“The current super bubble 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. Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come,” writes Jeremy Grantham.
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Jeremy Grantham believes the breaking of a “super bubble” takes the following stages:
- “First, the bubble forms.”
- “Second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realise that perfection will, after all, not last forever, and valuations take a half-step back.”
- “Then there is what we have just seen – the bear market rally.”
- “Fourth and finally, fundamentals deteriorate and the market declines to a low.”
Earlier this year, Grantham predicted benchmark stocks would cliff-dive almost 50% in a historic collapse. Fast forward to June, the S&P 500 plunged by almost 25% from its January peak before coming back in force the following two months. But as briefly alluded to in Step 4 of the “super bubble” lifespan above, recovery such as this might not be all that it’s cracked up to be.
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Grantham elaborates: “Bear market rallies in super bubbles are easier and faster than any other rallies. Investors surmise, this stock sold for $100 six months ago, so now at $50, or $60, or $70, it must be cheap.”
“Outside of the late stage of a super bubble, new highs are slow and nervous as investors realise that no one has ever bought this stock at this price before: so it is four steps forward, three steps back, gingerly exploring terra incognita.”
“Bear market rallies are the opposite: it sold at $100 before, maybe it could sell at $100 again.”
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Jeremy Grantham later outlined a few historic bull traps eerily similar to the current situation. Namely the November low in 1929 to the April 1930 high (“55% recovery of the loss from the peak”), the 1973 summer rally (“recovered 59% of the S&P 500’s total loss from the high”), as well as what occurred with the tech stock-heavy NASDAQ circa 2000 (“recovered 60% of its initial losses in just two months”).
“If the bear market has already ended, the parallels with the three other US super bubbles – so far so strangely in line – would be completely broken. This is always possible,” adds Jeremy Grantham.
“Each cycle is different, and each government response is unpredictable. But these few epic events seem to act according to their very own rules, in their own play, which has apparently just paused between the third and final act.”
“If history repeats, the play will once again be a tragedy. We must hope this time for a minor one.”
You can read Jeremy Grantham’s rationale in detail for the coming “super bubble” below.
