‘Good luck! We’ll all need it’: US market nears end of ‘super bubble’, says Jeremy Grantham

The US is nearing the end of a “super bubble” spanning stocks, bonds, real estate and commodities following massive stimulus measures amid the COVID pandemic, potentially leading to the largest wealth write-down in its history once pessimism returns to the US. dominant markets, according to legendary investor Jeremy Grantham.

“For the first time in the US, we have simultaneous bubbles in all major asset classes,” Grantham, co-founder of investment firm GMO, said in a newspaper on Thursday. He estimated that US capital losses could total $35 trillion if valuations for major asset classes returned to two-thirds of historical standards.

“One of the main reasons I deplore super bubbles — and blame the Fed and other financial authorities for allowing and facilitating them — is the under-recognized damage that bubbles do when they deflate,” Grantham said.

The Federal Reserve doesn’t appear to be “getting” asset bubbles, Grantham said, pointing to the “unspeakably massive stimulus to COVID” (some of which he believes was necessary) that followed the stimulus to recover from the bankruptcy of the 2006 housing bubble.” The only ‘lesson’ the economic establishment seems to have learned from the rubble of 2009 is that we haven’t tackled it with enough incentives,” he said.

Stock bubbles tend to start deflating the riskiest parts of the market first — like the bubble Grantham has been warning about since February 2021, according to his paper. “Good luck!” He wrote. “We’ll all need it.”

While the S&P 500 index SPX,
-1.10%
and Dow Jones Industrial Average DJIA,
-0.89%
which hit an all-time high in early January, have since plunged, along with the Nasdaq Composite Index COMP,
-1.30%,
as investors expect the Fed to end QE and start raising interest rates later this year to curb high inflation.

Read: Why 2022 looks like ‘a perfect negative storm’ for tech stocks, according to Deutsche Bank

The tech-laden Nasdaq saw its biggest drop in the three major stock benchmarks in 2022, moving into correction territory after hitting a record high in November, according to data from FactSet.

“We’re in what I consider to be the vampire phase of the bull market, where you throw everything you’ve got at it,” Grantham wrote. “You stab it with COVID, you shoot it down with the end of QE and the promise of higher rates, and you poison it with unexpected inflation – which has always killed P/E ratios, but quite uniquely, not yet this time — and yet the creature flies.”

That’s “until, just when you start to think the thing is completely immortal, it eventually, and maybe a little anticlimactic, falls over and dies,” Grantham said. “The sooner the better for everyone.”

According to data from FactSet, the Nasdaq is down 9.5% this month through Thursday, surpassing the S&P 500 by nearly 6% and a 4.5% loss for the Dow.

As for GMO’s investment recommendations, Grantham summed them up as avoiding US stocks and emphasizing value stocks in emerging markets and lower-cost developed countries, “particularly Japan.” On a personal note, he said: “I also like some money for flexibility, some means for inflation protection, as well as a little gold GC00,
-0.16%
and silver.”

In addition to the recent record highs of the US stock market and the “crazy” investor behavior that accompanied its rise, Grantham warned that “we are indeed participating in the widest and most extreme global real estate bubble in history.” He said homes in the US have “the highest multiplicity of household incomes ever, after a record 20% gain last year”.

In addition, Grantham said, “we also have the most expensive bond markets in the US and most other countries around the world, and of course the lowest interest rates in human history.”

And then there’s the “incipient commodity bubble,” he added. Oil CL00,
-1.72%
and most of the “major metals” are among commodities whose prices are well “above trend,” while the “UN index of global food prices is near its all-time high,” according to his paper.

“The combination, we saw in 2008, of still rising commodity prices with a deflating asset price bubble is the ultimate pincer attack on the economy and will almost certainly lead to major economic pain,” he wrote.

Grantham also considered how wealth grows more slowly with bubble pricing, while making it difficult for people to pay for their first home or build an investment portfolio.

“There’s the horrendous rise in inequality that comes with higher asset prices, which many simply don’t own, and ‘many’ today applies to the median family or beyond,” he wrote. “They’ve been let down, they know it, and they’re growing (and understandably) hating it. And it definitely hurts our economy.”