Investing legend Jeremy Grantham is once again sharing an apocalyptic forecast for U.S. stocks. In a recent note, he warned that the market is headed to a brutal crash and that we’re all about to witness the largest wealth destruction event in modern history. Over the past few years, the GMO founder has quietly turned from bullish to bearish on the U.S. stock market. He has been sounding the alarm about a potential financial disaster since June 2020. And after correctly calling the last three financial bubbles, he said this one is the ‘Real McCoy,’ and that the current rally is absolutely ‘crazy’.
However, in 2021, Grantham’s warnings of an imminent crash didn’t come true. In August, he said that a spectacular crash was coming within a few months. Right after that, he cautioned investors that the bursting of this epic bubble was going to be the most important investing event of our lives. This time around, he might have underestimated how determined the Fed is to avoid another financial meltdown amid a bumpy economic recession. But even though he’s got the timing wrong, that doesn’t mean he’s not right.
In the last days of December, U.S. stocks have started to plunge, especially in the tech sector, where the bubble has actually burst. Now that the Fed support is finally fading away, a reversal in this downward trend seems nearly impossible. That’s why, a couple of days ago, 83-year-old Grantham publish his gloomiest note yet, titled “Let The Wild Rumpus Begin,” in which he exposes that we are currently living in a superbubble – the fourth of the past century – and just as during the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, Grantham is “certain” the bursting of this bubble has begun. The iconic value manager sees the S&P plunging by at least 50% to 2,500 from its all-time high of 4,800 reached just a few weeks ago. The Nasdaq Composite, on the other hand, which has closed in correction territory last Wednesday, is about to face an even bigger and far more painful correction.
The expert has been seeing signs that something was terminally broken in the market since last February, but it wasn’t until recently that indicators started to show the same. The bursting of this superbubble has become crystal clear after dozens of the most speculative stocks began falling. For example, Cathie Wood’s ARK Innovation ETF, has already crashed by 52%, and so did the shares of the electric car maker, Rivian. And then, the Russell 2000, an index of mid-cap equities that normally outperforms in a bull market, fell behind the S&P 500 in 2021. In fact, most bubbly assets that are sensitive to central bank liquidity have been significantly lower over the past month.
While Grantham is one of the last remaining legendary investors and value managers that have been on Wall Street for over 50 years, calling boom and bust cycles for almost as long, according to Bloomberg’s Erik Shatzker, the veteran’s predictions are largely dismissed by today’s investors. They often ask, “how could the S&P 500 advance 26.9% in 2021 if stocks were set to go down, especially when Grantham was warning of an epic crash early last year?”
But instead of disproving his case, Grantham argued that the strength in blue-chip stocks at a time of weakness in speculative assets only reinforces it: “This has been exactly how the great bubbles have broken,” he stressed. “In 1929, the flakes were down for the year before the market broke, they were down 30%. The year before they’d been up 85%, they had crushed the market”. Simply put, the market veteran is alerting about the same kind of market leverage that led Goldman Sachs to ring the alarm last month, when the bank observed that 51% of all market gains since April are from just 5 overvalued tech stocks.
Having seen the same trends playing out in every past superbubble is what gives him so much confidence in predicting this one will crash in a similar manner. This is the “most dangerous breadth of asset overpricing in financial history,” he writes. And as it always happens, the stock market bubble has begun to deflate from the riskiest end of the market ﬁrst – as it has been doing since December, Grantham wishes us all good luck because that’s what we’re all going to need in the dark times that are fast approaching.
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