One of Wall Street’s top bubble watchers says we’re still in the middle of a ‘superbubble’ that hasn’t burst yet

Jeremy Grantham is one of Wall Street’s most respected investors.

The co-founder of Boston asset manager GMO is widely known for predicting Japan’s asset price bubble in the 1980s, the dot-com bubble of the late 90s and even the US housing boom before the financial crisis of 2008.

Now the 83-year-old Wall Street veteran argues that despite the stock market’s struggles this year, the economy’s real downturn is yet to come. Grantham has warned of a “superbubble” in the making, which he says has yet to burst.

In a research note on Wednesday, the investor noted that stocks remain “very expensive” and that the high inflation the economy is now experiencing has historically driven their valuations down. He also argued that global economic “fundamentals” have begun to “deteriorate enormously” in recent months, pointing to the COVID-19 lockdowns in China, the energy crisis in Europe, global food insecurity, the Federal Reserve’s rate hikes and the slowdown of government spending worldwide. .

“The current superbubble is characterized by an unprecedentedly dangerous mix of asset overvaluation (with bonds, housing and stocks all critically overvalued and now rapidly losing momentum), commodity shocks and Fed aggressiveness,” Grantham wrote. “Each cycle is different and unique – but every historical parallel suggests that the worst is yet to come.”

Grantham has consistently argued that loose monetary policies by the Federal Reserve and other central banks, including near-zero interest rates and quantitative easing, helped create a “superbubble” in asset prices worldwide over the past decade, sparking an era of investment euphoria . And when euphoria becomes common, a crash is usually around the corner, he argues.

Grantham also doesn’t buy into the idea that the stock rally this summer signaled the start of a new bull market, noting that “superbubbles” have historically been short-lived market rallies.

“Superbubbles are events unlike any other: While there are only a few in history that investors can study, they have clear commonalities,” he wrote. “One of those characteristics is the bear market rally … This summer’s rally fits perfectly into the pattern so far.”

His comments echo statements made by several Wall Street veterans, including Morgan Stanley Chief Investment Officer Mike Wilson, who argues that the bear market rally is nothing more than a “trap” for misled investors since June (although Wilson stops short of calling the market a bubble).

Grantham went on to explain the typical stages superbubbles go through when they collapse, noting that the current economic environment closely resembles the historical pattern.

“First, the bubble forms. Second, a pullback happens, just as it did in the first half of this year, when some wrinkle in the economic or political environment makes investors realize that perfection, after all, won’t last forever, and valuations take a half-step back. Then there’s what we just saw—the bear market rally. Fourth and finally, fundamentals are deteriorating and the market is falling low,” he wrote.

Grantham also explained how rising inflation was the main driver of the fall in stock markets in the first half of the year, but falling corporate profit margins will be the main cause of losses through December. However, he concluded his research note with an important caveat about his prediction.

“If the bear market has already ended, the parallels with the other three US superbubbles – so far so strange – would have been completely broken. This is always possible. Every cycle is different and every government response is unpredictable,” he said. “But… if history repeats itself, the play will once again be a Tragedy. We have to hope this time for a small one.”

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