Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO), says current market conditions that feature “extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior” demonstrate that the the long bull-market run in Wall Street since 2009 has turned into a “fully-fledged epic bubble.”
According to the famed British value investor who predicted the 2000 and 2008 downturns, “this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
The legendary investor says a wide range of gauges including the “Buffet indicator”( the ratio of total US stock market valuation to GDP) and the flood of interest in special-purpose acquisition companies (SPACs) in the US are also flashing bubble warnings.
“So, I am not at all surprised that since the [northern hemisphere] summer the market has advanced at an accelerating rate and with increasing speculative excesses,” the 82-year old says in the note. “It is precisely what you should expect from a late-stage bubble: an accelerating, nearly vertical stage of unknowable length – but typically short. Even if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears.”
Grantham has successfully called three market bubbles: Japan’s asset-price bubble in the late 1980s, the dot-com bubble in 2000, and the housing crisis in 2008. However, he says unlike all previous bubbles the 2020/21 version is inflating at time when underlying economic conditions look weak.
“Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent,” he says. “This is completely without precedent and may even be a better measure of speculative intensity than any SPAC.”
Of course, identifying stock bubbles is easier than timing the pop, which he says could happen as early as the late spring or early summer.
“But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives,” Grantham says.
“Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.”
The stock market guru advised investors to avoid the worst by placing their bets in value stocks and emerging markets equities, while having zero exposure to US growth stocks.
Grantham was born in Ware, Hertfordshire, grew up in Doncaster. He studied Economics at the University of Sheffield and in 1966 he completed an MBA at Harvard Business School.
He began his investment career as an economist with Royal Dutch Shell, started one of the world’s first index funds in the early 1970s and co-founded GMO, an asset management firm in 1977, from his office on the Boston Harbor.
GMO utilizes various long-term, value-based investment strategies that focus on risk management and diversification.