Charlie Munger already said it in December: the current stock market is “even crazier” than during the dotcom bubble. It seems that Warrent Buffett’s right-hand man was not wrong, because now another investment legend predicts a rather pessimistic future for the stock market.
Jeremy Grantham, co-founder of asset management firm GMO, believes the US is nearing the end of a historic “super bubble,” with devastating losses that could be as high as $35 billion.
“For the first time in the US we have simultaneous bubbles in all major asset classes,” said the 83-year-old analyst, known for predicting the last three financial bubbles.
In an article published this week, he highlighted some signs of a possible collapse, such as excessive valuations, investor euphoria and rampant speculation in risky assets like meme stocks and cryptocurrencies.
“I doubt the speculators in the current bubble will listen to me now; but giving this advice is my job and possibly the right thing to do,” he said.
Grantham called out the Federal Reserve and other authorities for “allowing and facilitating” the creation of superbubbles, which he detests for the “little-known damage they cause when they deflate.”
The Federal Reserve ‘doesn’t seem to understand’ asset bubbles. The market historian criticized the “unspeakably massive stimulus for Covid”, which came after the recovery stimulus after the 2006 housing bubble.
“The only ‘lesson’ this institution seems to have learned from the wreckage of 2009 is that we didn’t approach it with enough encouragement,” he said.
The phases of the bubble burst
As is often the case, the bubble will start to deflate first from the riskier end of the stock market, as has been the case since last February. “Good luck! We will all need it,” Grantham wrote.
For the co-founder of GMO, we are now in a “vampiric phase of the bull market, where you throw everything you have”. “You stab it with COVID, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation.”
You may also like:
That is “until, just when you start to think the thing is completely immortal, finally, and maybe a little anticlimactically, it just keels over and dies,” Grantham said. “The sooner, the better for everyone.”
Through Thursday, the Nasdaq had fallen 9.5% this month, outpacing the S&P 500’s nearly 6% drop and the Dow Jones’s 4.5% loss, according to FactSet data cited by MarketWatch.
What to do as an investor
Grantham left some GMO investment recommendations. In short, it could be avoiding US stocks and prioritizing emerging market stocks over cheaper developed countries, “especially japan”.
“Personally speaking, I also like some cash for flexibility, some resources for inflation protection, as well as a little bit of gold and silver,” he said.
to the analyst he doesn’t like cryptocurrencies and prefers to stay away.
“They make me feel like the child watching the emperor walk around naked. So many important people and institutions are admiring her clothes, and normal people just can’t understand and trust her. I would not do it. I have learned to prefer evasion to confidence”, he advised.
Currently, the all-time highs are not only being seen in big sectors like real estate, there is also the “nascent commodity bubble” and bond markets.
Oil and most “important metals” are among the commodities priced widely “above trend”.
“We also have the highest priced bond markets in the US and most other countries in the world, and the lowest rates, of course, that go with them, that human history has ever seen,” he wrote.