Famous Investor Says There Has Never Been A Stock Bubble Like This That Didn’t Decline 50 Percent

Written by Dana Sanchez

Jan 21, 2021

Jeremy Grantham, the long-term stock-market skeptic and investment strategist, predicts that the epic stock bubble we’re in could burst as soon as the spring or early summer with the broad rollout of the coronavirus vaccine.

“At that moment, the most pressing issue facing the world economy will have been solved,” Grantham wrote in a Jan. 5 note to investors titled “Waiting for the Last Dance.”

“Market participants will breathe a sigh of relief, look around, and immediately realize that the economy is still in poor shape, stimulus will shortly be cut back with the end of the covid crisis, and valuations are absurd,” Grantham wrote.

Since that Jan. 5 note, Grantham’s public warnings about his bubble concerns are sounding even more dire.

There has “never been a great bull market that ended in this kind of bubble that did not decline by at least 50 percent,” Grantham told CNBC’s “Squawk Box Asia” on Thursday. “It’s entitled to go tomorrow if you look at all the signs … As soon as the new president gets settled in, that would be a perfectly good time for the bubble to start deflating.”

Wall Street is in an epic bubble and individual traders are getting carried away, according to Grantham. “They’re becoming euphoric … They’re borrowing money. They’re trading more shares.”

Grantham is the co-founder and chief investment strategist at Boston-based investment management firm Grantham, Mayo, & van Otterloo. He dramatically reduced its exposure to stocks in 2020, cutting net equity exposure in its Benchmark-Free Allocation Strategy from 55 percent to to 25 percent, Barrons reported.

Grantham is credited with predicting the recessions of 2000 and 2008. Born in 2009, today’s bull market “has finally matured into a fully-fledged epic bubble” — one of the great bubbles of financial history comparable to 1929 and 2000, he argues. “These great bubbles are where fortunes are made and lost—and where investors truly prove their mettle,” he wrote.

In 1999, the S&P 500 closed at an all-time high brought on by the dotcom boom, only to be followed by a devastating correction in the first few days of 2000 when the dotcom bubble burst.

There are some parallels between the 2000 and 2020 markets. At the end of 2020, the Nasdaq was up 94 percent over the previous two years and up 44 percent for the year. In 1999, the Nasdaq surged 86 percent. The S&P finished 1999 up 19 percent, then fell 10 percent in 2000.

There’s one major difference between the dot-com bubble and today, and that difference could mean a continued rise in stocks from current levels: interest rates, Business Insider reported.

In 2000, the Fed Funds rate was near 5.85 percent, so investors had an alternative to booming tech stocks by getting a decent return from bonds. Today, the Fed Funds rate is near zero, and investors have no similar alternative.

“It’s a totally different interest rate environment, and there’s a lot of cash on the sidelines,” said Julian Emanuel, chief equity and derivatives strategist at investment banking and stockbroker group BTIG, on CNBC’s “Trading Nation”.

“If anything, the economy is waiting to accelerate, which we think happens on a global basis in 2021,” Emanuel said.

Grantham has a different take on global growth. “Global trade is declining as a ratio … global growth is getting steadily slower and slower for the last few decades. And the population profile is busting – there are fewer baby cohorts … these are all very bad for growth,” Grantham said.

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Grantham said he prefers emerging market assets over U.S. stock markets. He also likes cash and U.S. venture capital, CNBC reported.

Emerging markets are priced better than overpriced U.S. markets, he said. If U.S. markets fall, emerging markets will likely fall too but the crash won’t be as bad because they are cheaper, he said.

“The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals,” Grantham wrote.

Grantham cited his favorite examples of crazy investor behavior, including the market value of Tesla (although he said he owns one), the volume of small retail stock purchases, 248 SPAC listings (special purpose acquisition companies), and the combined price-earnings ratio near the top of the market’s historical range and an economy near the bottom.

The latter, Grantham wrote, “is completely without precedent, and may even be a better measure of speculative intensity than any SPAC.”

SPACs or “blank check companies” go public as cash shells, created for the sole purpose of raising capital from investors to acquire other operating businesses. Grantham described SPACs as “an invitation to give me your money and I’ll let you know one day what I’m going to do with it.”