Forget the tech bubble.
U.S. stocks are in a superbubble and it won’t end well, according to Jeremy Grantham, an influential voice on Wall Street who predicted the last two U.S. superbubbles.
“If an ordinary bubble involves an irrationally exuberant gain in the price of some asset, a superbubble is when the cost of several assets all head into orbit at the same time,” Alain Sherter wrote for CBS.
Grantham is the co-founder and chief investment strategist of capital market firm GMO (Grantham, Mayo, & van Otterloo), which manages about $65 billion in assets. He has been running GMO’s investments since the firm’s 1977 inception, and predicted the 2000 superbubble and the Great Financial Crisis of 2008, CNN reported.
“For the first time in the U.S. we have simultaneous bubbles across all major asset classes,” Grantham said in a GMO analysis published on Jan. 20 titled “Let the Wild Rumpus Begin. “Good luck! We’ll all need it.”
The tech bubble may have burst on Wednesday as Facebook was dragged down by a 20-percent share price decline, along with other tech stocks including PayPal and Spotify, due to unfavorable earnings reports.
The share price of Meta Platforms, aka Facebook, fell more than 20 percent late Wednesday after a rare profit decline and weaker-than-expected fourth-quarter earnings, warnings of stagnant user growth and shrinking advertising budgets. The slump pulled tech stocks and social media stocks lower in pre-market trading as a result, and extra pressure is expected on Nasdaq Composite futures, The Street reported.
A handful of bubbles have gone on to become superbubbles, Grantham wrote. These include the 1929 crash that triggered the Great Depression, the 2000 dot-com crash and Japan’s superbubble in 1989. The U.S. also had a housing superbubble in 2006. All these superbubbles “corrected all the way back to trend with much greater and longer pain than average,” Grantham said.
The U.S. is now in its fourth superbubble of the last 100 years, according to Grantham.
Facebook blamed a combination of challenges for Wednesday’s 20-percent share price decline, including privacy changes to Apple’s iOS and macroeconomic issues such as inflation and supply chain issues that are impacting Facebook advertiser budgets. “There’s also a shift to products that don’t generate as much revenue as its core news feed. For example, people are spending more time on its Reels videos,” CNBC reported.
Although Facebook’s daily active users increased by 5 percent to 1.93 billion year over year, that growth was the slowest in recent memory.
Spotify shares also saw a decline of more than 18 percent in after-hours trading Wednesday immediately after company executives released a report saying they expect 1 million fewer new subscribers in the first quarter than Wall Street expected.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
Spotify has been fighting a reputation as a home to covid disinformation since a New Year’s Eve podcast by Joe Rogan featured a discredited doctor spewing inaccurate information about vaccines. The medical community asked Spotify to change its policies, and musicians Neil Young and Joni Mitchell asked for their music to be taken off Spotify. Rogan secured a $100 million contract from the streaming giant in 2020.
PayPal shares saw their worst selloff on record, falling more than 24 percent Wednesday after the company lowered its 2022 profit outlook and canceled a growth strategy implemented in 2021. In the process, the payments company lost $50 billion in market value. PayPal has been a favorite among investors for most of 2020 and 2021 as consumers migrated to online shopping during the pandemic, Wall Street Journal reported.
Grantham described the most recent phase of the bull market as being in “the vampire phase … where you throw everything you have at it: 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 – which has always killed P/E ratios before, but quite uniquely, not this time yet – and still the creature flies. (Just as it staggered through the second half of 2007 as its mortgage and other financial wounds increased one by one.) Until, just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies. The sooner the better for everyone.”