Stock Market Bubble To Burst In Weeks Or Months Not Years, According to Legendary Investor Jeremy Grantham
When Jeremy Grantham heard his colleague recount the story of a young woman on a bus ride from New Hampshire to Boston in 2018 who wanted to sell her house to invest in stocks, Jeremy’s alarm bells went off. This, to him, signalled the peak of the US stock market in 2018. The woman wasn’t happy to see her $300,000 house gaining few percentage points every year when stocks were growing at a double-digit per annum since 2009. The stock market has subsequently dropped by 25% during the second half of 2018.
This was not the only time Jeremy Grantham has called a cycle peak in his 40+ years of experience. Since he co-founded GMO in 1977, a leading $60 billion asset management company in Boston, he has not only called mid-cycle pull-backs but a made a science of studying asset bubbles. He was one of the few investors who correctly predicted the Japanese bubble, the dotcom burst and the housing crisis in 2007/08. He came back today saying that the US stock market is in an unprecedented bubble and investing in it is “simply playing with fire”. He qualified it as the “the fourth real McCoy bubble” of his career. He also added that, the burst of the bubble will occur in weeks or months and that it is not a matter of years.
The current stock bubble is unlike any precedented one in his view. The formation of a bubble comes from market participants unrealistically assuming that a perfect economic situation will persist indefinitely. The COVID bubble is unique in the sense that the world expects one of the worst economic conditions and yet the market is valued at historically high levels. This is his view is the direct implication from central banks across the globe injecting liquidity into the system and cutting interest rates to close to zero percent or sub-zero in some countries. He said “every dollar injected in the economy doesn’t flow through the real world but ends up fuelling asset prices or the current bubble”. There hasn’t been this much disconnect between the real world (GDP, economies) and the paper world of stocks and P/E ratios.
Jeremy Grantham is also seeing signs of euphoria in the current market which historically have been good indicators of bubbles: the flood of interest in special-purpose acquisition companies (SPACs). SPACs are also known as blank check companies are essentially large pool of cash which is listed on a public exchange with the sole purpose of completing an acquisition. Investing in SPACs according to Jeremy is based on the proposition to “give me your money and trust me I will do something useful with it”. This is a testimonial of the speculative nature of the market. Another legendary investor who thinks the market is over-valued is Warren Buffet. Through his investment company, Berkshire Hathaway, he has been sitting on more than $130 billion in cash throughout the COVID crisis.