‘Good luck! We’ll all want it’: U.S. market approaches finish of ‘superbubble,’ says Jeremy Grantham

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The US is nearing the end of a “super-bubble” stretching across stocks, bonds, real estate and commodities after massive stimulus during the COVID pandemic, which legend has it will result in potentially the biggest asset discount in its history once pessimism returns to markets Investor Jeremy Grantham.

“For the first time in the US, we have simultaneous bubbles in all major asset classes,” Grantham, co-founder of investment firm GMO, told a newspaper on Thursday. He estimated that US wealth losses could total $35 trillion if valuations in major asset classes return two-thirds of the way to historical norms.

“One of the main reasons I regret superbubbles — and resent the Fed and other fiscal authorities for allowing and facilitating them — is the underestimated damage that bubbles cause when they deflate,” Grantham said.

The Federal Reserve doesn’t appear to be “getting” asset bubbles, Grantham said, citing the “indescribably massive stimulus to COVID” (some of which he said was necessary) that followed the stimulus to recover from the 2006 housing bubble burst . “The only ‘lesson’ the economic establishment seems to have learned from the wreckage of 2009 is that we didn’t tackle it with enough stimulus,” he said.

Stock bubbles typically start to deflate from the riskiest parts of the market first — like the one Grantham has been warning about, according to his paper, since February 2021. “So good luck!” he wrote. “We’re all going to need it.”

While the S&P 500 Index SPX at -1.89% and the Dow Jones Industrial Average DJIA at -1.30% both hit all-time closes in early January, they have since been along with the Nasdaq Composite Index COMP at -2.72 in got a slump %,
as investors expect the Fed to end quantitative easing and start raising interest rates later this year to combat high inflation.

Read: Why 2022 is appearing as “a perfect negative storm” for tech stocks, according to Deutsche Bank

The tech-heavy Nasdaq has seen the biggest drop among the big three stock benchmarks in 2022, falling into correction territory after hitting a record high in November, according to FactSet data.

“We’re in the vampire phase of the bull market where you throw everything you’ve got at it,” Grantham wrote. “You stab it with COVID, you shoot it with the end of QE and the promise of higher interest rates, and you poison it with unexpected inflation – which has always destroyed P/E, but not this time – and still the creature flies. “

That is, “until, just when you’re starting to think the thing is entirely immortal, it eventually, and maybe a little disappointingly, tips over and dies,” Grantham said. “The sooner the better for everyone.”

The Nasdaq is down 9.5% this month through Thursday, according to FactSet data, beating the S&P 500’s nearly 6% drop and the Dow’s 4.5% loss.

As for GMO’s investment recommendations, Grantham summarized that they avoid US stocks and emphasize value stocks in emerging markets and cheaper developed markets, “particularly Japan.” Personally, he said, “I also like some cash for flexibility, some resources for inflation protection, as well as some gold GC00, -0.35% and silver.”

Aside from the US stock market’s recent record highs and the “crazy” investor behavior that has accompanied its rise, Grantham warned that “we are indeed participating in the broadest and most extreme global housing bubble in history.” He said homes in the US are “the highest multiple of family income ever, after a record 20% gain last year.”

In addition, Grantham said, “we also have the most expensive bond markets in the United States and most other countries in the world, and of course the lowest interest rates in human history.”

And then there’s the “nascent commodity bubble,” he added. Oil CL00, -0.84% ​​and most “major metals” are among commodities whose prices are broadly “above trend,” while the “UN index of global food prices is hovering around its all-time high,” according to its paper.

“The combination we saw in 2008, of still rising commodity prices with a deflationary asset price bubble, is the ultimate pincer attack on the economy and is almost guaranteed to result in major economic pain,” he wrote.

Grantham also considered how fortunes add up more slowly in “bubble prices” while people are making it difficult to afford their first home or build an investment portfolio.

“There’s the horrific rise in inequality that comes with higher asset prices that many just don’t own, and ‘many’ nowadays applies to middle family or beyond,” he wrote. “They’ve been let down, they know it, and they’re increasingly (and understandably) resentful about it. And it’s absolutely damaging to our economy.”

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