‘Dangerous mix’: Sharemarket bubble expert sees trouble ahead

Famed investor Jeremy Grantham said the “super bubble” he previously warned about has yet to pop, even after this year’s turbulence in the US stock market.

The co-founder of Boston asset manager GMO, known for calling market bubbles, said in a note Wednesday that the surge in US equities from mid-June to mid-August fits the pattern of bear market rallies common after an initial sharp decline — and before the economy truly begins to deteriorate. Grantham, 83, sees more trouble ahead because of a “dangerous mix” of overvalued stocks, bonds and housing, combined with a commodity shock and hawkishness from the Federal Reserve.

Grantham predicted around the start of the year that benchmark stocks would plunge almost 50 per cent in a historic collapse. The S&P 500 at one point in June dropped almost 25 per cent from its January peak, before roaring back in the following two months. Yet US equities are tumbling yet again, on track to fall for the fourth straight session, with prominent strategists like Morgan Stanley’s Mike Wilson among those cautioning investors that the market hasn’t hit bottom.

“You had a typical bear market rally the other day and people were saying, ’Oh, it’s a new bull market,” Grantham said in an interview. “That is nonsense.”

To Grantham, the collapse of a super bubble comes in several stages. First, there’s a setback like the one in the first half of the year, then a slight rally follows. Finally, fundamentals break down, and the market reaches its low point.

Grantham became famous spotting and profiting from bubbles in Japan in the late 1980s, tech stocks at the turn of the century and in US housing before the 2008 financial crisis. Some of his other bearish predictions over the years have been wrong — or, at least, too early.

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This time around, he pointed to near-term problems such as the impact of Russia’s invasion of Ukraine on Europe, which is grappling with food and energy crises, along with fiscal tightening and China’s persistent Covid issues. While rising inflation drove declines in the first half of the year, falling corporate profit margins will cause the next round of losses, he said.

“My bet is that we’re going to have a fairly tough time of it economically and financially before this is washed through the system,″⁣ Grantham said.