Jeremy Grantham: ‘Superbubble’ Yet to Burst in ‘Epic Finale’

“This summer’s rally has so far perfectly fit the pattern,” Grantham added.

“The U.S. stock market remains very expensive and an increase in inflation like the one this year has always hurt multiples, although more slowly than normal this time. But now the fundamentals have also started to deteriorate enormously and surprisingly: between COVID in China, war in Europe, food and energy crises, record fiscal tightening and more, the outlook is far grimmer than could have been foreseen in January,” he said.

“Longer term, a broad and permanent food and resource shortage is threatening, all made worse by accelerating climate damage.”

The current bubble features the most dangerous mix of superbubble factors in modern times, with housing, stocks and bonds all “critically historically overvalued at the end of last year” and the economy confronting an inflation surge and interest rate shock, the type that ”have always cast a long growth-suppressing shadow,” Grantham said.

“If the bear market has already ended, the parallels with the three other U.S. superbubbles — so far so strangely in line — would be completely broken. This is always possible,” he wrote. But “these few epic events” seem to have their own rules, he said.

“If history repeats, the play will once again be a Tragedy. We must hope this time for a minor one,” Grantham said, mentioning in a footnote that “2000 was minor, 1972 major and 1929, of course, horrific.”

The market has been in a “true superbubble” for some time, and it’s important to remember that bubbles in developed markets have always “broken back to trend,” he said. “The higher they go, therefore, the further they have to fall.”

The Dow Jones Industrial Average fell more than 1,000 points Friday after Federal Reserve Chairman Jerome Powell indicated the central bank would maintain a hawkish stance on raising interest rates to tame inflation; the Dow had sold off another 900 points this week as of midday Thursday.