Jeremy Grantham, the 82-year-old co-founder of US asset management group Grantham, Mayo, & van Otterloo (GMO), yesterday described Wall Street as in the midst of “an epic bubble”. Grantham compared the recent bull rally for stock markets, against the backdrop of the economically devastating Covid-19 pandemic, as bearing many of the same hallmarks of euphoria, group-think crowd behaviour and speculation of the period that preceded the legendary 1929 crash.
Mr Grantham is convinced that despite the best efforts of the US Federal Reserve to prevent it, what he perceives as a now significant equities bubble will burst. He wrote in a letter to clients:
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe that this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000 [when tech stocks crashed].”
He also believes the inherent nature of the investment industry sets up the forming of periodical bubbles, noting:
“Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.”
However, he is convinced that, ultimately, the industry, and central bank and government policy, is fundamentally unable to prevent the bubble eventually bursting “with consequent damaging effects on the economy and on portfolios”.
He concluded his warning with:
“Make no mistake — for the majority of investors today, this could very well be the most important event of your investing lives.”
A respected figure on Wall Street, Boston-based GMO’s chief executive started his career as an economist for Royal Dutch Shell before cofounding the asset manager in 1977. It now manages around $65 billion in assets on behalf of pension funds and wealthy family offices.
Investors will be chilled to learn Mr Grantham’s previous record on calling market peaks. He accurately forecast the Japanese stock market crash in 1989 and the bursting of the dotcom bubble in 2000. He sees the same tell tale signs now:
“Believe me, I know these are old stories. But they are directly relevant. For this . . . is indeed the same old story.”
He pointed specifically to the 700%+ gains for electric car maker Tesla over the past year as evidence of illogical investor euphoria driving valuations into orbit, commenting:
“As a Model 3 owner, my personal favourite Tesla titbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 to equal that?”
While Grantham is convinced a deep and painful correction is coming, he is less sure exactly when. But he believes it is not only stock markets that are currently hugely expensive. He called Bonds “even more spectacularly expensive by historical comparison than stocks”.
His advice is for clients to dial down their exposure to U.S. growth stocks as far as “your career and business risk will allow”, and instead seek refuge from the storm to come in value stocks and emerging markets.