Grantham, a bubble research expert: The historic collapse of the "super bubble" in the US stock market has begun

Jeremy Grantham, a prominent investor who has been predicting market bubbles for decades, said the stock market is entering the historic crash he predicted a year ago, and even fed intervention will not be able to prevent a final nearly 50 percent plunge.

In a report released Thursday, the GMO co-founder said the U.S. stock market was in the midst of its fourth "super bubble" in the last 100 centuries. He is convinced that this bubble will burst like the stock market crash of 1929, the bursting of the Dot-com bubble in 2000 and the financial crisis of 2008, bringing the broader market index back to statistical norms and possibly falling further.

He said that meant the S&P 500 was down about 45 percent from Wednesday's close and 48 percent from the high it hit on Jan. 4 to 2,500. The Nasdaq Composite has fallen 8.3 percent this month, or a larger correction.

"A year ago, I wasn't as sure of this bubble as I was when I was in the tech bubble of 2000, or I was in Japan, or I was in the housing bubble in 2007," Grantham said in an interview. "I used to think the odds were high, but maybe not very sure. Today, I feel almost certain. ”

Grantham cites a wealth of evidence in his analysis. He noted that the earliest signs came last February, when dozens of the most speculative stocks began to fall. One indicator is Cathie Wood's Ark Innovation ETF, which has fallen 52% since then. Then there's the Russell 2000 index outperforming the S&P 500 in 2021, with the former being predominantly mid-cap stocks that typically perform well in a bull market.

Finally, Grantham called "investor behavior crazy," heralding the bubble's entry into its later stages: the buying frenzy of influencer stocks, electric vehicle stocks, the rise of nonsensical cryptocurrencies such as Dogecoin, and the millions of dollars in NFT prices.

"The super bubble has been fully formed, and a storm could come at any time," Grantham, 83, wrote in the report. "When pessimism returns to the market, the potential wealth shrinkage we face could be the largest in U.S. history."

He said that this could be comparable to the impact of the collapse of both the Japanese stock market and the real estate market in the late 1980s. Grantham believes that not only is there a super bubble in the stock market, but there is also a bubble in the bond market, and there is the "most extensive and extreme" bubble in global real estate, and the "bubble budding" in commodity prices. He calculates that, if not a complete return to statistical trend levels, the U.S. losses alone could reach $35 trillion.

Seeing that every past super bubble has shown the same pattern gave Grantham the confidence that this super bubble will burst in a similar way.

Grantham blamed the bubbles of the past 25 years on poor monetary policy. He believes that since Greenspan became fed chairman, the Fed's practice of releasing water first and then bailing the market in the event of a market correction has "fueled" the emergence of bubbles one after another.

Now, investors may not be counting on this implicit "Fed sell-off." Grantham said the 40-year high for inflation "limits" the Fed's ability to stimulate the economy by cutting interest rates or buying assets.

"They're going to try, they're going to have some impact," he added. "There are also some elements of selling rights. It's just severely weakened. ”

Grantham notes that in this case, the protection that a 60/40 traditional portfolio can provide is minimal and "completely useless." He recommends selling U.S. stocks, favoring those with lower valuations in Japan and emerging markets, hedging against inflation, holding some gold and silver, and having cash ready to wait for prices to become attractive again.

This article originated from the financial world