(SPY) – Market is in a super bubble, says Perma-Bear Jeremy Grantham: ‘Get ready for an epic finale’
Almost Shakespearean, perma-bear and well-known pessimist Jeremy Grantham said markets were in a super bubble in a Wednesday note and warned of significant turbulence ahead.
What is a superbubble? Well, let’s go.
A typical bubble occurs when prices rise rapidly while investors ignore serious risks, eventually causing the bubble to burst and subsequently prices to fall. In these typical situations, the indices rise up to two standard deviations from the most recent price average.
Grantham says the number increases to 2.5 or more in a super bubble. When stocks recovered from their first pandemic lows, the market was at this point in 2021.
“Only a few market events in an investor’s career really matter, and among the most important of all are super bubbles,” Grantham said. “These superbubbles are events unlike any other: although there are only a few in history for investors to study, they have clear characteristics in common.”
One such characteristic is the bear market bounce that occurs during the initial downgrade phase of the crash, but before the economy has obviously started to deteriorate, as is usually the case when super bubbles deflate.
“Get ready for an epic finale – If history repeats itself, the play will be a tragedy again. We have to hope for a miner this time around,” the CEO of GMO said.
The history of superbubbles: Of course, the lifelong pessimist is referring to the big financial declines of 1929, 1973, and 2000. With each decline, the market recouped about half of its losses before dropping free to new lows.
In each of the previous three instances, a bearish rally helped recoup more than half of the market’s initial losses, luring naive investors just as the market began to fall again.
This summer’s rally was a perfect fit for the model.
- From the November 1929 low to the April 1930 high, the market rebounded 46%, a 55% recovery of the loss from the high.
- In 1973, the summer rally after the initial decline recovered 59% of the S&P500 TO SPY total loss of the top.
- In 2000, the tech bubble, the Nasdaq recovered 60% of its initial losses in just two months.
- By 2022, at the August 16 intraday peak, the S&P had recovered 58% of its losses since its June low.
“So we could say that the current event, so far, looks suspiciously like those other historical superbubbles,” Grantham said.
The last word: According to Grantham, the three main asset classes – housing, stocks and bonds – were all historically overvalued at the end of last year, making the current superbubble the most perilous combination of elements that caused the past superbubbles.
“Given all of these negative factors, it’s no surprise that consumer and business confidence measures are testing historic lows,” he wrote. “And in the tech sector, the leading edge of the US (and global) economy, hiring is slowing, layoffs are rising, and CEOs are increasingly bracing for the recession.”