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GMO’s Grantham: US bull market in ‘vampire’ phase; massive crash ahead

GMO’s Grantham: US bull market in ‘vampire’ phase; massive crash ahead

GMO’s Grantham: US bull market in ‘vampire’ phase; massive crash ahead
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By CNBCTV18.com Jan 21, 2022 8:30:19 AM IST (Published)

Jeremy Grantham, co-founder of asset management firm GMO has warned the super-bubble in all four asset classes—equity, bonds, housing, and commodities—in the United States is set to burst. He said the bull rally in the stock market was now what he thought was a ‘vampire’ phase.

Jeremy Grantham, co-founder of asset management firm GMO, and one of the most outspoken sceptics of the rally in global equities over the last year has warned the super-bubble in the United States is all set to burst, and will result in severe economic pain.

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“This time last year it looked like we might have a standard bubble with resulting standard pain for the economy. But during the year, the bubble advanced to the category of super-bubble, one of only three in modern times in US equities, and the potential pain has increased accordingly,” Grantham wrote in his note to clients.
According to Grantham, all five previous super-bubbles—in equity and housing in the US and in Japan since 1929—‘corrected all the way back to trend’ with much greater and longer pain than average. In other words, when bubbles burst, prices retreat all the way back to where they had started.
Using this as the reference point, Grantham sees the US equity market crashing by at least 45 percent from current levels to around 2500.
Grantham highlighted that for the first time, the US has been witnessing a bubble simultaneously in four asset classes—equity, bonds, housing, and commodities. And there were signs the super-bubble in equity was close to bursting, or may have already burst.
“The final feature of the great super-bubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the bluechip market rises. This occurred in 1929, in 2000, and it is occurring now,” Grantham wrote.

By narrowing of the market, Grantham refers to the increase in the number of stocks that decline in price, compared to stocks that are appreciating. He buttressed this point by flagging the more than 50 percent drop in meme stocks like Gamestop, AMC, and in more than one-third of all Nasdaq stocks, besides a 40 percent drop in Bitcoin.
“The most important and hardest to define the quality of a late-stage bubble is in the touchy-feely characteristic of crazy investor behaviour. But in the last two and a half years there can surely be no doubt that we have seen crazy investor behaviour in spades—more even than in 2000—especially in meme stocks and in EV-related stocks, cryptocurrencies, and NFTs,” he wrote, adding “the checklist for a super-bubble running through its phases is now complete and the wild rumpus can begin at any time.”
He said the bull market was now what he thought was a ‘vampire’ phase.
“We are in what I think of as the vampire phase of the bull market, where you throw everything you have at it: you stab it with Covid, you shoot it with the end of QE and the promise of higher rates, and you poison it with unexpected inflation—which has always killed P/E ratios before, but quite uniquely, not this time yet—and still the creature flies,” Grantham wrote.
He cited the example of the global financial crisis when equities continued to rise through the second half of 2007 even as the rot in subprime loan portfolios was spreading at an alarming rate and bleeding the banks dealing in these securities.
“Until, just as you are beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies. The sooner the better for everyone,” Grantham wrote.
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