Famed investor Jeremy Grantham said the "super bubble" he previously warned about has not yet burst, even after this year's turmoil in the US stock market. Grantham became famous for observing and profiting from bubbles in Japan in the late 1980s, technology stocks at the turn of the century and in US housing before the 2008 financial crisis. I'm not saying his predictions worked 100% of the time, but more than once they did and he was able to profit handsomely in the process. So let's take a look at how he sees it and what his concept of a super bubble represents.

Legendary investor Jeremy Grantham.

Who is Jeremy Grantham anyway?

Grantham is the co-founder and chief investment strategist of Boston-based asset manager GMO (one of the most respected asset management firms in the world), which is known for defining and finding market bubbles. He currently manages approximately $70 billion in assets and is often considered a market skeptic. He is often dubbed a perma-bear, but that doesn't mean he has a biased or prejudiced view. On the contrary, he can seek out great investment opportunities.

• Jeremy Grantham is one of the most respected investors on Wall Street. The co-founder of Boston-based asset manager GMO is well known for predicting the Japanese asset price bubble of the 1980s, the dot-com bubble of the late 1990s and even the US housing explosion that came before the 2008 financial crisis.

What's the big deal about his name now anyway?

In a note to the public, he noted that the surge in U.S. stocks from mid-June to mid-August fits the pattern of a bear market rally common after an initial sharp decline - and before the economy really starts to deteriorate. Grantham sees more trouble ahead because of the "dangerous mix" of overvalued stocks, bonds and housing, combined with the commodity shock and the Federal Reserve's hawkish behavior.

Grantham predicted earlier this year that benchmark stocks would plunge nearly 50% in a historic collapse. The S&P 500 index plunged nearly 25% from its January high at one point in June before bouncing back in the following two months.

The epic finale of the market cycle

Jeremy Grantham argued on Wednesday that the current "superbubble" in asset prices has not yet burst and warned investors to "brace for an epic finale" to the market cycle.

• In a research note, Grantham compared the current market environment to three previous times he categorized as "superbubbles."

This list includes the Internet bubble that burst in 2000, the 1929 market crash that led to the Great Depression, and the "Nifty Fifty" period in 1972 (which he identifies as an "honorary member" because the bubble was not as large as the other two). Earlier, Grantham also noted the stock superbubble in Japan in 1929 and the housing superbubble in the US before the 2008 financial crisis.

• Here you have just the evidence that this guy is definitely not just splashing out to get attention. He really has a track record of defining and capitalizing on bubbles.

"If history repeats itself, the game will be tragedy again," Grantham wrote in a Wednesday note, "We must hope for less this time."

The GMO co-founder characterized the recent run-up in the market as a "bear rally" and identified a number of near-term issues that will provide headwinds to the market. These included tightening central bank policies, food and energy shortages and problems in China, where "too many things go wrong at once."

Grantham also pointed to longer-term issues that could plague the stock market, including population dynamics and climate, which he said "could be seen as at risk of spiralling out of control this year".

In making his case for continued headwinds, the famous investor pointed to signs of weakness across the economy, such as low readings for consumer and business confidence.

"In the technology sector, at the cutting edge of the U.S. (and global) economy, hiring is slowing, layoffs are rising, and CEOs are increasingly bracing for a recession," he wrote.

"The U.S. stock market remains very expensive, and inflation increases like this year's have always hurt multiples, though this time at a slower pace than usual," Grantham said.

He added: "But now the fundamentals have also started to deteriorate enormously and surprisingly: between the covid in China, the war in Europe, the food and energy crises, record fiscal tightening and more, the outlook is much gloomier than might have been anticipated in January."

"I bet we're going to have a pretty tough time economically and financially before it's washed through the system," Grantham said." What I don't know is: Will it get out of hand like it did in the '30s, is it pretty well contained like it was in 2000, or is it somewhere in the middle?"

Conclusion and my view

In this case, I agree with this great investor and, like him, I expect further declines. I define the summer rally exactly the same and see no sign of a market turnaround. We are now moving into the worst months for equity markets (on a historical scale) and winter is coming and with it more problems. Obviously, I'm not trying to scare anyone here or say that the market is going to drop 50% or anything like that, but I expect some problems and a series of declines to continue. As defined by Grantham - the Hawk Fed, the war and its effects, the energy crisis, problems in the Chinese economy, layoffs, increased costs for companies and households... It's really quite a lot. I don't see one single positive about the current environment and therefore hold a similar view.

• How do you see it? 🤔
• Do you agree with Grantham?

Please note that this is not financial advice. Every investment must go through a thorough analysis.