Renowned investor Jeremy Grantham predicts an extreme crash of the S&P500. When and why does he think it will come?

The spring was marked by the massacre of the market. The summer, on the other hand, was relatively calm and unexpectedly green. Now, however, everyone is nervously awaiting the autumn events, which many believe will once again mean somewhat turbulent times. Well-known investor Jeremy Grantham has said that the "superbubble" he previously warned about has not yet burst, even after the spring slumps.

Grantham warns of another downturn to come

The co-founder of Boston-based asset manager GMO, who has made a point of warning about market bubbles, said in a note on Wednesday that the sharp rise in US stocks from mid-June to mid-August fits the pattern of bear markets. Such a pattern is said to be common. A sharp decline (spring), a modest rebound and rise (summer), and then comes the grand finale in the form of a supercrash.

All of this, according to Grantham, is fed by a lethal combination of overvalued stocks, bonds and housing combined with a commodity shock and a hawkish Federal Reserve attitude.

At about the beginning of the year, Grantham predicted that benchmark stocks would plunge nearly 50% in an all-time collapse. The S&P 500 index plunged nearly 25% from its January high at one point in June. It did not bounce back until more than two months later.

But here comes the fall again. Many banking strategists are warning that the decline is not over, and that we could also see index readings of, say, around 3,600 by the end of the year. I also wrote about the different views of the largest US banks here:

The bull market is coming and everything is only going to go up by the end of the year. What leads a top economist to make such statements?

According to Grantham, the collapse of the super bubble has several phases. First there is a drop, as there was in the first half of the year, followed by a mild rally. Eventually, the fundamentals collapse and the market reaches its bottom. That might be a little bit true to the current situation.

"My bet is that by the time the market gets a handle on this, we're going to have a pretty tough time economically and financially," Grantham said. "What I don't know is: Will it get out of hand like it did in the 1930s, will it be pretty well managed like it was in 2000, or will it be somewhere in between?

Who is Jeremy Grantham, anyway?

Grantham rose to fame by uncovering 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. Some of his other bearish predictions over the years have been wrong - or at least premature. Kind of reminds me of Burry, doesn't it? 😁

This time he pointed more to short-term issues, such as the impact of Russia's invasion of Ukraine on Europe, which is struggling with food and energy crises, along with fiscal tightening and China's ongoing problems with Covid. While rising inflation was the cause of the decline in the first half of the year, falling corporate profit margins will cause another round of losses, he said.

Grantham's investment philosophy can be summed up in his oft-used phrase "reversion to the mean". Essentially, he believes that all asset classes and markets will revert from highs and lows to average historical levels. His firm seeks to understand historical changes in the markets and predict outcomes seven years in advance. If there is a deviation from historical averages, the firm may take an investment position based on the projected return to the average. The firm allocates assets based on internal forecasts of market direction. And it seems to be working pretty well for them.

Grantham is described as a contrarian investor and a permabear.

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Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and a few other analyses. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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