Grantham, a co-founder at one of the world’s biggest hedge funds Grantham, Mayo & Van Otterloo, believes that the “superbubble” in the US equity, housing, bond, and commodity markets is on the verge of bursting. In addition to the equity and real estate bubbles, Grantham also flagged “crazy” investor behaviour in the US stock market. Holding the Federal Reserve responsible, he says record low rates and humungous liquidity incentivised greater risk-taking. He warned that the that the standard bubble in the US equities market that was visible in 2021 had graduated to a “superbubble”, the likes of which have been witnessed only thrice in the history—1929, 2000, and 2007. “Even more dangerously for all of us, the equity bubble, which last year was already accompanied by extremely low-interest rates and high bond prices, has now been joined by a bubble in housing and an incipient bubble in commodities,” He defines the “superbubble” as price movement that is three standard deviations above the normal long-term trends.
Emerging market investors may agree that Grantham’s argument can be extended to over-priced markets like India, which have been trading nearly two-standard deviation above their long-term one-year forward earnings for more than 12 months. In addition to the equity and real estate bubble, Grantham also pointed towards “crazy” investor behaviour in the US stock market such as the meme stocks phenomenon. “Third, as if this were not enough, we also have the highest-priced bond markets in the US and most other countries around the world, and the lowest rates, of course, that go with them, that human history has ever seen. What our financial leadership should know is that multiplying these risks—these three and a half bubbles—will multiply the total shock if the damage occurs simultaneously. And this package presents more potential for writing down perceived wealth than at any previous time in history. Grantham warned that as and when pessimism would return to the global market, as it invariably does, and if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses would be in the order of $35 trillion in the US alone.