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Bear and bubbles: Grantham shouts another round

Veteran investor, Jeremy Grantham, has nominated a falling global property market as lead contender to drive the next deflationary phase of the multi-asset ‘super bubble’.

In the latest of his long-running super-bubblistic series, Grantham says investors should prepare for further downward legs despite the stock and bond crashes of 2022 that drained much of the “speculative froth” from markets.

“But after a few spectacular bear market rallies we are now approaching the far less reliable and more complicated final phase,” he says. “At this stage housing markets, which are always slower to react, have not fully rolled over yet; neither has the economy gone into recession, nor have corporate profits yet been severely hit.”

“One important factor is that the bursting of the global housing bubble, which is only just beginning, is likely to have a more painful economic knock-on effect than the decline in equities is having, for extreme bubble pricing in stocks has been confined to the U.S. only,” he says.

In true contrarian form, Grantham also tips further falls of almost 17 per cent this year in US equity markets amid a bullish start to 2023. That’s just his best guess of the most likely outcome. The real risk is “the unusually wide range of possibilities around this central point”, and if a severe recession does hit the US, share markets could drop by 50 per cent or worse.

“To put this in perspective, it would still be a far smaller percent deviation from trendline value than the overpricing we had at the end of 2021 of over 70%,” he says. “So you shouldn’t be tempted to think it absolutely cannot happen.”

However, the renowned founder of investment firm, GMO, hedges his short-term pessimism somewhat with several factors possibly keeping investor sentiment aloft over the next 12-18 months such as lower inflation, robust employment figures, China reopening and the “underrecognized and powerful Presidential Cycle” (where markets tend to rise in the third year of the four-year US presidential terms).

Grantham also cites the late surge in downbeat expert commentary compared to the previous year’s almost exclusive rosy forecasts as a perma-bear pause-for-thought moment.

“It is all enough to make a god-fearing contrarian wake up in the night sweating,” he says. “I do take consolation from earnings estimates that remain wonderfully unaffected by all the possible negatives, but still I’d prefer a lot more optimism, which a year ago was nearly universal.”

Regardless of the gloomy outlook, Grantham says value stocks, emerging markets and companies geared to addressing “climate change and the increasing pressure on many raw materials” remain attractive. The bear-master also countered criticisms that his super-bubble thesis – set in print at the beginning of 2021 – relies on a statistically unreliable historical sample of just six events (excluding the current alleged seventh).

Grantham notes that a meteorite hitting Earth and destroying 80 per cent of life on the planet would similarly be dismissed by economists on statistical grounds. The collection of six (or seven) super-bubble examples provide enough evidence of persistent human behaviour that “has probably changed less than our understanding of the laws of physics”.

“Our intellectual fallback, in any case, has always been value and the inescapable truth that if you triple the price of an asset, you will divide its future returns by three, and that fact alone may be enough to guarantee the miserable outcomes from those historic and dizzying market heights,” he says. “It also provides sufficient data for investors to try to sidestep some of the pain. At least for me it does.”

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