Market Insights

Famous Investment Strategist Warns Investors: Superbubble Collapse Imminent  

Gold Alliance disclaimer
Legendary investment expert Jeremy Grantham warns that the superbubble in the stock market could collapse.

In a hard-hitting Executive Summary to his clients last Wednesday, top investment strategist Jeremy Grantham says he believes America’s market superbubble is poised to collapse. 

Famous for calling both the 2000 dotcom crash and the 2008 global financial crisis, Grantham says conditions are worse this time due to unprecedented overvaluations across multiple asset classes fueled by excessive optimism and rampant market speculation.

Or as Grantham calls it: “Crazy wishful thinking.”

Grantham says markets behave normally about 85% of the time. But it’s the other 15% we’re facing now that we should care more about, as we may be speeding towards the grand finale of a market collapse. And investors should take heed because “If history repeats, the play will once again be a Tragedy.” 

The four stages of a superbubble 

Grantham theorizes that superbubbles happen in four stages.  

First, a bubble forms. Then we see a temporary correction, followed by a momentary bear market rally. And for the grand finale, the markets drop through the floor. 

Let’s unpack each stage. 

Stage 1: The initial bubble formation 

After a long period of economic prosperity and normal asset price appreciation, a market bubble forms. The bubble then grows rapidly as manic investors in a speculative buying frenzy drive asset prices up to unsustainable levels. 

Stage 2: The black swan market correction  

In stage two, a market correction — usually triggered by a “black swan” event (an event no one saw coming but is easy to explain, like the housing crash in 2008) — pulls valuations back down from unsustainable highs.  

According to Grantham, the shockwave of raging inflation starting in 2021 was the unpredictable event that triggered stage two of the current superbubble. This caused a sharp correction in equity prices. As a result, investors shifted out of growth stocks into value stocks. 

Stage 3:  The bear market rally trap 

As investors attempt to recoup their losses, they purchase assets at what look like bargain prices. And this rush of bargain hunters pushes asset prices up temporarily. 

But the rally caused by overinflated equity prices is only a financial trap that “lures unwary investors back just in time for the market to turn down again, only more viciously, and the economy to weaken.” 

Now, after this summer’s stock price rally, Grantham believes we’re in stage three and rapidly approaching stage four. 

Stage 4: The mass sell-off  

The fourth and final stage is the capitulation phase: Rationality returns to the market, and sky-high valuations come back to earth after a mass sell-off.  

And Grantham believes we’re entering the fourth stage of the superbubble now as the following near-term problems may send markets tumbling. 

Near-term problems pushing us into Stage 4 

Fundamental causes can push our market into stage four. Here are some of the near-term problems Grantham believes may contribute.  

Global food inflation and soaring energy prices  

Rising food and energy prices have caused civil unrest across parts of the world that are particularly exposed, like Sri Lanka, whose economy recently collapsed after defaulting on its debt.  

Russia’s weaponized oil exports 

In response to the sanctions imposed by the West, Russia has weaponized its oil exports. This caused a sharp increase in energy prices and put an additional financial burden on already struggling economies.  

A pressurized Chinese economy affecting us all  

Persistent headwinds from the Covid-19 pandemic have disrupted global supply chains and burdened China’s economic activity. 

Additionally, China’s real estate market — one of the primary drivers of economic growth in recent years — is showing signs of weakness.   

Given the country’s starring role in global trade, Grantham says a sharp economic slowdown in China could have far-reaching implications for the global economy.  

Inflation and rising interest rates  

The Fed’s decision to taper asset purchases will remove a key support we’ve seen propping up US markets since the pandemic began.  

Now, countries across the globe are following the Fed’s lead — taking similar tapering measures to offset the mountain of  debt incurred during the pandemic. As a result, US profit margins are expected to come under pressure in the near future.  

And Grantham believes this global reaction coupled with higher interest rates and pressurized profit margins could tip the scales and send markets crashing.  

Long-term problems 

While these near-term problems may trigger the final stage of the superbubble, we’re also facing several long-term issues that could hobble the markets for years to come. 

Climate change 

One of the most pressing issues, according to Grantham, is the problem of climate change consequences and the need for a global transition to renewable energy. This will require a massive investment of resources and a significant reallocation of capital, which may lead to higher taxes and inflation.   

And, in a scenario that Grantham expects to become more common in the years ahead, rising temperatures are already taking a toll on agricultural productivity as droughts and fires destroy crops, leading to higher food prices.  

A vanishing workforce 

Grantham also says declining population growth will hurt economic activity and productivity over the long run. And this is particularly true for developed countries where fertility rates have been below replacement levels for some time.  

Baby Boomer woes 

In the US, as the Baby Boomer generation enters retirement, fewer workers mean fewer people available to assist the aging population. And this will place additional strain on social welfare programs.  

When will the superbubble collapse?  

While it’s impossible for anyone to predict when and if the final stage of the superbubble will occur, current conditions do seem to point to an imminent market correction.  

Walmart’s cancellation of a billion dollars in orders before the holidays, compounded by FedEx’s CEO statements about laying off employees and closing locations due to a coming global recession, shows clear signs of a pullback.  

Grantham urges investors to brace for impact and prepare for what may be a sharp sell-off in the months ahead. Given his stellar track record with predicting economic downturns, it may be wise to take his warning seriously.