According to Grantham, who co-founded the investment management firm GMO, “I’ve always looked at it from the point of view that the longer and the bigger and the higher it goes, the more exciting and dangerous it will be, and this has moved up the rank of super bubbles,” he said in a Friday Bloomberg podcast interview.
However, he noted that the current bubble on Wall Street is nothing like the real estate bubble in Japan around the same period or the “mother and father of all super bubbles” that occurred there in 1989.
His pessimistic assessment of US stocks is not new. He cautioned investors against them at the beginning of 2024, even though the S&P 500 SPX concluded the year up 23%. When the index ended 2023 up 24%, he predicted a possible 50% decline in stocks. However, the investor is also well-known because of his accurate predictions regarding the collapse of the housing market and the dot-com bubble.
His most recent warning coincides with a decline in big technology stocks like Tesla (TSLA) and Nvidia (NVDA), as U.S. stocks have failed to rise due to concerns over President Donald Trump’s tariffs. For stocks, “every measure of traditional value,” including the cyclically adjusted price-to-earnings ratio, is at record highs, according to Grantham.
Like “every really important new technology,” artificial intelligence (AI), one of the market’s primary drivers, is likewise encircled by a bubble, he claimed.
“Our world will undoubtedly shift as a result. Naturally, it is impossible to predict how it will work out and whether it would be totally advantageous,” he stated. “If the government does not smooth out the benefits of AI, you will have either starvation or revolution.”
Grantham would want to put his money in projects that are focused on “greening the economy,” but he did not specify which specific assets he would choose.
The biofuels group Darling Ingredients (DAR), the Korean battery and storage firm LG Chem (KR:051910), the solar group Sunrun (RUN), the biofuels company Ameresco (AMRC), and the Canadian copper producer Ivanhoe Mines (CA:IVN) were the top stocks in GMO’s Climate Change Strategy as of January 31.
He thinks it will be a “long and bumpy” journey, but it will be a huge endeavor that is desperately needed and will take a lot of money and labor to complete. He added that it’s a run-down section of the market.
“Unlike most things in the stock market, I would say that is an area that we’ll have sooner or later, a massive regrouping and a huge outperformance of the rest of the market,” Grantham stated.
Additionally, he sees a system that is subject to many more significant shocks, and he stated that “in that environment you do not want to be caught with a lot of leverage,” which will only destroy firms. In addition to having healthy profit margins for a buffer, he stated that “you have to be able to withstand shocks unexpectedly arriving, and to do that, you need little or no debt.”
“The 1930s served as an excellent final reminder. “You have to be careful because things are usually inexpensive for a good reason,” he remarked. “If you’re going to play the cheap game, you’ve got to make sure, it is armor-plated with as much quality as you can get into it.”
According to Grantham, non-US markets that have been gaining popularity among investors, like European and Chinese stocks, are “much less dangerous to own and will very likely over five or 10 years crush the U.S. market as has happened several times.” Foreign and U.S. markets frequently alternate “great” decades, he noted.
Cryptocurrencies, according to the investor, “are a wonderful speculative medium,” but they don’t create anything.
Despite the fact that gold doesn’t pay dividends, Grantham stated that “it has a 10,000 years head start over bitcoin, and its absolutely indestructible.”
“So, gold makes me uneasy. But compared to bitcoin, it is far better to stack in your mattress,” he stated.
