Grantham Renews ‘Epic Bubble’ Warning After Stocks’ Record Year

(Bloomberg) -- GMO co-founder Jeremy Grantham renewed his grim outlook for U.S. stocks, warning of a “fully-fledged epic bubble,” just days after equity indexes finished off a euphoric year.

Stocks are careening away from fair prices amid “hysterically speculative” investor behavior -- and even the Federal Reserve won’t be able to stop a looming crash, Grantham wrote in a letter, titled “Waiting for the Last Dance,” on Tuesday.

Famous for his bearish calls, Grantham already raised alarm bells over the divergence between the economy and stock valuations in June. But the rally barreled onward. GMO investors chafed as the firm’s flagship Benchmark-Free Allocation Fund sunk about 2.5% last year. The S&P 500 Index gained 16% in 2020 and returned 18%, including dividends, even as the unemployment rate stood at around 7%.

“I am doubling down, because as prices move further away from trend, at accelerating speed and with growing speculative fervor, of course my confidence as a market historian increases that this is indeed the late stage of a bubble,” Grantham wrote. “A bubble that is beginning to look like a real humdinger.”

Grantham, 82, didn’t say when or what factors will end the extraordinary run. Nonetheless, he asserted that a reckoning will come, and will go down in history with the South Sea bubble, the 1929 crash and 2000 tech bubble.

Investors have turned away from GMO in recent years. The firm’s flagship fund had about $6.6 billion in assets as of Dec. 31, having dropped by more than half since 2015.

Grantham, for his part, said a successful bearish call means only that “sooner or later there will come a time when an investor is pleased to have been out of the market.”

“In the last few months the hostile tone has been rapidly ratcheting up,” he wrote. “The irony for bears though is that it’s exactly what we want to hear.”

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