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Billionaire Jeremy Grantham is a British investor who has built a reputation over the years for anticipating bubbles and financial crises. He co-founded Boston-based GMO LLC, which has about $60 billion in assets under management.
In September 2007, Grantham wrote an article for Fortune, saying the US housing market was in “genuine bubble territory” and prices were “guaranteed” to fall. Grantham also foresaw the Japanese asset price bubble and the dot-com bubble.
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Grantham also said the surge in stock prices following the pandemic was somewhat similar to the 2000 tech bubble. However, he believed the AI-led market rally delayed the recession he’d warned about for months.
In August, Grantham gave a detailed interview to the YouTube channel We Study Billionaires, in which he reiterated his warnings and made some serious predictions.
Grantham analyzed the market bubbles, including the Japanese bubble in the 1980s. The billionaire called Japan the “mother and father” of all bubbles. He said a high P/E ratio does not indicate a healthy market and should often alarm investors about things to come.
“So you fast forward to Japan, which is, in a way, the mother and father of all bubbles. The Japanese market had never sold over 25 times earnings until it did in ’87. By ’89, it was put to us that it was 65 times earnings. As far as we could tell, the Japanese market was 65 times trading earnings, never having sold above 25. And this is what should put the fear of God in anyone trying to time the market. This had gone up 150 percent more than it ever had in history.”
Grantham Says This is the “Most Vulnerable Market There Has Ever Been”
Grantham said high earnings multiples often project the “worst periods of our history,” and since today’s market is trading at a high multiple, he’s issuing recession warnings.
“Constantly for 30 years, this is the most vulnerable market there has ever been and given the incredible record of the past that the highest multiples do not predict good times—which you learn a business school but have historically predicted the worst times.”
“You Will Not Be Warned”
Grantham said the market does not usually take caution or concerns seriously before things go off the peak, but he still warned listeners of the interview:
“And, of course, the market does not feel concerned or cautious. It didn’t in 1929. It didn’t in Japan in ‘89. It didn’t in the U.S. before the housing bust of 2007-2008. That’s the way the market is. So, dear listener, get used to it. You will not be warned.”
Jeremy Grantham’s Thoughts on AI and Its Impact on Markets, Human Society
Grantham, 85, said the market was starting to decline when ChatGPT was released in November 2022, causing the Magnificent Seven stocks to reach new highs. While the investor is skeptical about the ROI of AI spending, he’s sure AI will change the world.
“AI played a very big role. AI is serious. Whether people will actually make real money is another matter, but is it serious? Yes, it is. It will change the nature of warfare completely. It will know who you are. It will have face identification. It will be an alarming tool for governments to know what you’re doing, who you are, where you are and, if necessary, in warfare, destroy you.”
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‘It’s Not Clear’ Whether Spending on AI Chips Will Get a Return
However, Grantham is not sure whether AI spending will meet market expectations when it comes to returns:
“And everyone’s putting a lot of money into developing AI products. And so the chip seller is brilliant and it’s not clear yet whether the people paying for the chips will ever get a return on them and we’ll find out. I don’t think it’s inconceivable,” Grantham added.
Jeremy Grantham Says Recession Is Imminent Based on Unemployment Data
In the interview, Grantham predicted a recession, citing unemployment data and historical patterns.
He said unemployment is one of the “best indicators” of recession.
“If you see that in a long-term chart, you’d be impressed. When the market ticks up 50 basis points, half a percent in unemployment, 70 percent of the time it’s followed by a recession. When it ticks up 0.6 percent, it is followed 100 percent of the time historically with the recession. Today, it’s 0.7. Today, it is nicely, I mean visibly, above the level that historically has always predicted a recession. Recessions have this slippery habit of taking a little longer than you would like.”
How Did Grantham Predict the Japanese Asset Bubble Burst?
Later in the interview, the fund manager explained how he was able to spot the cracks in the Japanese market in the past.
“I have spent my entire life being early in the stock market. The most important one probably was Japan. We were one of the early firms in international investing and we knew that Japan had never sold over 25. And by the time it got to 45, we felt it was almost immoral to be in Japan.”
When Grantham gave this interview, the Fed had not started cutting rates. With a 50-basis-point rate cut now announced and inflation on the decline, it’ll be interesting to see how Grantham’s predictions pan out in the coming weeks and months.
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This article Billionaire Who Predicted 2008 Crash And Dot-Com Bubble Calls The Current Economy The ‘Most Vulnerable Market That Has Ever Been’ originally appeared on Benzinga.com
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