On August 1st and August 31st, 2022, Jeremy Grantham, a famous value investment guru, co-founder and chief strategist of asset management firm GMO, published an article Entering the Superbubble’s final Act , warned that the “super bubble” burst in US stocks is about to enter the final stage and come to the “epic” ending. Since Grantham successfully predicted Japan’s stock market crash in 1989, the dot-com bubble crash in 2000 and the subprime mortgage crisis in 2008, his predictions in his recently published article have caused quite a stir in the economics community. This article will first analyze what a super bubble is and then briefly summarize some of the discussions in Grantham’s article. What is a stock market bubble? According to the definition on smartasset.com, a stock market bubble is “a period of growth in stock prices followed by a fall”, and the performance is usually “Prices rise quickly and significantly, growing far beyond their previous value in a short period of time. When they fall, they do so quickly and often below the starting value”. The root cause of bubbles in a stock market is that the price of a stock is much higher than it is worth, which in most cases is caused by the speculation of a large number of investors . Using the theory of positive feedback loops, the process of how bubbles form goes something like this: If a segment of investors begin to believe that certain types of stocks will rise in price (in fact, they believe that being a shareholder of the company behind these stocks will huge profits), and intentionally or unknowingly let this thinking influence the behavior of more people, then more people will buy these stocks.

The stock price will rise due to the scarcity of those stocks. Such a process does not stop automatically because all the forces generated during the process are in the direction in which the process occurs. Until one day, for some reason, some investors will find that the stocks they bought at a high price will not bring their expected revenue, and even bring losses, they will begin to sell stocks. Similarly, they passed on this idea to more investors, causing more stocks to be sold and their share prices to fall, i.e. the bubble burst.

In Jeremy Grantham’s article, he points out that the current “super bubble” is an unprecedented combination of multiple bubble crises, including severe overvaluation of housing, stocks and bonds. Now, in contrast to the inflation surge and interest rate shock of the early 1970s, rising commodity and energy prices have also greatly reduced expectations for long-term economic growth. At the same time, the fundamentals of the U.S. economy have deteriorated sharply, and various negative factors such as the conflict between Russia and Ukraine, food and energy crises, and record fiscal austerity coexist, all of which will make the outlook for U.S. stocks even more severe. In addition to the above macro analysis of the current state of the economy, Grantham also predicts that the current trend of the U.S. stock market by drawing on various performances of the U.S. stock market before and after the “super bubble” burst event. In a nutshell, the current U.S. stock market seems to be following the same track as past “super bubbles” bursting, and the U.S. and the world must prepare for a possible recession. The end of the article does not mention ways or even possibilities to alleviate this situation, but “hope (the “supper bubble”)this time for a minor one”.

By Tao Cheng