Value investing guru Grantham warns: The US stock market is about to crash, and the AI bubble is no different in essence from historical tech bubbles

On the 28th, the "bubble hunter" of the investment world, renowned value investor and co-founder of GMO, Jeremy Grantham, issued a warning: The U.S. stock market is in a "super bubble," and a "significant decline" is imminent.

Grantham is known for his keen insights into market bubbles. Throughout his career, he has successfully predicted the bursting of multiple market bubbles. In an interview with Bloomberg, Grantham emphasized, "The longer a bubble lasts and the higher it rises, the worse the situation becomes."

Grantham believes that current valuations of U.S. stocks have surpassed those of 1929 and 2021, second only to the super bubble in Japan in 1989. Both traditional valuation metrics, such as the Shiller P/E ratio, and the more comprehensive "total market cap/economic total added value" metric indicate that U.S. stock valuations are at historical peaks. Models show that U.S. stocks still have a 50% downside potential to return to normal valuation levels.

Notably, Grantham expressed concerns about the long-term impact of declining population, arguing that a declining population could lead to the disappearance of "animal spirits," resulting in slower economic growth and declining productivity. He urged investors to pay attention to long-term trends and social issues.

Grantham: The AI Bubble is No Different from Historical Tech Bubbles

Grantham believes that the current AI craze is fundamentally no different from other historical tech bubbles. "This is an argument that arises every time a significant new technology emerges," he pointed out:

"Every major new technology in history has been accompanied by a bubble."

He cited the railroads of the 19th century and the internet at the end of the 20th century as examples, illustrating how new technologies often attract massive funding in their early stages, leading to bubble formation. He specifically mentioned Amazon, whose stock price plummeted 92% during the internet bubble burst, but ultimately became one of the few companies that "dominate the world." Grantham emphasized, "It is precisely the importance of AI and its obvious significance that guarantees the formation of a bubble."

U.S. Stock Valuations Reach Historical Highs, Downside Risk Could Be 50%

Grantham pointed out that multiple indicators show that U.S. stock valuations are too high. He mentioned, "Every traditional value measurement metric, the best of which is the Shiller P/E ratio, is at historical highs. Most common indicators are at the top 1% or 2% levels."

He particularly emphasized a more comprehensive metric, a variant of "total market cap/economic total added value." This metric shows that current U.S. stock valuations have exceeded the peaks of 1929 and 2021, setting a new historical high in the U.S.

Grantham also cited a behavioral model he developed with Ben Inker 25 years ago. This model does not consider market efficiency or dividend discount models, but focuses on the actual performance of the market since 1925. The model shows that low inflation and high profit margins are favored by the market, while the stability of GDP growth also has a positive impact on the marketHowever, even considering these factors, Grantham believes that the U.S. stock market still has a 50% downside potential to return to normal valuation levels (the Shiller P/E ratio is 18, while currently over 37).

In the face of a potential market downturn, Grantham advises investors to focus on companies with long-term growth potential and solid financial health. He is particularly optimistic about the green economy sector:

“Greening the entire global economy is a daunting task that requires massive investment and labor, but it must be done.”

He believes that due to the unavoidable physical realities of climate change, the green economy sector will eventually undergo large-scale restructuring and outperform the market.

Additionally, Grantham emphasizes that in a turbulent market environment, investors should avoid excessive leverage:

“Leverage, like in the 1930s, can bankrupt you.”

He suggests that investors choose companies with lower debt levels and higher profit margins to enhance their ability to withstand market shocks.

Grantham: Population Decline Leads to the Disappearance of "Animal Spirits"

In addition to concerns about the stock market, Grantham is also focused on the long-term effects of population decline. He believes that population decline is “the fastest-growing potential threat,” negatively impacting the economy.

Grantham points out that a declining workforce directly affects GDP growth:

“If the workforce in your society is declining, you will find that the productivity level you are in will also decrease.”

He believes that population decline will lead to the disappearance of “animal spirits,” causing businesses and individuals to become more conservative and less willing to take risks and invest. He mentioned that Europe’s workforce has declined by nearly 0.5% on average over the past 15 years, which has directly led to a 2% decrease in GDP growth.

While immigration can alleviate some of the issues caused by population decline, he believes that, in the long term, societal incentives for childbirth need to be changed to increase birth rates.

The Rise of Non-U.S. Markets? Grantham's Global Investment Strategy

Despite his pessimistic view on U.S. stocks, Grantham believes that non-U.S. markets are relatively reasonable:

“Of course, the risks of holding non-U.S. markets are much lower, and they are likely to outperform the U.S. market in the next 5 to 10 years.”

He points out that in past market cycles, non-U.S. markets often catch up after the U.S. market performs well. Although non-U.S. markets may be affected during global market downturns, he believes they will recover faster and perform better in the long run.

Regarding cryptocurrencies, Grantham believes they “produce nothing and are not a medium of exchange, but they are an excellent speculative medium.” He thinks that during the stimulus plans in 2020, a large amount of money flowed into the cryptocurrency market, exacerbating speculative behavior.

As for gold, Grantham states that although he is cautious about gold, he believes it is still a better safe-haven asset than Bitcoin:

“Gold does not pay dividends and produces nothing. Aside from being a wonderful, beautiful metal with some industrial uses, one must admit that it is 90% a speculative mediumGrantham also criticized the limitations of traditional economic theory. He cited James Galbraith's new book "Entropy Economics," which examines economics from the perspective of physics and entropy.

Grantham believes that traditional economics "performs very poorly when dealing with the real world." He pointed out that traditional economic models only consider capital, labor, and productivity, while ignoring key factors such as raw materials and energy. He emphasized, "There cannot be compound growth on a finite planet. This is a physical law, it doesn't work."