Market historian Jeremy Grantham just warned of a 'superbubble' and predicted an epic crash. Here are the 4 key takeaways from his latest research note.

• Jeremy Grantham warned of a "superbubble" and predicted an epic crash this week.
• The GMO cofounder explained his thinking, blamed the Fed, and offered advice to investors.

Jeremy Grantham raised the alarm on a massive US "superbubble" and predicted a historic market crash in a research note this week.

The market historian and GMO cofounder walked through his diagnosis in the note, and laid out why the sprawling bubble poses an enormous threat to investors and the economy. He also accused the Federal Reserve of helping it to form, and outlined how he's preparing for when it bursts.

Here are the 4 key takeaways from Grantham's latest note:

1. Caught in a bubble

Grantham said there are bubbles in equities and housing, and another bubble is forming in commodities. He asserted that asset prices always return to trendline growth, and the higher they climb above historical norms, the more pain they cause and the longer the damage lasts.

The veteran investor pointed to the "blow-off" or surge in stock-price growth in 2020 — underpinned by near-zero interest rates and unprecedented amounts of stimulus — as a key indicator of a bubble. He also called out the rampant speculation on high-risk assets such as meme stocks and cryptocurrencies, and the widespread belief that assets only go up in price.

Grantham pointed to the market narrowing, with blue-chip stocks rising and speculative stocks underperforming, as the ultimate sign of a superbubble. He noted that oil, several major metals, other commodities, and global food prices have surged in price.

2. Paying the price

Grantham listed several reasons why bubbles and crashes are bad news for virtually everyone.

High prices fuel inflation and squeeze people's real incomes, he said. Grantham added that if commodity prices keep rising as other assets tumble in value, that represents the "ultimate pincer attack on the economy," as people become less wealthy while their cost of living rises.

Bubbles exacerbate wealth inequality and resentment, as the poor own fewer assets so they miss out on the gains of the rich, Grantham said. Soaring asset prices also lead to people spending beyond their means, as they think they're wealthier than they really are, and that often leaves them overextended when the bubble pops, he continued.

Moreover, expensive assets yield less, hamper people's compounding of wealth over time, and price the young out of buying a house or setting up their first portfolio, the investor noted.

Grantham warned there could be $35 trillion in wealth losses in the US alone when the superbubble pops. If inflation also jumps due to rising food and energy costs and various shortages, the economy could be hit extremely hard, he said.

3. Blame the Fed

Grantham accused the Fed of cheering on the dot-com bubble and housing boom, and said the US central bank has failed to learn from the crashes that followed.

He complained that regulators are ignoring the risks of asset bubbles, and have focused on mitigating the fallout when they burst, instead of preventing them from forming.

4. Preparing for the bubble to burst

Investors can soften the blow to their portfolios in a few ways, Grantham said in his note.

The GMO boss recommended avoiding US equities, and instead looking for deals in emerging markets as well as Japan and other, less overpriced stock markets. He said that he holds some cash so he can deploy it easily, takes steps to protect himself from inflation, and keeps a small amount of gold and silver.

Grantham also dismissed crypto as a haven, comparing it to the emperor's new clothes — an asset pitched as amazing and complex, but there's nothing underneath the facade.