- Jeremy Grantham said stocks are dangerously expensive and a recession seems highly likely.
- The bubble expert noted that past periods of lofty valuations were followed by painful downturns.
The AI-fueled boom in stocks will end in catastrophe based on how past crazes have played out, and a recession looks assured, Jeremy Grantham warned.
"This is the most vulnerable market there has ever been," the bubble historian and long-term investment strategist at GMO told the "We Study Billionaires" podcast in an episode released on Thursday.
Grantham underscored that periods of steep price-to-earnings multiples on stocks are consistently followed by painful downturns. He pointed to research by veteran investor John Hussman showing the S&P 500 had surged this year to its most aggressive valuation since 1929.
"It should give you cause for some concern and some caution, and of course the market does not feel concerned or cautious," Grantham said, speaking before stocks turned lower this month.
The veteran investor noted that mere days after the market peaked in 1929, stocks crashed "colossally," the global economy cratered, and "everything went to hell immediately" as the Great Depression took hold.
He pointed out that the Japanese asset bubble in the late 1980s, the dot-com bubble at the turn of this century, and the mid-2000s housing bubble were all followed by harsh downturns.
AI and recession
The release of ChatGPT in late 2022 ignited investor interest in artificial intelligence, lighting a fire under Big Tech stocks like Nvidia and Microsoft and pulling the broader market to record highs earlier this year.
But past innovations ranging from railroads to the internet have inflated a "glorious bubble up front" that reliably pops, and that's likely to be the case with AI too, Grantham said.
Grantham also stood by his long-standing recession call, noting that economic slumps often take longer to materialize than experts predict. He underlined that US unemployment climbed in July "above the level that historically has always predicted a recession."
"I would strongly bet as a historian — I would just say you've always had a recession in these conditions," he said. "Perhaps this will be an exception. I wouldn't hold my breath."
Grantham has been sounding the alarm on a market crash and a recession for years now, but his predictions are yet to pan out. For instance, he warned in October that the S&P 500 could plummet to 2,000 points — a 62% drop from its current level — if only a couple of bad things happen. While the index has faltered in recent days, it's still up 12% this year.
The bubble guru acknowledged on the WSB podcast that he was "clearly a couple of years too early" with his dire warnings.
"This is par for the course for me," he said, adding that he found it more painful to prematurely call the crash during the dot-com and Japanese bubbles.