Jeremy Grantham: What's Coming is WORSE Than a Recession

TL;DR

Jeremy Grantham expects a recession, possibly beginning in 2023 and running deep into the following year, with an accompanying decline in stock prices. He says the United States is descending from the major 2021 bubble as higher inflation and interest rates pressure asset values. Read on to understand his warning, his criticism of the Federal Reserve, and why changing interest rates can dramatically alter stock prices.

Transcript

do you think we're in a major bubble now at right now in the United States and do you think that the tech bubble has burst sufficiently so so that the tech Bubble Burst is over throughout his over 50-year career billionaire investor Jeremy Grantham has developed a reputation as somewhat of a doomsday Oracle he has become famous for predicting some ... Read More

Key Insights

• 🍝 Grantham's reputation as a doomsday Oracle comes from accurately predicting major stock market crashes in the past.
• 😘 The US stock market has reached unsustainably high levels, fueled by historically low interest rates.
• ☠️ The relationship between interest rates and asset values is crucial in understanding the stock market's behavior.
• 😮 Bubbles form due to fear of missing out (FOMO) and the desire to participate in a rising market.
• 🤯 Even the most brilliant minds, like Isaac Newton, have fallen victim to financial bubbles.
• 🫰 Grantham suggests investing in global index funds outside the US due to the concentrated overpricing in the US market.
• 🥳 The US stock market has a high price-to-earnings ratio (PE ratio) compared to other major economies.

Questions & Answers

Q: What does Jeremy Grantham predict will be worse than a recession?

Grantham warns that the deflation of the 2021 market bubble could combine a recession with an accompanying decline in stock prices. He says the downturn may begin in 2023 and run perhaps deep into the following year.

Q: Does Jeremy Grantham think the US stock market is still in a bubble?

Grantham says the market is descending from the 2021 bubble, which he calls one of the great bubbles. The page also describes the US market in 2023 as approaching all-time highs and dangerously overvalued.

Q: Does Grantham think the tech bubble has fully burst?

He characterizes the market as still descending from the 2021 bubble rather than saying that the process is complete. He links the remaining deflationary period to whether earnings and profit margins decline and whether the economy enters a recession.

Q: When does Jeremy Grantham expect a recession?

Grantham says a recession may start in 2023 and could run perhaps deep into the following year. He also expects an accompanying decline in stock prices.

Q: Why does Grantham disagree with the Federal Reserve’s no-recession projection?

Grantham argues that the Federal Reserve has never called a recession, particularly those following major bubbles. He says the Fed highlights the economic benefits of rising asset prices but does not claim responsibility for the deflationary effects when those prices break.

Q: What is Grantham’s outlook for inflation and interest rates?

He suspects inflation will not return to the low average seen over the previous 10 years. He expects a period of moderately higher inflation and, therefore, moderately higher interest rates.

Q: Why do higher interest rates push stock prices down?

The transcript explains that a stock’s value reflects its future cash flows discounted back to the present using an interest rate. A higher discount rate reduces the present value of those cash flows, while a lower rate raises it.

Q: How much can interest rates change a stock’s calculated value in the example?

For a stock producing $30 annually for 10 years and then selling for $300, the calculated value is $174 per share at a 20% rate. It rises to $225 at 15%, $300 at 10%, and $388 at 6%, even though the cash produced stays unchanged.

Summary & Key Takeaways

• Jeremy Grantham believes that the US stock market is in a bubble and is dangerously overvalued.

• He predicts a recession and a decline in stock prices, possibly starting in 2023.

• Grantham disagrees with the Federal Reserve's projection that there will be no recession, citing their history of being wrong in predicting market crashes.

• Low interest rates have fueled the stock market's rise, but Grantham expects a period of moderately higher inflation and interest rates.