During this interview with Merryn Talks Money, Jeremy Grantham believes that the stock market is in a bear market and that the recent rallies are temporary reprieves. He points to the fact that the rallies have occurred in the middle of a great bubble that is on the way down, which has not happened in previous bear markets. He also argues that the artificial intelligence mini rally is not big enough or soon enough to stop the deflating. Here’s an excerpt from the interview:

Grantham: So we had a typical presidential cycle rally and we had a strong January bounce. If you’ve wiped out the growth stocks, the following January, you always have a great bounce, even if the bear market is not over.

The perfect example would be 2001. The tech bubble was huge. It got… the growth stocks got hammered. In 2000 they were down fifty percent, and then rallied a bit at the end of the year, and then in January they had a huge rally eight or nine percent.

And so we should have expected the same, and basically we got it a little bit less, but a strong January rally. Why not because there were lots of tax losses that had been taken and people replacing their position, investing their Christmas bonuses and so on.

So that was fairly normal, and so was the presidential cycle effect. What was abnormal is that they occurred in the middle of a great bubble that was on the way down. This had not happened in 1929, ’72, or a 2000 or 2007. All of them had neatly sidestepped that seven month window.

But this one it fell right in the middle of the deflating phase.

Host: So we got a bit of a reprieve as a result of that.

Grantham: Yeah, we got a bit of a temporary reprieve. And then I argued back to the meat grinder, but before the meat grinder had time to really get going, we ran into the artificial intelligence mini rally, and yes it was only a dozen or two stocks, but it included some very big ones and they had huge rallies.

And even though the average stock didn’t move, it sent the S&P up, I don’t know, fifteen sixteen seventeen percent this year, year to date, and on the backs of these handful of huge names.

Host: Okay, so another little reprieve for the index.

Grantham: Yeah, is artificial intelligence for real? And my answer is yes, absolutely, it is for real. It will have huge effect. Is it big enough, soon enough to stop the deflating. No, I don’t think it is.

You can listen to the entire discussion here:

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