Jeremy Grantham: We Should All Expect Something Pretty Bad This Time

During his recent interview with Nate Hagens, Jeremy Grantham explained why we should all expect something pretty bad this time. Here’s an excerpt from the interview:

Grantham: 2000 was another humdinger, bigger and better than 1929, full of absolutely crazy behavior. The housing bubble was very much a housing bubble, crazy behavior, a three-sigma event, a bigger remarkable breakout of housing prices even than 1929 and 2000 in stock prices.

And then once again, in 2021, we had the two-and-a-half sigma and utterly crazy behavior. I believe if you look at the scale of it, the biggest, most significant crazy behavior in recorded history of the US stock market.

And when you look at those, they go back to trend like all the other normal ones, but they cause a whole lot more pain because they distort the system.

On the way up, there is a huge income effect and wealth effect. And when they inevitably break, they’re always a shock because everyone has locked into the new paradigm.

And they nearly always take longer than people think because they’re so powerful and they didn’t get there by accident. They were driven by some underlying important fundamentals. So there was lots to believe in.

But they eventually come down to trend and all but one of them in history go below trend for a while and that creates an enormous negative income effect and has always caused a recession.

If you miscalculate, the recession turns into something really terrible like the depression of 1929, like the bitter recession of the NIFTY 50, ’72, ’74, of the near total financial collapse of the housing bust in ’08.

And one should expect something pretty bad this time. And we await to see if this follows the pattern of history or whether it is indeed that lovely creature, a new paradigm. But history is not kind to the new paradigm thinking.

You can watch the entire discussion here: