During his recent interview with Morningstar, Jeremy Grantham describes a unique market cycle where a classic 2021 bubble merged with the rapid rise of AI-related stocks in 2022-2023. Initially, a small group of AI-driven stocks, the “Magnificent Seven,” surged as the broader market declined, marking a concentrated gain.
Grantham likens AI’s impact to transformative technologies like railroads and the internet, predicting it will change everything. However, he warns that groundbreaking innovations often lead to excessive enthusiasm and bubble bursts. Historically, great ideas are overhyped in the short term, face inevitable crashes, and then emerge stronger to reshape the world over the long term.
Here’s an excerpt from the interview:
Grantham: No, this is unique. This is two fairly distinct events, one merging almost into the other. We had a classic bubble in every way, perfectly ordinary in context of the other four in 2021. And melting down the first half of 2022 was the worst market for stocks and bonds since 1939, the year after I was born. That’s quite a long time.
And then in November of that year, October or November, when they introduced the chat, a handful of stocks that happened to be very large that had a future that they could relate to AI took flight. The rest of the market drifted lower as a matter of fact for another 10 months. And all of the gain, plus a little, was in the hands of the “Magnificent Seven,” all of which had an AI story to tell.
And then finally, impressed by this steady advance, and also impressed by AI itself, the broader market jumped on board in late ’23, the other day really, and we had a broader market advance. So, this is unique as if you came in in 1932 with some magnificent new invention, some really cheap fusion or something. And AI is serious. It will change everything. And therefore, it’s not surprising the market took it seriously.
The bigger the new idea, the bigger the new invention, the more the market becomes overpriced, the more it attracts euphoric. It’s not accidental. Really great things happen in the internet phase, ’98-’99. But they overdo it. They overdid it with the canals apparently in England.
They overdid it magnificently all over Europe, particularly the UK, but also the US with railroads. They were spectacular bubbles. The canals were huge; the railroads were even much more profound, changed everything.
They were serious, but that didn’t stop them attracting too much capital, charlatans, putting eight different railroad lines between Manchester and Liverpool, or planning them and raising capital for them when one or two was clearly enough.
And the result was a bubble that broke for canals and railroads, and then somewhat the same with automobiles and radio and so on in 1929. Electrification of everything and development of mass markets for a lot of them.
And then the internet. The internet was serious. We all use the internet. We can’t live without our iPhones, and yet it was overdone. Everyone knows that Amazon went up multiple times in ’99. I forget how many times, but several times.
It was the star of ’99, which was a great year to be a star. And then in the break, they went down 92%. Very few people realize that. Amazon, huge success, went down 92%. And then it rose from the wreckage, as did a handful of them, and inherited the earth.
But how many, what fraction of those stars of ’99 survived? I think 80% of the internet stocks just ceased to exist. Some were bought for scrap iron price. Basically, they ceased, and a handful of super leaders emerged.
So, the fact that it’s a real idea doesn’t say that there won’t be a crash. It’s quite the reverse. The more important the idea, the more guaranteed almost it is, historically, that it will attract too much short-term attention, then there will be a crash, and then the railroads will change the world, internet will change the world, AI will change the world.
But it would be classic for it to be overdone. That’s what the history book is shouting at us. And to have that come in the middle, if you will, in the middle of a gentile old-fashioned bubble forming and breaking, is to create a very novel and complicated twist.
But it happens. That’s what life is all about. Every now and then something really weird happens, and a guy catches the football on the back of his helmet. They do happen. And this is it.
So where do we go from here, I think, is back to the history books. When you have these great developments, they overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term. And that’s what I expect will happen this time.
You can listen to the entire interview here:
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