Legendary investor Grantham warns that a U.S. stock market crash is imminent

Source: Jintou Data

In a conversation, the host interviewed Jeremy Grantham, co-founder of GMO and a renowned investment strategist known for accurately predicting market bubbles.

Based on more than fifty years of investment experience, Grantham analyzes the current market’s “super bubble,” green transformation dilemma, population crisis, and issues a stern warning to the US stock market. The following is an excerpt from the selected dialogue.

U.S. stocks: an unprecedented super bubble

Q: You predicted a major correction in U.S. stocks, but the market has held up so far. The AI boom has even fueled the bubble. Has your opinion changed?

Grantham: The bigger the bubble, the higher the risk. The current US stock market has reached the third largest super bubble in history, second only to the 1989 Japanese stock market and real estate bubbles, far exceeding the Great Depression of 1929 and the previous peak in 2021. Measured by the Shiller PE ratio, the valuation of the US stock market has reached a historical high, and the ratio of total market value to economic added value has set a record. If we regress to normal behavior models, the US stock market needs to plummet by 50% - this is only to return to the “normal human psychological tolerance range”.

Q: Proponents believe that AI will reshape the economy and that high valuations will be priced into future growth. How do you refute this?

Grantham: Major technological revolutions are inevitably accompanied by bubbles! The 19th-century railways and the late 20th-century internet were no exception. People crazily invested in the vision of “changing the world,” and in the end, most of them lost everything, while the survivors (like Amazon) took over the market. AI is no different: it will indeed disrupt society, but when the bubble bursts, 99% of the concept stocks will disappear, leaving only a few winners to reap the rewards.

The Paradox of AI: Productivity Improvement and Social Fracture

Question: If AI fully replaces human labor, how will the economic system be maintained?

Graham: Assuming that all work in the future is done by robots, who will consume? The answer can only be strong government redistribution. History proves that when productivity benefits the masses (such as the “Golden Age” of the United States from 1935 to 1975), social stability is strongest; whereas if wealth concentrates at the top (as in the United States after 1975), discontent will lead to political unrest. The current general antipathy of the European and American public towards the establishment is precisely a manifestation of this imbalance.

Q: Is there a need for “big government” in the AI era?

Grantham: A must! The government does not need a large bureaucratic system, but must ensure that wealth flows to the lower levels through taxation and welfare. Otherwise, we will face famine or revolution.

Safe Haven Investment: Green Transformation and Resilient Assets

Q: Are there any safety corners in U.S. stocks?

Grantham: Green economy-related stocks are significantly undervalued. The urgency of the climate crisis is unavoidable – fires and floods are normalized, global decarbonization is bound to accelerate, and there will be long-term investment opportunities in related sectors. In addition, high-quality, high-profit, low-debt companies (such as Coca-Cola’s performance in the 1929 crisis) are more resilient than penny stocks.

Q: Are the European and Chinese markets worth paying attention to?

Grantham: Non-U.S. markets are relatively reasonably valued and may outperform U.S. equities in the long term. **In emerging markets, for example, the S&P fell 22% in 2022, but they were almost flat. This divergence will continue to play out in the future.

Demographic Crisis: A Neglected Time Bomb

Q: Why is the declining population so dangerous?

Grantham: Labor shrinkage directly drags GDP, and the more dreadful thing is to strike at the ‘animal spirit.’ When companies no longer expand and promotion opportunities decrease, society will fall into conservatism and pessimism. Japan’s ‘Lost 20 Years’ serves as a warning. Immigration can only temporarily alleviate the pressure, but the global declining birth rate trend is irreversible—Africa’s birth rate has dropped sharply from 6.5 to 4.2, and many European countries rely on immigrants to sustain their population, but this is not a long-term solution.

Q: What about the solution?

Grantham: Social incentives must be refactored! **The government needs to reshape childbirth as a “public good” through policies such as housing subsidies, high childcare allowances, and free education. Culturally, there is a need to reassign the value of the family to a high status, rather than treating childbearing as a personal burden.

Gold vs. Crypto: Safe Haven or Trap? **

Q: What do you think of gold vs. Bitcoin?

Grantham: Gold is not actually produced, but it has been tested for 10,000 years and is much more reliable than cryptocurrencies. Bitcoin is a purely speculative vehicle, and the AI-induced surge in electricity demand has made cryptocurrency mining an environmental disaster.

Ultimate Warning: The Physical Limits of Economics

Grantham: Traditional economics ignores the fact that the pursuit of infinite growth on a finite planet inevitably hits the southern wall of physical laws. When resources run out and the environment collapses, any model will fail – that’s humanity’s biggest bubble.