Legendary investor Jeremy Grantham says we’re in the fifth great bubble of the modern era—and warns the economy won’t ‘skate through’ a housing crisis

Fortune ^ | 5/6/22 | Will Daniel

[EBH]

“2000 showed you can just about skate through a stock market event, but Japan and 2008 showed you can’t skate through a housing crisis,” Grantham says.

Wall Street titan Jeremy Grantham has been warning of a “superbubble” in the U.S. since last year, arguing the S&P 500 is set to be cut in half as an era marked by exceedingly risky investor behavior begins to fade.

Now, the cofounder and chief investment strategist of the Boston-based asset management firm Grantham, Mayo, and van Otterloo (GMO) is warning the U.S. may be headed toward a housing crisis as mortgage rates soar, and the effects on the economy could be devastating.

So far, his prediction about the S&P 500 has proved to be prescient, if a little dramatic, as the index is now down roughly 15% year to date. Stocks, particularly in the once high-flying tech sector, have been hammered as the Federal Reserve continues to raise interest rates in hopes of combating levels of inflation not seen in four decades.

Grantham argues the U.S. economy can weather dramatic drops in the stock market, as evidenced by the merely mild recession that surrounded tech stocks’ blowup during the dotcom bubble. But when it comes to a housing crisis, he says, the economy is unlikely to come through unscathed.

The dotcom bubble of “2000 showed you can just about skate through a stock market event, but Japan and 2008 showed you can’t skate through a housing crisis,” Grantham told Bloomberg in an interview published on Friday.

Grantham is convinced that we’re in the midst of a fifth great bubble of the modern era, following the Wall Street crash of 1929, the Japanese asset bubble of 1989, the dotcom blowup in 2000, and the Global Financial Crisis of 2008.

[Entrepreneur]

If housing does crash, you can bet Blackrock and the other lefty groups will be sucking up the housing stock at basement bottom prices under the direction of Dr. Evil (aka, Klaus Schwaub) and the World Economic Forum.

[EBH]

That’s the point actually.

No private property for the poor.

[xenia]

No private property for anyone except the elite.

[ReaganGeneration2]

I have a genuine question on this:

How exactly can THIS housing bubble be worse that 2008?

1) 2008 had millions of people in ARMs, resulting in defaults all over the place - not so many today
2) 2008 had MBS’s that killed other investors - they’re still around today, but see #1
3) 2008 had oversupply - not nearly as bad today; the shock to Construction will be much lower
4) 2008 had flippers all over the place - not as bad today
5) 2008 had no BlackRock with power and an interest in cushioning the blow (no, not saying that’s a net good thing)

Yes, I know that prices have soared relatively higher than 2006-8. Not saying it won’t be bad. Some people in a few months will wake up and see they’re underwater. This will depress consumer spending in many ways.

But not nearly as many ways as 15%-20% Inflation and the subsequent painful Deflation, as well as a 50% S&P drop.

Like Ukraine/Putin and Covid, this seems like COVER for the post-Inflation Deflationary Great Biden Depression that’s coming.

Need help here. I’m listening.

[Entrepreneur]

That’s the point actually.

No private property for the poor.

You mean the serfs. It's a return to feudalism.

[cgbg]

Good post.

It is the general derivatives market that remains a huge risk for the entire world economy—the MBS are probably not the largest piece of that risk today.

[Solson]

It won’t be anything like 2008. More like the housing crises of the late 70s, late 90s or really 2000s.

[Wuli]

He may be wrong, due to part of the nature of the housing bubble this time versus last time.

In the run up to the housing price bubble last time much of the price increases had little to do with lack of availability. This time avialability is way down as regardless of pricing building has not been keeping up with demand for a number of years now.

If the bubble were due only to loose money it could produce the same fallou as the last housing bubble. But this bubble is different in terms of the supply versus demand factors and the type-of-mortgages being made factors (not anywhere near as loose as in the last bubble).

Who is likely to get hit first are sellers, not the banks, as interest rates will have buyers backing off unless the sellar lowers their price. We could begin to see the price-divide between existing and new homes changing as sellers of older homes feel the need to lower price expectations to get buyers but builders of new units are stuck with today’s higher building costs. I think the price divide between existing and new homes is larger today than in the run up to the last housing bubble. And low inventory of new homes is a bigger part of this bubble than the last.

[upchuck]

FJB this mess is mostly his handler's fault.

[fatboy]

I think those people that recently purchased homes at high market prices, low down payment, have upside down eq as prices slide and are watching their 401k crater, that specific group might be at risk for a mental breakdown.