Legendary investor Jeremy Grantham says the stock market right now is in the 4th 'Real McCoy' bubble of his career
Renowned investor Jeremy Grantham told CNBC on Wednesday that the US stock market seems to be forming a 'Real McCoy' bubble that may end up hurting investors. Grantham, said this may be the fourth and most "crazy" major market bubble in his long career, referring to the strong rebound in US stocks from coronavirus-induced lows in March. The investing legend is notable for calling out three previous market bubbles: Japan in 1989, the tech bubble in 2000, and the US housing crash in 2008. Visit Business Insider's homepage for more stories.
A stock market legend, Jeremy Grantham, seems certain that the US stock market's strong recovery from its historic lows in March will end up in pain for investors. "My confidence is rising quite rapidly that this is, in fact, becoming the fourth real McCoy bubble of my investment career," he said in a CNBC "Closing Bell" interview aired on Wednesday. "The great bubbles can go on a long time and inflict a lot of pain but at least I think we know now that we're in one." Grantham presented an alarming scenario in which uncontrolled day traders who are out of work and into heavy market speculation around bankrupt companies, including car-rental firm Hertz, may just be the most "crazy" market he's seen in his career. "It is a rally without precedence," he told CNBC's anchor Wilfred Frost, noting that the market rebound clashes with other harsh economic realities including a low point for health, unemployment numbers, and a rising growth of bankruptcies. US stocks have been rallying in the past week despite investor fears over a second coronavirus wave and rising geopolitical tensions. But a steady flow of government stimulus, that Grantham called a "favorable environment" for speculative investors, seems to have put a rocket under stocks and kept all major US stock markets climbing, with major US indexes up more than a third from their March lows. Read More: A venture capital fund set up by 2 ex-Googlers has raised a $60 million to invest in deep tech On investor exposure to US equities, Grantham said: "I think a good number now is zero and less than zero might not be a bad idea if you can stand that." Grantham, a co-founder and chief investment strategist of Boston-based asset management firm GMO, is noteworthy for his accurate predictions related to three major prior market bubbles. Grantham called Japan's asset price bubble in 1989, the dot-com bubble in 2000, and the housing crisis of 2008. In anticipation of those market downturns, he warned that stocks were overvalued both in 2000 and 2007, according to the Wall Street Journal. Back then, he also mentioned how the relationship between home prices and income had become removed from reality, and that at least one large financial institution would fail. The subsequent 2008 financial crisis proved his predictions right. Read More: Schwab's global investing chief says the market's best-performing stocks are due for a surprising rotation for the first time in 12 years — and shares 3 ways to get ahead of the shiftSEE ALSO: 'Foolish to stand in the way': Fed support and the day-trading boom will drive stocks higher, an analyst says Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
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A 2nd wave of coronavirus won't stop the stock market's momentum upward, Wharton Professor Jeremy Siegel says
Wharton professor of finance Jeremey Siegel told CNBC that the stock market would not lose upward...Wharton professor of finance Jeremey Siegel told CNBC that the stock market would not lose upward momentum if the US were to experience a second wave of COVID-19. Siegel said that because stocks are so forward looking, a short-term lapse in the economy will not stop long-term moves higher. The professor also said he believes both tech stocks and cyclical stocks will go higher in 2021 as the US begins to fully re-open. Visit Business Insider's homepage for more stories. Professor Jeremy Siegel told CNBC on Tuesday that it's unlikely a second wave of the coronavirus would derail the stock market's march upward. "We're not anywhere getting near down those March lows. A little pause if we get that wave, but I don't think it's going to really stop the longer-term momentum," the Wharton School of Business professor of finance said. The S&P 500 has rallied more than 55% since its March 23 low. It traded 0.07% higher on Tuesday. Siegel stressed that the forward-looking nature of stocks and the continued liquidity provided by the Fed will be a "really powerful force" for the market's drive upward. The professor said that even if an effective coronavirus vaccine takes another six months or more, stocks will still move upward in a V-shaped recovery. Read more: BlackRock unpacks the 4 biggest changes it has made to portfolios since the crisis began 6 months ago — and shares how it's positioning to thrive in a post-COVID world "That's why you could have a U-economy, a W-economy, and you can still have a V-stock market. Because of that forward looking component," the professor said. According to Siegel, 90% of the value of a stock depends on its earnings more than 12 months in the future. He also discussed the popular debate about whether investors should buy more tech stocks or pivot into cyclical stocks as the US begins to recover. "I think there's room for both groups to go up in 2021," Siegel said. Siegel said he believes that even if cyclical stocks outperform the market next year, it doesn't mean that tech stocks have to go down. The coronavirus pandemic has demonstrated to the economy how important tech is, and Siegel does not think that's going to go away. Read more: US investing champion David Ryan famously garnered a compounded return of 1,379% in just 3 years. Here is the 11-part criteria he uses to find the next big winner.Join the conversation about this story » NOW WATCH: Why YETI coolers are so expensive
Day traders have recklessly bought into bankrupt and distressed companies in recent weeks. Billionaires Mark Cuban...Day traders have recklessly bought into bankrupt and distressed companies in recent weeks. Billionaires Mark Cuban and Howard Marks compared the buying frenzy to the dot-com bubble. Warren Buffett has warned against speculating and discussed market bubbles many times. "Normally sensible people drift into behavior akin to that of Cinderella at the ball," he said. Visit Business Insider's homepage for more stories. Day traders have piled into bankrupt and distressed companies in recent weeks, thumbing their noses at experts and proclaiming that "stocks only go up." Warren Buffett, perhaps their favorite punching bag, has warned for years about the dangers of mindless buying. Taking on the 'suits' Thousands of people, stuck at home during the coronavirus pandemic with casinos closed and live sports suspended, have turned to playing the stock market on Robinhood and other zero-commission trading platforms. They have sent shockwaves through the investment community with their contrarian moves. Those include plowing cash into struggling businesses such as airlines and cruise lines, and snapping up shares in Hertz, JCPenney, and other bankrupt companies despite the high risk of getting wiped out. These irreverent amateurs have also taken swipes at industry veterans. Dave Portnoy, their self-proclaimed captain, has dismissed Buffett as "washed up" and wrong in his decisions. The "suits" who whine about him and his followers are just jealous of their success, he says. Read more: Jefferies says buy these 14 cheap stocks that are financially strong and positioned for market-beating returns Billionaire investors and market commentators have rushed to sound the alarm on the trend. "Shark Tank" star Mark Cuban and Oaktree Capital chief Howard Marks both said the buying frenzy reminds them of the dot-com bubble. Meanwhile, "Mad Money" host Jim Cramer, Omega Advisors boss Leon Cooperman, and Wealthfront investment chief Burton Malkiel have all warned the new market entrants that wildly speculating will almost certainly lose them money and might accelerate a market crash. 'One helluva party' Buffett hasn't publicly commented on the day-trading boom, but he's discussed similar behavior in the past. The billionaire investor and Berkshire Hathaway boss defined speculation in his letter to shareholders in 2000 as focusing "not on what an asset will produce but rather on what the next fellow will pay for it." Speculators may knowingly pay more than what a stock is worth in the hope of selling it for an even higher price, he said in his 1992 letter. Buying Hertz shares with the goal of dumping them before the stock becomes worthless fits that description. Read more: The stock market's fear gauge is sending a persistent warning that has a 30-year track record of signaling meltdowns ahead Amateur traders who cashed in during the recent stock rally may also be overconfident and greedy for more profits. Buffett described the phenomenon in his 2000 letter. "Nothing sedates rationality like large doses of effortless money," he said. "Normally sensible people drift into behavior akin to that of Cinderella at the ball." "They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice," Buffett continued. "But they nevertheless hate to miss a single minute of what is one helluva party," he said. "Therefore, the giddy participants all plan to leave just seconds before midnight." "There's a problem, though: They are dancing in a room in which the clocks have no hands," Buffett added. In other words, speculators don't know when the music will stop and reality will set in, wrecking their portfolios. Learning their lesson Buffett compared the tech-stock fever in the late 1990s to a contagious infection in his 2000 letter. "It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them," he said. However, irrational exuberance and boundless optimism is never sustainable. Read more: A market-crash expert known as 'Dr. Doom' warns a 10-year depression is coming — and says investors are far too confident about a possible recovery "A pin lies in wait for every bubble," Buffett said. When a bubble pops, "a new wave of investors learns some very old lessons," he continued. One of those is that "speculation is most dangerous when it looks easiest." Gambling versus investing Buffett also discussed rampant speculation during Berkshire's annual meeting in 2017, according to a transcript on Sentieo, a financial-research site. "There's nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks," he said. "Markets have a casino characteristic that has a lot of appeal," Buffett continued. "People like action and they like to gamble." "If they think there's easy money to be made, you get a rush," he added. "And for a while, it will be self-fulfilling and create new converts until the day of reckoning comes." Read more: From a late-night infomercial to a 1,040-unit empire worth $188 million, how Jacob Blackett perfected his real-estate-investing strategy after losing $70,000 on his first deals The good news about bubbles inevitably bursting is that investors can profit, Buffett said. Those who resist the hype and keep their nerve when the market crashes may find themselves with ample cash and opportunities to invest it, he said. The Berkshire boss put his philosophy to work during the financial crisis, when he struck lucrative deals with Goldman Sachs, General Electric, Harley-Davidson, and other companies hungry for cash. He was far less active during the coronavirus crash because he worried about the pandemic's fallout, the US Treasury and Federal Reserve swiftly moved to help companies and shore up markets, and private-equity firms lined up to offer cheaper bailouts than Berkshire. Day traders are ruling the roost for now, but Buffett is likely shaking his head at their reckless behavior and waiting for his moment to shine. Read more: The chief strategist of $2.5 trillion State Street recommends 7 ETFs for investors looking to profit from a permanently altered post-coronavirus landscapeJoin the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence