Legendary investor Jeremy Grantham raised the alarm on an AI bubble, revealed a pandemic bet that didn’t pay off, and recommended young people steer clear of Wall Street in a memoir published last month.
The GMO cofounder wrote in “The Making of a Permabear: The Perils of Long-term Investing in a Short-term World,” which he coauthored, that ChatGPT’s release in late 2022 shored up a crumbling stock market and created a “bubble within a bubble.”
There’s “no clear historical analogy to this strange new beast,” Grantham wrote, but the AI bubble is likely to “at least temporarily deflate,” allowing the original market bubble to pop.
He issued a grim outlook, warning that the massive run-up in stocks has frontloaded returns so the market’s long-term prospects “look as poor as almost any other time in history.” Investors face either a “dismal return forever or a hefty bear market followed by a normal return,” he added.
Grantham also predicted that past interest-rate hikes and “ridiculous speculation” during and after the pandemic would “eventually end in a recession.”
“The US market since at least 2020 has been in a bubble,” he wrote, adding that even though bubbles can be unpredictable, all of them have popped so far.
Right bet, wrong size
Grantham disclosed in his book that he anticipated the COVID-19 pandemic would tank the stock market, but he didn’t win big from the prescient call.
The investor wrote that he dug into every rumor about the mystery virus in January 2020, and determined it posed a serious medical and economic threat, especially if countries bungled their responses.
He took steps to protect the portfolio of his family foundation — the Grantham Foundation for the Protection of the Environment — from a slump in stocks, and later convinced his GMO colleagues to prepare for trouble too.
“I get to brag here at how early this was compared to most,” Grantham wrote. “The bad news was that when the smoke had cleared, our trade was so unlevered and so lacking in cleverness that we really might as well have done nothing.”
Grantham contrasted that with Bill Ackman, whose Pershing Square hedge fund spent $27 million on credit-default swaps (CDS) on investment-grade and high-yield CDS swap indexes in February 2020.
Those derivatives soared in value within weeks, and Ackman sold them for $2.6 billion by late March, scoring a nearly 100-fold profit. The windfall offset losses in Pershing’s equity portfolio, and Ackman plowed more than $2 billion into stocks before they rebounded.
Grantham said his comparatively lackluster pandemic trade was a reminder that he’s “good at research and judgment, but left to my own devices sometimes mediocre at implementation.”
He gave another example of that shortcoming. He recalled publishing a bullish outlook the day the stock market hit its low in March 2009, but “neither I nor our Foundation nor GMO came close to maximizing the potential rewards of such a highly confident call.”
Skip the finance job
Grantham wrote in his book that he enjoyed the “intellectual challenge” of investment management, but came to view it as a “trivial activity.”
“If I started out all over again I’d prefer to do something that has some socially redeeming features,” he wrote.
Grantham said the world needs more people with practical and scientific skills to weather hard times and tackle existential risks such as climate change.
“We are going to have desperately difficult years ahead,” he wrote. “And I would urge young people with talent to do really seriously useful stuff: engineering, farming, metal bashing and serious science and research because we are going to need those kinds of skills.”
Grantham added that his foundation invests in new ventures that could “save the day” by harnessing geothermal energy or replacing toxic food packaging with greaseproof paper.
He wrote that making strides in “something so important is more satisfying and exciting than the equivalent breakthrough in making money in the stock market.”
