This piece features investor Jeremy Grantham arguing that today's market bubble is even bigger than the dot-com bubble of 2000, driven mainly by retail investors. He warns against SPACs (a way to go public that he calls a legalized tool to exploit investors) and Bitcoin. He favors emerging-market value stocks (cheap stocks in cheap countries) and green tech, like QuantumScape (a solid-state battery company he bought at $2.50 seven years ago, which later peaked at $130 but he sees as overvalued). He advises individual investors to hold cash and avoid chasing highs.
Jeremy Grantham (co-founder of GMO) stated in this episode of Invest Like the Best that the current market is in a historic bubble, driven primarily by retail investors rather than institutional ones. He identified three key signals of a bubble: asset prices detached from fundamentals, rampant specu
Jeremy Grantham (Co-founder of GMO, long-term investment strategist) systematically presents his assessment of the current market in this episode: In terms of extreme valuation levels, intensity of speculative behavior, and magnitude of price acceleration, the current market has surpassed the 2000 tech bubble across all three dimensions, making it one of the most comprehensive bubbles in history, driven primarily by retail investors rather than institutions.
Grantham argues that there are three core dimensions for identifying a bubble, and the current market has surpassed historical extremes on every one.
Valuation Dimension: Grantham has compiled approximately 80 valuation indicators, of which about 80% currently read higher than their peaks in 2000. "The 2000 tech bubble was the real champion — the S&P 500 trailing 12-month P/E was 35 times, while the 1929 peak was just 21 times. Today, about 80% of valuation indicators are higher than in 2000." He specifically emphasizes that when using cyclically adjusted measures, current readings are "more impressive than in 2000."
Acceleration Dimension: When stock prices begin to rise at 2-3 times the normal rate, it is often a strong signal that a long-term bull market is ending. "It was true in 1999, in 1928-29, and in the last two years of the Japanese bubble — the current market has passed the acceleration test with flying colors."
Manic Behavior Dimension: Grantham considers this "the single most effective signal," though its manifestation varies with each bubble. "In 1929, there was no Bitcoin; in 2000, there was no GameStop. The easiest signal to detect is news-driven — when financial headlines migrate to the front page, when evening news starts covering GameStop or Tesla, you know the top is very close." He recalls that at the peak of the 2000 bubble, cheap restaurants in Boston switched sports channels to CNBC, "which gave you a one- to two-month window to plan your exit."
| Bubble Dimension | Historical Extremes | Current Status |
|---|---|---|
| Valuation (80% of indicators higher than 2000) | 2000 S&P 500 P/E of 35x | About 80% of valuation indicators are higher |
| Price Acceleration | 1999/1928-29 at 2-3x normal speed | Has passed the acceleration test |
| Manic Behavior | Varies each round (SPACs/GameStop/Bitcoin) | "Has passed the test with flying colors" |
Grantham is highly critical of SPACs, arguing that they are essentially a "legalized tool for exploiting investors."
Structural Issues: Grantham breaks down the three-tiered interest transfer mechanism of SPACs—"First, sponsors spend six months finding a deal and take 20% of the shares as compensation. Second, half of the hedge funds exit after the deal is announced, reclaiming their principal plus a small number of warrants, then recycle into the next SPAC. Third, the other half of investors who actually put up the capital bear all the risk and earn below-market returns." He notes that academic research has already proven SPACs have performed "dismally" over the past seven years.
Ironic Case Study: Grantham cites GMO's investment in QuantumScape (a solid-state battery company) as an example—"We entered at $2.5 seven years ago, it went public via SPAC at $10, then surged to $130, giving it a market cap exceeding that of General Motors and Panasonic. A company with no revenue and no profit for four years, valued higher than General Motors—this itself is a perfect testament to the bubble." More ironically, Grantham himself could not sell before May 1 due to lock-up restrictions, "and I happened to predict that this bubble might not last until May 1."
Criticism of the IPO Process: Grantham acknowledges that traditional IPOs also have flaws—"Investment banks have an incentive to underprice the offering and allocate shares to major clients, who reciprocate with commission kickbacks. Direct listing is a better alternative, but SPACs have not only failed to solve this problem but have made it worse."
Grantham points out that the current bubble is fundamentally different from 2000—2000 was an institutional bubble, while today is a retail bubble.
Historical Comparison: He recalls the mini-bubble he personally experienced in 1968-69—"I bought American Raceways at $7, and three weeks later it rose to $21. I added leverage and chased it to $100, only to see it fall back to zero. That was the most thrilling year of my life—from zero to enough to buy a house in cash, and back to zero." He believes GameStop is today's American Raceways, "and they will all eventually go to zero."
Differences Between Retail and Institutional Investors: "In 1929, it was institutions and wealthy individuals; in 2000, it was a typical institutional bubble—pension funds, foundations, and endowments all believed Greenspan's claim that 'the internet would permanently boost productivity'; today, institutions are just going with the flow, and the real frenzy is among retail investors." The share of retail investors in trading has risen sharply, a phenomenon not seen in decades.
Hostility Toward Market Bears: Grantham shares a personal experience—after making a "faith-based" comment about Bitcoin on Bloomberg's Front Row program, "a wave of retail investors flooded the comments section, calling me senile and ignorant, and some even attacked my big ears—something I hadn't encountered since I was seven years old." He believes "a sharp rise in hostility toward bears is a very effective signal of a late-stage bubble."
Grantham argues that global demographic shifts are the most important economic driver over the coming decades, and their impact is severely underestimated by policymakers.
Collapse in Labor Force Growth: "In the 1960s, the U.S. labor force grew naturally at 1.5% per year; now it's 0.2%, and within 10 years it will turn to -0.2%. Europe is already flat or declining, Japan has been declining for over 20 years, South Korea is about to follow, and China will soon see a decline in its 20-year-old labor force."
Plummeting Fertility Rates: Grantham provides startling data—"South Korea's fertility rate in 2020 was 0.85, the lowest since the Black Death except for that period; China is around 1.4; the U.S. 1.7; Italy 1.4; Hungary 1.3." He specifically notes that endocrine disruption from chemical substances is exacerbating the problem—"Sperm counts in developed countries have fallen to one-third, and infertility rates are rising at 2% per year."
Implications for the Economy: Labor shortages will push up wages, reverse inequality trends, and drive inflation higher. "Japan leads the U.S. by a factor of five in robot usage, and South Korea also uses many—you will have to increase capital expenditure to compensate for labor shortages. This will make the world feel more like the 20th century—workers and unions will have more influence, inflation will return to moderate levels, real interest rates will rise, and asset price multiples will fall."
The Social Cost of High Asset Prices: Grantham presents a counterintuitive view—"High asset prices are disastrous for young people and long-term societal well-being. If the yield on a farm drops from 6% to 3%, the time to double societal wealth goes from 12 years to 24 years. After 48 years, wealth is only one-quarter of what it would have been. Young people can't afford homes or stocks—how is that prosperity?"
Grantham fundamentally challenges the core assumption that "low interest rates stimulate the economy."
35 years of data: "Since 1985, total U.S. debt-to-GDP has risen from approximately 1x to 3x, while capital expenditure as a share of GDP has continued to decline, productivity growth has continued to decline, and GDP growth has continued to decline. You tripled debt and lowered interest rates from 16% to 1.5%, yet growth actually slowed—isn't this a failed experiment?"
Questioning the importance of finance: Grantham argues that the importance of the financial world is severely overestimated—"Debt is just double-entry bookkeeping. Every dollar of debt corresponds to a dollar of assets. Pension payments come from this year's GDP pie, not from some lockbox. What truly matters is the quantity and quality of labor, and the quantity and quality of capital per capita. Paper is merely a tool to facilitate transactions, not the underlying reality."
Mocking market efficiency: He cites Dimensional Fund Advisors' claim in the FT that "markets are efficient, and Tesla does not constitute a counterexample"—"Either Tesla at one-eighth of today's price a year ago was efficient, or Tesla at eight times that price today is efficient, with sales only up 25%. Both cannot be efficient simultaneously. Actual market volatility is 17 times higher than the reasonable volatility justified by dividend and earnings streams."
Grantham offers differentiated advice for different investors.
For individual investors: "You have no career risk and can build a substantial cash reserve. Even if you exit 18 months early, it will be highly advantageous over a full cycle."
For institutional investors: "Career risk and business risk are enormous. Even if you are right, they will only pat you on the head in the room and call you a 'dangerous weirdo' when you leave; if you are wrong, you will receive no mercy."
Specific allocation: Grantham points out that there are currently "glorious safe havens" — "Value stocks have been crushed for 11 years, and last year was the worst year relative to growth stocks in 200 years of data. Emerging markets are at historically low valuations relative to the S&P 500. The intersection of the two — emerging market value stocks — almost guarantees acceptable returns over 10-20 years."
| Asset Class | Current Status | Grantham's Judgment |
|---|---|---|
| U.S. Growth/Tech Stocks | Extremely overvalued | Bubble, avoid |
| U.S. Value Stocks | Worst relative performance in 11 years | Relatively cheap |
| Emerging Markets | Historically low valuations relative to S&P 500 | Cheap |
| Emerging Market Value Stocks | Intersection of the two | "Almost guarantees acceptable returns" |
| Cash | — | Individual investors can hold |
Grantham is highly optimistic about green technology, citing multiple specific cases.
QuantumScape (solid-state batteries): "Half the weight and volume, non-flammable, 10-minute charging, will kill gasoline and diesel vehicles."
Agricultural technology: RNA engineering causes Colorado potato beetles to be unable to digest carbohydrates and starve to death, "one gram treats half an acre, extremely cheap and effective"; nitrogen-fixing microorganisms "could potentially replace the Haber process—which consumes 2% of global energy and feeds half the world's population."
Carbon capture: "I believe we can extract CO₂ at $50 per ton within 30 years, possibly even $25. But government help is needed—the simplest approach is to adopt the EU's carbon tax (about $40/ton), increasing by $2 annually, reaching $100 in 30 years. This does not require $100 today, because everyone building a 30-year plant will factor future price increases into their decisions."
| Position | Guest Stance | Key Data |
|---|---|---|
| QuantumScape | Bullish (but notes valuation bubble) | Entered at $2.5 seven years ago, SPAC listing at $10, peak at $130 (market cap exceeding GM + Panasonic), lock-up period until May 1 |
| Tesla | Used as a valuation bubble case | Sales +25%, stock price +800%, Grantham himself is a Model 3 owner |
| GameStop | Used as a speculative behavior case | Retail short squeeze, Grantham compares to 1968 American Raceways |
| American Raceways | Historical comparison case | $7 → $21 → $100 → zero |
| Microsoft/Apple | Used as VC success cases | "The two oldest FANG stocks" |
| Bitcoin | Criticized ("faith-based") | Triggered retail investor attacks |
1. "Approximately 80% of valuation indicators currently read above their 2000 peaks" (Grantham) — even more so after adjusting for the profit cycle, making this the most comprehensive valuation extreme in history.
2. "SPACs are a legalized tool for exploiting investors" (Grantham) — three layers of profit transfer: sponsors take 20%, hedge funds engage in circular arbitrage, and retail investors bear all the risk.
3. "The current bubble is a retail bubble, not an institutional one — the first time in decades" (Grantham) — in 2000, institutions believed in the "new paradigm"; today, retail investors trade via Robinhood.
4. "The sharp rise in hostility toward short sellers is the most effective signal of a late-stage bubble" (Grantham) — he was attacked by retail investors as "big ears" for criticizing Bitcoin, similar to 2000 when institutional clients asked him to "stop mentioning mean reversion."
5. "South Korea's fertility rate is 0.85 — the lowest since the Black Death" (Grantham) — global demographic changes are severely underestimated, which will reverse inequality, push up inflation, and lower asset price multiples.
6. "35 years of tripling debt, with interest rates falling from 16% to 1.5%, yet growth has actually slowed — this experiment has failed" (Grantham) — the assumption that low interest rates stimulate the economy lacks data support.
7. "High asset prices are a disaster for young people — yields drop from 6% to 3%, and after 48 years, social wealth is only one-quarter of what it would have been" (Grantham) — asset inflation is not prosperity; it is intergenerational exploitation.
8. "Emerging market value stocks almost guarantee acceptable returns over 10-20 years" (Grantham) — value stocks' worst relative performance in 11 years + emerging markets at historical valuation lows versus the S&P 500 = the safest haven today.
9. "QuantumScape's solid-state battery will kill gasoline and diesel vehicles" (Grantham) — half the weight, non-flammable, 10-minute charging, but no revenue for four years; the $130 valuation itself is evidence of a bubble.
10. "The market's actual volatility is 17 times higher than what is justified by dividend and earnings streams" (Grantham) — market efficiency is an illusion; 80% of the time it is rational, 20% of the time it is "completely out of control."