Grantham and Dalio: The Equity Bubble is Bursting and Stagflation Awaits

Two of the world’s most respected investors, GMO’s Jeremy Grantham and Bridgewater’s Ray Dalio, offered identical warnings: The bubble in U.S. equities is unwinding, and the economy is headed for stagflation.

The two spoke in a virtual panel discussion earlier this month. They were interviewed by Jim Haskel of Bridgewater and Alex Shahidi, who is a managing partner and co-chief investment officer at Evoke Advisors, a Los Angeles-based asset manager, as part of its master speaker series.

Grantham is the co-founder and long-term investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. Dalio is the co-chief investment officer of Connecticut-based Bridgewater Associates, the world’s largest hedge fund, which he founded in 1975.

The market is showing signs of breaking down, according to Grantham. He said this has been the worst opening of a year for the S&P since 1939, a year before he was born.

“This is the real McCoy,” Grantham said, and market dynamics are playing out close to the way they did in 2000, when the dot-com bubble burst.

He said this was one of the “great bubbles,” which are characterized by hysterical behavior and accelerated price moves on the upside. As it unwinds, investors are shifting to blue-chip stocks, which are going up, but risky growth stocks are going down. This phenomenon is unusual, he said, but it happened in 2000. Grantham called it a “very rare indicator of impending doom.”