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By Ven Ram, Bloomberg markets live cross-asset strategist

It’s not quite the message you would perhaps like to hear going into a Friday, but picture this: an adrenaline junkie who is bungee-jumping off Victoria Falls discovers halfway during the drop that they don’t have a cord attached to the hip. Stocks, warns legendary investor Jeremy Grantham, are headed for a similar destiny.

The S&P 500, he says, is headed for a plunge of 50%, taking it all the way down to 2500 — sorry about your spilled tea if you are reading this at breakfast! Grantham’s research is fascinating, yet straightforward and simple: stocks are caught in a super bubble, which he defines as a three-standard deviation move away from trend. For our bungee-jumping adventurist who has no time to calculate such arcana, that would be the equivalent of a nasty shock occurring less than once in 100 times during a jump.

Grantham goes on to say that super bubbles always fall back to trend, based on the five previous occasions it’s happened — citing the U.S. stock market before the Great Depression, then in 2000 and Japanese stocks in 1989; and two in real estate — the U.S. in 2006 and Japan in 1989.

MLIV has often pointed out that equity valuations are way too excessive, eclipsing even the dotcom bubble, so I would readily agree with Grantham. While, for instance, I see the possibility of the Nasdaq 100 and S&P 500 falling more, I find it hard to see a drop to 2500 on the latter. With global savings near a record and pension funds waiting to pounce on every correction, it’s hard to imagine a plunge of that magnitude in the absence of systemic shock (as happened with global financial crisis).

Let’s also not forget that the Federal Reserve and other global central banks are only ever willing to turn their lender of last resort status to become a buyer at first retort if the markets start feeling the pull of gravity too heavily (to be fair to Grantham, he does concede that to some extent). Just yesterday, we visited a scenario where a Fed official went on record to say that policy makers don’t want to surprise the markets.

In short, Grantham’s observations are indisputable. His conclusions, less so. That means our bungee jumper may, after all, get a reprieve — for the merchants of central bank will help put a net underneath.


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