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  • Jeremy Grantham said the US is in the fourth “superbubble” of the last hundred years. 
  • Bryan Cannon agrees that there are many signs of late-cycle behavior.
  • Cannon recommends ETFs from emerging markets that are heavy on energy, materials, and commodities.

Legendary investor Jeremy Grantham has said the US is in the fourth “superbubble” of the last hundred years.

The first three that he identified preceded the crash of 1929, the Japanese crisis of 1989, and the 2000 dot-com collapse. Grantham, who is known for predicting the 1989 and 2000 episodes as well as the 2008 financial crisis, now says a forthcoming bubble pop could wipe out $35 trillion of wealth. He expects it to send the S&P 500 to 2,500, about 48% below its record high.

What makes this bubble unique and more dangerous is that it extends beyond equities and into housing, bonds, and commodities — every major asset class. This scenario, shaped in part by historically low interest rates, is only comparable to Japan’s stock and real estate bubble that popped in the early 1990s, he wrote in a note posted by his asset-management firm GMO.

“This time last year it looked like we might have a standard bubble with resulting standard pain for the economy,” Grantham said. “But during the year, the bubble advanced to the category of superbubble, one of only three in modern times in U.S. equities, and the potential pain has increased accordingly.

Final-stage indicators of superbubbles include price acceleration at two to three times the average speed of a full bull market, persistent underperformance of speculative stocks, and “crazy investor behavior” seen recently in meme stocks, EV-related stocks, and digital assets such as cryptocurrencies and NFTs, he noted.

What Grantham's forecast means for the average investor

Grantham's prediction is certainly plausible, says Bryan Cannon, CEO and chief portfolio strategist at Cannon Advisors. In technical analysis, it reflects the Elliott Wave Theory or grand supercycles, which observes repetitive market behaviors and may flow over hundreds of years, he noted.

This long timeframe is useful to keep in mind but is not very practical from a trading perspective, Cannon said.

While he agrees that there are many classic signs of late-cycle behavior, including rising wages, inflation, and rising interest rates, trying to time the market isn't easy. It could be several years before Grantham's prediction plays out, he said.

And for the average investor, it's difficult to make any specific portfolio adjustments or trading maneuvers based on that forecast.

"I think it's prudent to follow some of Grantham's portfolio ideas to help dampen volatility," Cannon said. "He spoke of looking globally and not being so US-centric in our investing, avoiding speculative positions, keeping the quality high on your equities, focused on more low-price stocks, not chasing stocks."

Grantham also mentioned his preference for raising some cash. "I think that's fine if you put that cash back to work at a lower rate, otherwise it was all for none," Cannon said.

Most people are not going to get it right, and Cannon thinks that's where the damage will be done. His advice is to take a simpler approach.

First, for the average investor, if you're not into stock-picking, then lean your portfolio on exchange-traded funds and index funds focused on value stocks, Cannon said.

Second, consider emerging markets that are heavy in commodities such as oil and gas. Countries like Brazil, Indonesia, the Philippines, Saudi Arabia, and Qatar are global markets that fit that scenario.

Third, avoid speculative, growth-based stocks because as inflation rises, it's harder for those companies to continue to grow at their previous rates, Cannon said.

This is another reason to look outside the US because the S&P 500 and Nasdaq are heavily weighted towards tech and growth, which tend to lag in a rising-interest-rate environment, Cannon noted. Developing countries tend to have an underweight of tech and are more weighted toward energy, materials, and commodities, which hold up much better against a backdrop of inflation.

One ETF that follows Brazil's market is iShares MSCI Brazil ETF (EWZ). It's heavily invested in energy, materials, financials, and consumer staples, all of which tend to outperform during periods of inflation, Cannon said. Even a stock such as Petróleo Brasileiro (PBR) has dramatically outperformed the S&P 500 year-to-date (up 29% versus down 13%) and has more upside, Cannon added.

Other country ETFs that stand out are iShares MSCI Indonesia ETF (EIDO), iShares MSCI Philippines ETF (EPHE), and iShares MSCI Saudi Arabia ETF (KSA).

Fourth, keep in mind crypto is a very speculative investment with lots of big moves that can create lots of wealth but by the same token, erase it very rapidly. He admits that in reality, the asset class is here to stay but it's too early to determine whether it's an alternative to stocks and a hedge for inflation.

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