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The Federal Reserve's (Fed) fight against inflation is shaping up to be one of the most remarkable victories in US history. The soft landing looks set to be consolidated in 2025 and the economy will continue its upward path after defeating inflation without the need for a recession. However, the legendary Jeremy Grantham warns of a major danger for the markets.

It is worth mentioning that this is not just an opinion, but one of the most respected in the financial world. This expert predicted financial crashes such as the tech bubble of 2000, the financial crisis of 2008, the Japanese bubble of 1989, and the Covid-19 bubble of 2021-2022. As you can see, this is someone who should be listened to seriously when he speaks.

For several years now, the expert has been warning about a serious situation in the financial markets. Basically, he claims that a huge bubble is brewing that threatens a devastating recession. In his opinion, part of the responsibility for this hypothetical event lies with the US government. Simply put, the soft hand against technological monopolies will end up causing a big problem.

Jeremy Grantham's theory about big bubbles has been successfully applied in cases such as Amazon stock. It is that the bigger the new idea, the more the market overvalues it and the more euphoria it attracts. This leads to a crash, as in the case of the bubble in 2000.

Grantham warns of looming recession

According to Grantham, the market is preparing for a new bubble burst situation. The new cause would be the euphoria related to artificial intelligence and the fact that this technology is controlled by the well-known monopolies or oligopolies.

In any case, the expert says that the main indicators do indeed point to a financial collapse. These include the spread between 6-month and 10-year interest rates. Added to this is the constant rise in unemployment and the gigantic debt of the United States.

He believes that the current high valuations are due to the aforementioned lack of control over monopolies. This leads to unusual profits for firms such as Alphabet, Microsoft, Apple, Amazon, Nvidia and Meta. On the other hand, he points out striking anomalies in the valuation model.

He's referring to the correlation between high profit margins, inflation and P/E ratios. He notes that there is currently an anomaly similar to that of the bubbles of 2000 and 1925. Under normal conditions, the P/E should be at 23x, but now it's at 38x, or a spread of 49%.

The analyst also points out that only 20% of the stocks that took off in the Internet bubble of 2000 managed to survive the burst. In a recent interview in August, he said that in 2024 " we are facing the weakest market ever seen ."

In simple terms, the phenomenon that Jeremy Grantham warns about can be summed up as follows: the higher the valuation, the greater the chances of a bubble bursting. The expert recommends that the risk can be minimized by investing in emerging markets such as India, Brazil or Mexico.