Recognising Bubbles — Grantham's Framework

Jeremy Grantham has predicted every major asset bubble of the past 50 years with unusual accuracy — including the 1989 Japanese market, the 2000 technology bubble, the 2008 housing crisis, and others. His framework for bubble recognition is not magic. It is a structured approach to identifying when markets have moved so far from historical norms that mean reversion is not merely probable but historically inevitable.

Why This Matters

Jeremy Grantham co-founded GMO (Grantham Mayo van Otterloo) in 1977 and has spent decades documenting, studying, and eventually predicting major asset bubbles. His quarterly letters are among the most intellectually rigorous and historically informed pieces of market commentary produced anywhere, combining detailed historical valuation data with psychological analysis of investor behaviour. Grantham's central thesis is simple and empirically supported: asset prices mean-revert to their long-run historical average valuations. This is not a controversial claim — it is a statistical property of any mean-reverting series. What is remarkable is how consistently this property is ignored during periods of extreme overvaluation, and how long the overvaluation can persist before reverting.