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Stock market is in 'fully-fledged epic bubble,' warns GMO’s Jeremy Grantham

Yahoo Finance's Ines Ferre joined Yahoo FInance Live to break down why GMO's Jeremy Grantham believes the stock market is is a 'fully-fledged epic bubble,' and Americans continue to struggle with COVID-19.

Video Transcript

SEANA SMITH: And, Ines, we had a couple of notes out on this over the past couple of days. Goldman's note, it was titled "It's nearly a toss up," just talking about how close the race is right now. What's at stake when it comes to the outcome for the markets and for the US economy?

INES FERRE: Right, and Goldman saying that if the Dems win both seats, Kamala Harris, vice president-elect, would be able to cast that tie-breaking vote. So Goldman is saying that if the Dems win, expect more spending. Expect around $600 billion more on top of the recently enacted $900 billion for stimulus. Also look at tax increases. And also saying that even though you've got-- with an evenly divided Senate, you're not going to see, though, the type of tax increases that Biden had proposed during the campaign.

As far as Nomura, which wrote a note on these Georgia runoffs, saying that it's really a toss-up. The outcome is effectively a toss-up, but historically Republicans do have the advantage. They expect that the Republicans would at least take one of the seats.

So what would the implications be if you had a Republican Senate control? Then you'd see that that Biden $200 trillion infrastructure bill that he talked about in the campaign trail, that it's very unlikely to pass. There would also have to be negotiations, of course, on budget, on a debt limit, and also any increases on taxes would be extremely unlikely.

Of course, what the markets like-- Oppenheimer put out a note recently saying is checks and balances, when you do see some gridlock, so to speak. So if the Dems were to win both seats, Oppenheimer is saying that you may be seeing a sell-off in the markets, anywhere between 6% up to 10%.

ADAM SHAPIRO: When you talk about sell-off, there are some people who are calling it a bubble. And I'm looking at my other computer. You have a write up about what GMO's Jeremy Grantham has to say, and this is a warning but also an opportunity. What is he saying?

INES FERRE: Yeah, he is saying that we are into-- going into a fully fledged epic bubble, and basically what he's saying is that he's comparing this to the 1929 market crash. He's comparing it to the bubble, the tech bubble of 2000.

And what he's saying is is that this bubble in due time will burst no matter how hard the Fed tries to support it. His thesis is that the economy is still wounded, that it's partially recovered, that we're probably going into a slowdown. What he's predicting is that this bubble will burst, although it's very difficult to predict when. But he's saying it may happen in late spring, in the summer. This would coincide with the rollout of the COVID-19 vaccine.

At that moment, everyone will breathe a sigh of relief. The pandemic is over or nearly over. They will look around, though, and that they will see that the economy is still in poor shape. The stimulus will be cut back because the crisis is over. And he's saying that valuations are absurd.

Now what do you do? What he's basically looking at are value and emerging assets. He's saying that's where the bets should go. But certainly he is very adamant saying that we are in a bubble, that this bull market since 2009 has finally matured.