Legendary investor Jeremy Grantham sees shades of the dot-com bubble in markets - and predicts stocks will slump and recession will strike

• Jeremy Grantham compared the post-pandemic boom in stocks to the dot-com bubble.
• He expects stocks to fall and a recession to hit as hot air escapes the overheated market.
• The GMO cofounder doubts AI buzz can offset the impact of higher interest rates and tech woes.

Jeremy Grantham has compared the post-pandemic market mania to the heydays of the dot-com bubble, and predicted that stocks will slump and a recession will strike.

People of all stripes piled into meme stocks, SPACs, and high fliers like Tesla and Ark in a haze of hype and speculation in 2021. The buying frenzy was fueled by rock-bottom interest rates, stimulus checks, federal grants and loans, lockdown boredom, and other factors.

"We had some of the craziest investor behavior of all time," Grantham said in an interview for an upcoming episode of "Bloomberg Wealth with David Rubenstein." The resulting surge in stocks was "in many ways about equal to the 2000 tech bubble," the veteran investor and GMO cofounder added.

The stock market slumped last year but has roared back in recent months, reflecting investor excitement about artificial intelligence along with aggressive government spending ahead of next year's presidential election, Grantham said. Those forces have prevented what he's previously labeled a "superbubble" in asset prices from bursting, he said.

"Everything and its dog seems to have intruded," Grantham said about the muddled picture. "It's made life incredibly complicated."

While AI could prove to be a transformative technology, at this point "it's perhaps too little too late to save us from a recession," he argued.

Grantham predicted the implosion of the tech bubble in 2021, and the "very negative, slow-moving influence" of steeper interest rates on real estate, would work in concert to pull down asset values and choke economic growth.

"I suspect that they will once again dominate, and we will have a recession running perhaps deep into next year and an accompanying decline in stock prices," he said.

Separately, the market historian brushed off the Federal Reserve's recent announcement that it no longer expects a recession, citing the central bank's dismal track record of predicting downturns. He also slammed it for accepting plaudits when it inflates asset bubbles, yet failing to take responsibility for the fallout when they burst.

Grantham added that a recession could still hit this year, and forecasted moderately higher inflation and interest rates in the years to come versus the last decade.