Ex-Black Cats striker Martyn Waghorn scored and set up three more as his new side Ipswich Town ran out 5-2 winners at Portman Road to condemn Grayson's side to their sixth league defeat of the season.
Sunderland have secured just one win league this season, a 3-1 victory at Norwich City on August 13, and are now firmly in the Championship relegation zone.
"Tonight is a massive kick in the backside that we aren't anywhere near as good as we should be," Grayson told talkSPORT.
"You can keep using that word (confidence) all the time and, to be fair, I'm sick of using it in the press that I do. Players are getting paid handsomely to run around and do what millions of people would like to do.
"Yes, you might have a lack of confidence but it still doesn't stop you from running around and stopping the opposition from playing, getting a tackle, getting close to the opposition from playing forward or defending the box."
Next up for the Black Cats is a trip to Grayson's former side Preston North End on Saturday.