Jeremy Grantham of GMO “has a track record that’s difficult to ignore”, says Steven Russolillo in The Wall Street Journal. He foresaw the internet bubble and the housing bubble, and “almost perfectly timed” the market bottom in 2009. So what does he think will happen next?
The American stockmarket, already far from good value, will keep going up and end in ”a fully fledged bubble”, he says. That implies a level of “at least” 2,250 on the S&P 500, around 15% above current levels. The US Federal Reserve under Janet Yellen has made it very clear that it won’t try to “head off or curtail any asset bubbles” by raising interest rates.
Instead it will stick to the Greenspan/Bernanke approach of simply propping up markets and the economy, even though we have been through two of “the most painful burst bubbles in history”. This “affirmation of moral hazard” is encouraging speculation and fuelling the bubble.
“A veritable explosion” of mergers and acquisitions (M&A) will accompany and reinforce stocks’ last hurrah, reckons Grantham. The cost of debt is now lower compared to other deal frenzies, while profit margins are still high. “Not a bad combination for a deal maker.” The economy, despite being in the sixth year of the recovery, also appears to have “enough slack to keep going for a few years”.
Previous M&A booms came when economic cycles were “already showing their wrinkles” – witness 2000 and 2007. But this time there seems plenty of scope for further growth. If I were a dealmaker ,“I would be licking my lips”. Another factor likely to promote M&A is that there are practically no appealing investments left as yields are at rock-bottom levels. “All previous deal records are likely to be broken in the next year or two” as a “very dangerous” bubble re-emerges.