The bulls are living on borrowed time, says Jeremy Grantham

The Fed's money printing can only keep stocks up for so long, says GMO founder Jeremy Grantham. Here's why.

James McKeigue
By
published
in Features

Veteran value investor Jeremy Grantham believes that the two-year bull market in equities will not last long. Speaking a day before the Japan earthquake he warned that stocks were "dangerously overpriced".

The British-born founder of GMO, one of America's largest asset management firms, warned investors that "bulls are living on borrowed time".

Some analysts seem to make a living out of their pessimistic outlooks, but Grantham has a pretty good record. He avoided the inflated Japanese property market in the late 80's and stayed out of tech stocks in the run-up to the dotcom crash. What's more he doesn't just predict crashes. In March '09 he said that equities would recover it turned out to be the start of a two-year bull run for stocks.

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Grantham said the strong performance of recent years has been down to the Federal Reserve's policy of quantitative easing (QE money printing). He expects equities to do well in the short-term, especially as the Obama administration enters its third year. The market always "gets a kicker and this [QE] is extra" said Grantham. As a result we are facing a "year three on steroids".

Grantham was repeating a widespread accusation that the Fed which he sarcastically referred to as "completely independent" adjusts its policy to help incumbent governments manage election cycles.

But Grantham thinks the trick can only work for so long. The underlying picture, he warned, is much worse. "We are running out of everything," he said, and dwindling resources will put "strong, but intermittent, pressure on commodities". Meanwhile, agriculture is struggling to recover from the "worst year in history of farming globally". He noted that despite "putting more and more fertiliser" we are "getting a decrease in production".

When it comes to gold, Grantham is not so keen. He admits that some people have made and will make money from it. However, he questioned the importance of a metal that is "used for noting In a world running out of everything, jewellery is not our problem."

James McKeigue
James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine. 

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