Jeremy Grantham: The Fed blows a bubble

Investment guru Jeremy Grantham has warned that US stocks are almost in bubble territory.

Jeremy Grantham, co-founder of asset manager GMO, rightly dismissed the 2003-2007 stockmarket rally as "the greatest sucker rally in history" and timed his March 2009 bullish market call perfectly. Now he is warning that US stocks are almost in bubble territory.

A recurrent theme in Grantham's writing in recent years has been the structural slowdown in America's long-term growth prospects due to a faltering working-age population and higher energy prices over the past 30 years. The credit crisis and low recent capital investment haven't helped either. But don't expect the current market and economic cycle to end just yet, says Grantham.

"In our strange, manipulated world, as long as the [US Federal Reserve] is on the side of a strong market there is considerable hope for the bulls." The key point is that the Fed has been on the side of a strong market since the late 1980s, when it appeared to become official policy to stoke confidence by blowing up asset prices. The "wealth effect" is supposed to stimulate the economy.

The Fed first blew a bubble in US stocks; when that burst, it inflated the housing bubble. These were "by far the biggest" stock and housing bubbles in American history. The central bank made no attempt to temper the markets' irrational exuberance.Note that the cyclically adjustedprice-earnings ratio has been 60% higher, on average, since the late1980s than in the previous century.

Fed chair Janet Yellen has made clear that she is also keen to engender a wealth effect. So "absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we have a fully fledged bubble". Bubble territory is still 8% or so away on the S&P 500, says Grantham, while the cycle is also unlikely to end before mergers and acquisitions hit a record and growth strengthens further.

Recommended

James Anderson: innovation is still the key to returns
Investment strategy

James Anderson: innovation is still the key to returns

James Anderson, the man behind the Scottish Mortgage investment trust, tells Merryn Somerset Webb what he’d buy now
13 May 2022
Interest-rate rises mean more pain for stocks
Stockmarkets

Interest-rate rises mean more pain for stocks

Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain t…
13 May 2022
Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers
Investment strategy

Anna Macdonald and Mikhail Zverev: Investing in innovative new frontiers

Merryn talks to Anna Macdonald and Mikhail Zverev of Amati about investing in growth-focused innovation in the teeth of a tech-stock selloff, and the …
12 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
11 May 2022

Most Popular

High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
Cryptocurrencies are crashing – so how low will bitcoin go?
Bitcoin & crypto

Cryptocurrencies are crashing – so how low will bitcoin go?

The entire cryptocurrency sector is crashing, with bitcoin now well below $30,000. This is big, says Dominic Frisby. So just how low could bitcoin go?
12 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022