Last month’s banking crisis triggered panic and anybody who thinks it has been resolved is in for a shock.
It will soon be back with a vengeance, according to renowned US investor Jeremy Grantham, who says the situation is “ominous”.
When Grantham talks, investors listen, because this man has serious form. He made his name forecasting the dot.com crash in 2000, then repeated the trick by predicting the great financial crisis of 2007/08.
Predicting one meltdown is hard enough. Spotting two is close to uncanny. Now he’s warning of a third, as what he has called a “superbubble” is set to end in an epic crash and economic disaster.
Grantham, 84, has seen numerous crashes in his investing career and predicted most of them.
Last month’s banking crisis is only the start, he said in an exclusive interview with CNN. “Other things will break, and who knows what they will be. We’re by no means finished with the stress to the financial system.”
Trouble has been brewing ever since interest rates were slashed almost to zero during the Covid pandemic, while central bankers and politicians pumped out trillions of dollars in fiscal and monetary stimulus.
Hot money flooded markets triggering a frenzy as investors drove asset prices to new heights. In 2021, Grantham called this “one of the great bubbles of financial history”.
Tech stocks, property, bond prices and crypto-currencies like Bitcoin soared to all-time highs, only to crash in 2022.
Exactly as Grantham predicted.
Now he is warning of much worse.
Grantham was born in Britain in 1938 but operates in the US, where he is co-founder of Boston-based asset manager Grantham, Mayo, & van Otterloo (GMO).
His investment philosophy is that all markets eventually see a “reversion to the mean”, returning to historical levels after a bubble or crash.
He made his name predicting the Japanese stock market bubble of the 1980s, and has been successfully spotting them ever since.
Some call Grantham a “permabear”, for his permanently bearish view on stock markets, but nobody can argue with his strike rate.
By 2010 he had studied 34 different bubbles and noted that “every single one of them has broken”. As will the current one. The process has already started.
The US benchmark index, the S&P 500, has fallen around 15 percent since central bankers started hiking interest rates to fight inflation almost 18 months ago.
Grantham sees a bigger drop ahead, saying the “best we can hope for” is a fall of about 27 percent from current levels.
The worst-case scenario would see a crash of more than 50 percent, which may continue until “deep into next year”.
Years of cheap money have encouraged investors to take excessive risks, but money is no longer cheap.
In the US, the Federal Reserve has repeatedly hikes interest rates to five percent, and it isn’t finished yet.
READ MORE: The global house price crash is here. Brace yourselves
The Bank of England is expected to increase rates again next month to 4.5 percent. It will have to keep hiking as inflation rages, and some reckon UK bank rate will soon hit five percent, too.
We now face a harsh reckoning, Grantham says. Even low-risk bonds are in peril, with falling bond prices to blame for Silicon Valley Bank going bust.
As the superbubble implodes, so will the economy, Grantham warned.
“Every one of these great bursts of euphoria, the great bubbles with overpriced markets … has been followed by a recession,” Grantham said.
The only question is how bad it will get. “The recessions are mild if everybody does everything right… they are terrible if people get everything wrong.”
Grantham has previously said that predicting bubbles is easy and his track record confirms that. The “impossible” part is saying exactly when they will burst.
The only thing investors should count on today is “being surprised”, he said.
When the great bubbles break, they impose a lot of stress on the system. “It’s like pressure behind a dam. It’s very hard to know which part will go.”
Grantham said this is most likely to happen when the US economy enters a recession, which many, including the Fed, expect later this year.
Stock market valuations remain “way above any long-term traditional relationship” to corporate performance and when they crash “almost everybody gets hurt”.
That day is moving closer, if Grantham is correct. And he usually is.
