Matthew Lloyd / Getty Images for ReSource 2012
Legendary investor Jeremy Grantham warned investors during an interview with Bloomberg that the $ 1.9 trillion in federal aid that President Joe Biden is seeking from Congress will further increase the stock market bubble.
The GMO co-founder told Erik Schatzker that he “has no doubt” that part of the stimulus aid will end up on the market. He said the “sad truth” about the last stimulus bill passed in 2020 is that it did not increase capital spending and did not increase real production, but it certainly flowed into inventories.
The plan that Biden is proposing contains an increase of $ 1,400 for stimulus checks, robust state and local aid and funds for vaccine distribution. Grantham said that if the approved package is worth $ 1.9 trillion, it could lead to the dangerous end of the bubble.
“If it’s as big as they say, it would be a very good fabrication of a top for the market, the kind that history books would appreciate,” said Grantham.
“We will have a few weeks of extra money and a few weeks to put your last desperate chips in the game, and then an even more spectacular break,” he added.
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Grantham has long been alert to the growing bubble he sees in the US stock market. In his investor outlook letter in early January, he detailed how extreme overvaluations, explosive price increases, frantic issuance and “hysterical speculative investor behavior” demonstrate that the stock market is in a bubble that even the Fed cannot. prevent it from bursting.
“When you reach that level of obvious super-enthusiasm, the bubble has always, without exception, burst in the coming months, not a few years,” Grantham told Bloomberg.
Grantham also said that the Fed’s combination of fiscal stimulus and emergency programs that helped inflate the bubble could increase inflation.
“If you think you live in a world where production doesn’t matter and you can just create paper, sooner or later you will do the impossible, which is to bring inflation back,” said Grantham. “Interest rates are paper. Credit is paper. Real life is factories, workers and production, and we are not looking at an increase in production.”
He told investors to look for stocks outside the US markets, as many other countries have not seen the huge bull market the US has seen. He called emerging market stocks “well priced”.
“You will not have a considerable 10 or 20 year return on US growth stocks,” said Grantham. “If you could make emerging, low-growth and green, you could win the prize.”
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