Billionaire investor Jeremy Grantham has come out with a dire warning for investors; stocks are overpriced by any metric and the Fed has no clue.
Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (GMO) investment company, is credited with predicting multiple bubbles in the past.
Grantham predicted the Japanese real estate in the 1980s, the internet bubble in 1990, the dot com bubble in the 2000s and the 2008 housing bubble.
Now, his investment firm has issued a warning in its second-quarter outlook. The market is showing all the signs of being in a bubble. (Story continues below.)
“It gives us no pleasure to remind our clients that U.S. stock valuations, by almost any backward or forward-looking measure that we’ve come up with, are at levels that concern us,” the report wrote.
The firm expects a negative inflation-adjusted return on 10 out of the 11 asset classes it monitors in the next seven years. According to its projections, U.S. large-cap stocks will give a negative 8% return.
GMO fired back at some of its critics on “Twitter-sphere” who “expressed frustration with GMO’s bearishness.”
Critics on social media think that GMO is not giving enough credit to disruptive tech stocks.
“We absolutely concede that somewhere in the global growth basket sits the next Amazon,” GMO responded. “Unfortunately, they’re also ALL being priced that way, and for us, that is a bridge too far.”
The firm recommends three strategies for protecting against the coming crash. These are:
1) exploit the bubble with an equity long/short strategy
2) avoid the bubble by investing in alternatives
3) concentrate assets away from the bubble in emerging market value, Japan small value, cyclicals, and quality.
Grantham: Stocks Peak On The Most Optimistic Days
Grantham gave an interview echoing his firms’ sentiment. It’s not easy to predict when the bubble is ultimately going to burst, he thinks.
“The peak of a bubble is always hard to get right. The market doesn’t peak when things start to look bad. The market peaks on one of the most optimistic days,” he said.
“Most bubbles start to let out air with the craziest, most optimistic stuff,” he added.
He also warned about the record levels of borrowed money in the stock market.
“They push the stocks by increasing leverage. Margin today in America is back to the high levels of GDP as it was in the 2000s.”
‘The Fed Hasn’t Got A Clue’
Grantham went on to say that he firmly believes that the Fed knows very little about stock bubbles just like it “hadn’t a clue in the 2020s.”
Grantham pointed out how Fed Chairmans Alan Greenspan and Ben Bernanke missed the dot com bubble and the 2008 housing crash, which happened during their respective terms.
“Alan Greenspan talked about the internet stock profit margins staying high forever, and how the market will have very high P/E forever,” Grantham said.
High average price-to-earnings ratios (P/E) can be indicative of an inflated stock market.
Grantham quoted Bernanke who said that the housing market merely reflected the strong U.S. economy, and that “the U.S. housing market has never gone down.”
“How is it that Greenspan could miss that bubble? How is it that Bernanke missed the housing bubble? They always do. They haven’t got a clue about investment bubbles,” Grantham concluded.