Legendary Investor Warns Next Stock Market Bust ‘Will Be Unlike Any Other’

FTMDaily.com – Mr. Jeremy Grantham is one of the largest money managers in the world. As the co-founder and chief investment strategist of GMO (Grantham Mayo van Otterloo), he oversees $100+ billion in assets.

Through his years of quantitative research, Grantham has demonstrated that bubbles in all “commodity, stock and bond markets excluding timber” end with a reversion to the mean. This is a hallmark of the man’s work.

But one of the reasons that Grantham has been so successful is his ability to identify speculative market bubbles and move his clients’ assets out before the “crash”.

Some of the past “bubbles” Grantham has warned his clients about include: The Japanese stock and property bubble of the late 1980’s and the “dot-com” tech bubble of the late 1990’s.

In recent years, he has become one of the most vocal critics of the Federal Reserve within the stratosphere of the investing elites. For example, in an interview with the NY Times last month, Grantham accused new Fed Chairwoman, Janet Yellen, of being “ignorant.” In addition, he has blamed America’s failing economy upon the Fed’s quantitative easing program. Grantham believes that if the Fed would just get out of the way and stop its intervention, the U.S. economy could finally begin moving towards some level of sustainability. It seems that on this point, of the Fed and its inept policies, we find ourselves in wholehearted agreement with Mr. Grantham.

In a recent interview with Fortune magazine, the legendary investor explains in further detail why he believes that the Fed is killing America’s recovery:

“In the economic crisis after World War I, there was no attempt at intervention or bailouts, and the economy came roaring back. In the S&L crisis, we liquidated the bad banks and their bad real estate bets. Property prices fell, capitalist juices started to flow, and the economy came roaring back. This time around, we did not liquidate the guys who made the bad bets.“

Grantham adds:

“There’s no proof on the other side, that the economy is any stronger from quantitative easing. There’s some indication that the crash would have been worse and the downturn would have been sharper had the Fed not stepped in, but by now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.“

And as to America’s fake economic “recovery,” Grantham argues:

“Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke’s policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It’s anecdotal evidence, but we have never had such a limited recovery.”

So what does Grantham think about the U.S. stock market?

“We do think the market is going to go higher because the Fed hasn’t ended its game, and it won’t stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market’s mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.”

Again, I agree with Grantham on this point. In my own estimation, it is unlikely that the Fed will stop its excessive intervention until the Dow Jones Industrial Average reaches at least 18,000. That is about 11% higher from here. I think that 11% is the minimum upside from here. But Grantham could certainly be correct in his optimistic belief that U.S. stocks climb another 25% from here.

Regardless, this final boom — before the inevitable bust — will not come all at once. It will be “two steps forward and one step back.” (After all, nothing goes up in a straight line.)

Finally, when asked about how he is managing his client’s money in this current environment, Grantham had this to say:

“We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before… It’s going to be very painful for investors.“

If you have been following our work here at FTMDaily, you know that this is a near carbon copy of our opinion about what lies ahead for U.S. stocks. We believe that the Fed’s monetary policies have ruined the U.S. economy and have only served to inhibit America’s natural economic resilience.

The days of this current stock rally are numbered. Unfortunately, no crystal ball exists to tell us “when” the collapse will take place.

But rest assured… it’s coming.

Sadly, it seems the only thing we learn from history is that we never learn from history.

Until tomorrow,
Jerry Robinson

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