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Matthew Lloyd / Getty Images for ReSource 2012
Legendary investor Jeremy Grantham warned investors in an interview with Bloomberg that the $ 1.9 trillion in federal aid President Joe Biden is seeking from Congress would further inflate the stock bubble.
The GMO co-founder told Erik Schatzker that he had “no doubt” that some of the stimulus aid would end up in the market. He said the “sad truth” about the latest stimulus bill passed in 2020 was that it did not increase capital spending or increase actual output, but it certainly sank into inventory. .
The plan proposed by Biden includes a $ 1,400 increase in stimulus measures, robust state and local aid, and vaccine distribution funds. Grantham said if the adopted package was worth $ 1.9 trillion, it could lead to the dangerous end of the bubble.
“If it’s as big as what they’re talking about, that would be a really good build of a top for the market, just the kind the history books would appreciate,” Grantham said.
“We’ll have a few weeks of extra cash and a few weeks to put your last desperate chips in the game, and then an even more spectacular bust,” he added.
Read more: A notorious market bear who called the dot-com bubble said he saw a “ further deterioration ” in the market indicator that first signaled the crashes of 1929 and 1987 – and warns stocks are blackberries for a drop of 70%.
Grantham has long warned of the rising bubble he sees in the US stock market. In his early January investor outlook letter, he detailed how extreme overvaluations, explosive price hikes, frenzied issuances, and “hysterically speculative investor behavior” all demonstrate that the stock market is in a bubble that even the Fed cannot prevent it from breaking out. .
“When you’ve reached that level of obvious super-enthusiasm, the bubble has always, without exception, shattered in the next few months, not a few years,” Grantham told Bloomberg.
Grantham also said the combination of fiscal stimulus and emergency programs from the Fed that helped inflate the bubble could increase inflation.
“If you think you’re living in a world where production doesn’t matter and where you can just create paper, sooner or later you’re going to do the impossible, and that’s bringing back inflation,” Grantham said. . “Interest rates are on paper. Credit is on paper. Real life is factories, workers and production, and we are not looking to increase production.”
He told investors to look for stocks outside of the US markets as many other countries haven’t seen the huge US bull market. He called emerging market equities “bargain priced.”
“You’re not going to make a great 10 or 20 year return with US growth stocks,” Grantham said. “If you could do some emerging, low growth, green business, you could hit the jackpot.
Read more: GOLDMAN SACHS: These 22 stocks are still not back to pre-pandemic levels – and are set to explode amid higher profits in 2021 as the economy recovers
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