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Legendary investor Jeremy Grantham warned investors during a Bloomberg interview that the $1.9 trillion in federal aid President Joe Biden is seeking from Congress will further inflate the stock market bubble.
The GMO co-founder told Erik Schatzker that he has “no doubt” some of the stimulus aid will end up in the market. He said the “sad truth” about the last stimulus bill passed in 2020 was that it didn’t increase capital spending and didn’t increase real production, but it certainly flowed into stocks.
The plan that Biden is proposing contains a $1,400 boost to stimulus checks, robust state and local aid, and vaccine-distribution funds. Grantham said that if the package passed is worth $1.9 trillion, it could lead to the dangerous end of the bubble.
“If it’s as big as they talk about, this would be a very good making of a top for the market, just of the kind that the history books would enjoy,” said Grantham.
“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he added.
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Grantham has long-warned of the ballooning bubble he sees in the US stock market. In his investor outlook letter in the beginning of January, he detailed how extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior” all demonstrate that the stock market is in a bubble that not even the Fed can stop from bursting.
“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” Grantham told Bloomberg.
Grantham also said that the combination of fiscal stimulus and emergency Fed programs that helped inflate the bubble could increase inflation.
“If you think you live in a world where output doesn’t matter and you can just create paper, sooner or later you’re going to do the impossible, and that is bring back inflation,” Grantham said. “Interest rates are paper. Credit is paper. Real life is factories and workers and output, and we are not looking at increased output.”
He told investors to seek out stocks outside of US markets, as many other countries haven’t seen the huge bull market the US has. He called emerging markets stocks “handsomely priced.”
“You will not make a handsome 10- or 20-year return from U.S. growth stocks,” said Grantham. “If you could do emerging, low-growth and green, you might get the jackpot.”
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