US is approaching the end of a SUPERBUBBLE caused by COVID stimulus and could now endure the largest markdown of wealth in its history, top investor Jeremy Grantham warns
- Legendary UK investor Jeremy Grantham warned the US ‘superbubble’ that saw economic prosperity across all markets would soon pop
- The GMO co-founder said the market could lose $35 trillion in value once the Federal Reserve begins raising interest rates
- He said the blow would finally slay the ‘vampire phase of the bull market’ that survived COVID and rising inflation
- The bull market is used to describe when prices are on the rise for a fixed period of time
- Grantham blamed the Federal Reserve for encouraging the ‘superbubble’ as it lowered rates and raised optimism in the market throughout the pandemic
- It comes as the Federal Reserve is set to meet next week with investors expecting news on an interest rate hike
GMO co-founder Jeremy Grantham
The co-founder of the investment firm GMO warned on Thursday that the U.S. is approaching the end of a ‘superbubble’ that saw overall prosperity across the market despite the pandemic and rising inflation.
Legendary U.K. investor Jeremy Grantham published a paper claiming the market could lose a total $35 trillion in value should stocks, bonds real estate and commodities return to historical norms in 2022.
He said that while the markets suffered at the start of the COVID pandemic, the Federal Reserves guidelines rallied them with lower interest rates, making the markets unflinching to any outside force as he dubbed it ‘the vampire bull market.’
The bull market is used to describe when prices are on the rise for a fixed period of time.
‘You stab it with COVID, you shoot it with the end of QE [quantitative easing] and the promise of higher rates, and you poison it with unexpected inflation… and still the creature flies,’ Grantham wrote.
That is ‘until, just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies.’
Grantham blamed the Federal Reserve and other financial authorities for creating the ‘superbubble’ during the pandemic by lowering interest rates, influencing mortgage rates and creating a ‘judiciously overstated view of our real wealth.’
Grantham blamed the Federal Reserve to the coming ‘superbubble’ pop, which he likened to the pops already seen in the US and Japan. He warned that the US markets could lose $35 trillion in value once the Fed raises interest rates
He said that once rates return to normal and realism returns to an overzealous market, the bubble will pop.
‘Then, as bubbles break, they crush most of those dreams and accelerate the negative economic forces on the way down,’ he wrote.
‘To allow bubbles, let alone help them along, is simply bad economic policy.’
Grantham said the U.S. had already seen this trend before in the years leading up to the Great Depression, the 2000 tech bubble pop and the 2008 housing market crash.
He added that Japan witnessed its own crash under similar conditions during their 1989 bubble pop.
Grantham warned that the newest crash would come sooner rather than later in 2022 following the poor showings in the Dow Jones, S&P 500 and Nasdaq Composite this month.
The Dow Jones saw a short rally at the start of January, with shares reaching nearly $36,799.65 before falling to $34,366.28 as the market was closing on Friday, nearly a 7 percent drop.
The S&P 500 also saw a short-live rally in the first few days of January as shares went up to $4,796.56 before dropping by about 8 percent to $4,404.34 on Friday afternoon.
The Nasdaq shares fell by more than 12 percent in the last month, dropping form $210.01 to $177.36 by Friday afternoon.
It comes as stocks on Friday were closing out their worst week in months.
The Federal Reserve is meeting next week and investors are eyeing for any guidance on the central bank’s plan to raise interest rates. Economist expect them to steer markets to a quarter-percentage-point March rate hike, CNBC reported.
The Federal Reserve also expected to raise benchmark interest rates four times this year to tackle the new annual inflation reading of 7 percent, the highest level in 40 years,
Higher interest rates could put a damper on rising prices, but will also increase the rates for mortgages, credit cards, and other consumer borrowing.
Annual inflation hit 7% in December, the highest 12-month increase since June 1982
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