GRANTHAM: 'The Next Bust Will Be Unlike Any Other'

Veteran fund manager Jeremy Grantham of GMO recently spoke to Fortune Magazine about the state of markets.

In his view, central banks have created an enormous bubble in stocks, by holding rates too low.

Grantham has long been sceptical of Fed actions. But the language he uses here is pretty dire. While he expects stocks to go higher in the near-term, he’s going long on stocks for his long-term investors. From his interview:

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…

…But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money.

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. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.

What’s more, he explains, Fed actions have actually held back a stronger recovery, explaining that they have failed to boost capital spending while punishing savers.

Read the full interview at Fortune »

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