As the bubble grows
Posted: Fri May 01, 2015 7:58 am
GMO's Jeremy Grantham has a relatively gloomy outlook for the markets and economy.
But that doesn't mean he isn't somewhat bullish in the near-term. In his latest quarterly letter to investors, Grantham reiterates his expectation that the S&P 500 will surge to 2,250 before falling apart. That would be about 8% higher than Thursday's 2,085.
What's behind this?
Grantham blames decades of lax monetary policy. He goes all the way back to the Alan Greenspan era of the Federal Reserve. From his letter (emphasis added):
The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls. In the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully-fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet.
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250 on our traditional assumption that a two-sigma event, based on historical price data only, is a good definition of a bubble. (As we like to describe it, arbitrary but reasonable, for it fits the historical patterns nicely.)...
Read more: http://www.businessinsider.com/gmos-grantham-forecasts-fed-fueled-asset-bubble-2015-4#ixzz3YtJp8fE4
But that doesn't mean he isn't somewhat bullish in the near-term. In his latest quarterly letter to investors, Grantham reiterates his expectation that the S&P 500 will surge to 2,250 before falling apart. That would be about 8% higher than Thursday's 2,085.
What's behind this?
Grantham blames decades of lax monetary policy. He goes all the way back to the Alan Greenspan era of the Federal Reserve. From his letter (emphasis added):
The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls. In the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully-fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006. Both of these were in fact stunning three-sigma events, by far the biggest equity bubble and housing bubble in U.S. history. Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet.
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250 on our traditional assumption that a two-sigma event, based on historical price data only, is a good definition of a bubble. (As we like to describe it, arbitrary but reasonable, for it fits the historical patterns nicely.)...
Read more: http://www.businessinsider.com/gmos-grantham-forecasts-fed-fueled-asset-bubble-2015-4#ixzz3YtJp8fE4