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This article was last updated May 9, 2023.
The investor who made his name predicting the dot com crash in 2000 and the financial crisis 2008 is warning of another ‘ominous’ bust.
Jerry Grantham, co-founder of the investment firm GMO, told CNN Business this week he fears another bubble is about to burst, with the crisis that gripped the banking system in March only the beginning.
“Other things will break, and who knows what they will be,” Grantham told the outlet. “We’re by no means finished with the stress to the financial system.”
In 2021, Grantham predicted “one of the great bubbles of financial history” spurred by the rock bottom interest rates experienced at the height of the coronavirus pandemic.
Since the beginning of 2022, U.S. stocks have dropped about 15 percent as the Federal Reserve has hiked up interest rates in its war against inflation.
Grantham said the best we can currently hope for would be a fall of about 27 percent from current levels, while the worst case scenario would be a freefall of more than 50 percent. A low point might not arrive until late 2024, he predicted.
Analysts at Goldman Sachs and Bank of America meanwhile, are predicting that the S&P 500 will close out 2023 only 2 percent below current levels.
The pandemic economy also saw valuations for bonds, cryptocurrencies, and real estate shoot up and encourage investors to take more risks with cheap cash.
As that bubble deflates, an economic downturn is all but inevitable Grantham told CNN.
“Every one of these great bursts of euphoria, the great bubbles with overpriced markets … has been followed by a recession,” Grantham said. “The recessions are mild if everybody does everything right and there [are] no complications. They are terrible if people get everything wrong.”
Grantham said he sees parallels between today and the dot com crash of 2000, when a dizzying increase in the price of tech stocks was followed by a huge crash.
Further concerning him is that bubbles in both the real estate market and stock market seem poised to burst at the same time — similar to what took place in Japan in the early 1990’s and has held back their economy to this day, Grantham said.
“They have had basically a lost 20 years, and in addition a fairly lame 10 years,” he said. “The occasions where people have tried to break a bubble in the stock market and the real estate market together are fairly ominous.”
U.S. home prices hit record highs in 2022, but have started to recede slightly in 2023 as higher mortgage rates lock out more consumers. Fears about the commercial real estate sector have also risen in recent weeks as the market for offices continues to be hurt by the popularity of remote work.
The only way out of economic turmoil Grantham sees is for the Federal Reserve to stay the course of hiking rates in the style of Paul Volcker, who led the central bank from 1979 to 1987.
“If [Jerome] Powell could just channel a little bit of Volcker, that would be a distinct improvement,” Grantham said.