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Jeremy Grantham, investment strategist at GMO

Portfolio > Economy & Markets

Grantham Explains His Latest Doomsday Prediction & Where He Invests His Money

By Isabelle Lee

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What You Need to Know

  • The investor discusses his record of anticipating bubbles.
  • He expects a recession next year and an accompanying stock market decline.

While many on Wall Street have stopped obsessing about a recession, Jeremy Grantham has not. That should shock no one who has followed the career of Grantham Mayo Van Otterloo & Co.’s co-founder.

Doubling down on the gloom in an interview taped for an upcoming episode of “Bloomberg Wealth with David Rubenstein,” Grantham said the Federal Reserve’s most aggressive tightening in four decades could tip the economy into recession and take the stock market with it.

“In the end, life is simple. Low rates push up asset prices. Higher rates push asset prices down,” he told Rubenstein. “We’re now in an era that will average higher rates than we had for the last 10 years.”

Grantham, 84, is well known for bearish forecasts that have occasionally been issued before big market shocks, such as in 2000 and 2008.

He called the post-pandemic surge in equities “in many ways about equal to the 2000 tech bubble” but said its deflation has been delayed by the frenzy surrounding artificial intelligence. His own call is on the line.

While prognostications of doom looked well-timed when shares tanked in 2022, they look less prescient amid this year’s rally.

During the wide-ranging interview, the renowned investor also discussed his record of predicting bubbles, what worries him the most about the economy and where he invests his money.

Do you think we’re in a major bubble right now in the United States? And do you think that the tech bubble has burst sufficiently? 

I think we are descending from the 2021 bubble, which was one of the great bubbles. And this should be normally the deflationary period. Will the earnings decline, will profit margins decline, will the economy go into recession? Every great bubble has been followed by a recession.

Personally, I think AI is very important. But I think it’s perhaps too little too late to save us from a recession.

The deflationary forces from the tech stocks breaking in 2021, probably too big, the power of interest rates rising and depressing the real estate market, very negative, slow-moving influence, I suspect that they will once again dominate.

And we will have a recession running perhaps deep into next year and an accompanying decline in stock prices.

The recession that you’re predicting probably is not going to happen in 2023?

It may start in 2023.

The Federal Reserve recently said that they think we’ve cleared the recession hurdle and they don’t really project a recession any longer. Do you agree or disagree with that? 

The Fed’s record on these things is wonderful. It’s almost guaranteed to be wrong. They have never called a recession, and particularly not the ones following the great bubbles.

They prided themselves in stimulating the bubbles. They took credit for the beneficial effect of higher asset prices on the economy. They have never claimed credit for the deflationary effect of asset prices breaking. And they always do.

You said not too long ago that you weren’t a big fan of Jerome Powell and the way he’s been handling inflation. Is that correct?

Yes, that’s correct.

And you think he’s done a better job recently in getting inflation under control?

It’s largely out of his hands. The forces work. I suspect inflation will never be as low as it averaged for the last 10 years, that we have reentered a period of moderately higher inflation, and therefore moderately higher interest rates.

What are you most worried about when you wake up every day and look at the stock market and the economy? 

Well, if you want my honest answer, I feel that the economy and particularly the stock market is very secondary to a list of important long-term problems that we have that no one takes seriously enough yet. And I feel that when we sit here discussing the stock market, we’re a little like Emperor Nero fiddling while Rome burns.

My job description these days at GMO, I haven’t done traditional stock work for 15 years, is working on long-term, underrated problems. And it’s been a wonderful time to be doing that because we have climate change, the most important issue in the investing world for the next few decades.

We have shortages of resources. We have shortages of manpower. A population bust the like of which we have never seen, particularly in a few countries like China. We have an incredible growth in inequality, which I think is the poison in the political system. And we have a great surge of toxicity.

I think we’ve made our planet unfavorable to life in every form, including homo sapiens. And these are real issues. They’re moving incredibly fast. They threaten perhaps the existence of a stable global society.

When you go to a cocktail party and people ask you how the world is doing, and you tell them it’s all falling apart, do people get tired of hearing this from you? Do you ever tell people, “Actually there’s something good happening?” 

Absolutely. I’m very sensitive to the idea that you can be so depressing no one would want to live with you. Forget a cocktail party. You’ve got to frame it in a more interesting way. And fortunately, the reality is the effort going into climate change, for example, is so impressive.

It’s moving so fast. You can look back at what people thought would happen to wind, solar, and storage, and electric vehicles. We have done much better than people thought 20 years ago. So we frame it as the race of our lives.

When did you become so well known for predicting bubbles or thinking that the markets were out of kilter sometimes? Was that because of your writings, your stock picking or your public speeches? 

I started writing quarterly letters in 1998. And 1998 to 1999 of course was a glorious bubble. And it just went up, and up, and up, and up. And we fought the bubble all the way. So we were horrifically too early.

In early 1998, the P/E went to 22 times. And the highest in history had been 1929, when it peaked at 21. So we were relatively patient.

We didn’t take a position against the market until it was the highest P/E in the history of the U.S. stock market in early 1998. And then we watched it go to 35 times earnings. And that is not a modest increase from 21.

That was a brutal two years. And the earnings were rising as well. So the market made a magnificent move from its all-time high in early 1998. It went straight up until March of 2000.

And our clients did not approve of us being early and, to a very considerable degree, fired us. And they were very upset. Missing out on making money when your golfing partner at the neighboring pension fund is making a fortune is very irritating.

Who manages your money?    

I’m pleased to say 95% of my money is in a foundation. I co-manage the foundation. I’m advised by Cambridge Associates. And we are invested 75% in early-stage venture capital, which most people would consider a bizarre concentration.

We consider it the best part of capitalism and very much the best part of American capitalism. American venture capital industry is the pride and joy of the venture capital world — bigger and better — attracts people from all over the world.

Would you call yourself, overall, an optimist or a pessimist? 

I think of myself as a realist, trying to see the world as it really is and not the way I’d like it to be. Sometimes I succeed and sometimes I fail in that.

But when I focus on new ventures, I must say, it’s irresistible to be optimistic. They can really carry you along.

–With assistance from Todd McEvoy.

(Image: Bloomberg)

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