According to renowned Wall Street critic Jeremy Grantham, increasing interest rates, gradually exerting their impact, will ultimately harm the economy, contradicting the Federal Reserve’s hope to prevent the US economic recession.
Powell informed journalists that the central bank intends to maintain the restrictive policy until they are assured of sustainable inflation reduction to their 2% objective. Unlike historical tightening situations, Powell conveyed his belief that inflation can reach the target without causing extensive job losses.
Jeremy Grantham’s Views on the US economic recession
In response to chairman Jerome Powell’s belief that the US economic recession can be averted, Jeremy Grantham, the co-founder of the Boston-based investment firm Grantham Mayo Van Otterloo, stated that the Federal Reserve has never accurately predicted US economic recessions. Especially those that follow major market bubbles. This suggests skepticism about the Fed’s ability to foresee such economic downturns.
During an interview with David Rubenstein on Bloomberg Wealth, Grantham reinforced his pessimistic outlook.
Aged 84, Grantham’s well-known grim predictions occasionally foreshadow significant market upheavals, like those in 2000 and 2008. His forecasts, though sometimes foretelling market turmoil, are notable for the parallels he draws between events. He likened the post-pandemic stock surge to the 2000 tech bubble but noted interruptions due to AI speculation and election-related stimulus.
He remarked that numerous factors have encroached, making life highly complex and AI’s significance vital yet insufficient. He expressed that various influences have disrupted life’s simplicity, and while AI is important, it might not avert the US economic recession.
Grantham cautioned against the AI-driven enthusiasm boosting tech stocks to high values. Despite its current impact, he noted that the inflated tech stock values fueled by AI cannot avert the US economic recession.
He stated that last year’s tech stock drop had an excessively significant deflationary impact. Rising rates, affecting sectors like real estate, will lead to a prolonged recession and stock decline. In January, he predicted the S&P 500 to reach 3200 by year-end, over 1000 points below current levels.
Economic instability after the Pandemic
Economic instability post-COVID-19 challenges market forecasts, affecting most individuals’ lives. Grantham’s 2021 alerts about extreme bullishness seemed accurate as stocks suffered losses. This year, Nasdaq 100’s 30% rise at times made Grantham’s concerns appear exaggerated. This pandemic aftermath has disrupted market predictions, impacting many people’s lives negatively.
Insight on July Minutes
Recent minutes from the July Federal Open Market Committee indicated ongoing inflation concerns. Policymakers might consider additional interest-rate increases to address inflation worries.
Various Projections of Grantham
Grantham projected the S&P 500 to be at 3200 by the year’s end, significantly lower than now. The July Federal Open Market Committee minutes reflected policymakers’ concern about inflation.
Independent of policymakers, the Fed’s influential economists no longer foresaw a year-end mild recession. Achieving this target, Grantham suggested, might prove challenging.
He anticipated inflation staying above its past 10-year average, leading to increased interest rates. Grantham stated a simple principle: low rates elevate asset prices, and high rates reduce them. He highlighted an era of higher average rates, differing from the past decade.
In January 2022, Grantham restated his prior year’s belief about a US stock super-bubble. He identified four such bubbles in the last century, including 1929, 2000, and 2006.
These bubbles historically corrected to trend with extended and intense pain. The GMO Benchmark-Free Allocation Strategy, valued at around $9.4 billion, gained 8.52% from January through July 31.
The strategy allocates dynamically across asset classes without traditional benchmark constraints.
The GMO Equity Dislocation Strategy, valued at $5 billion, lost 3.02% from January to June 30. The strategy involves going long on value equities and short on those with high growth expectations.
Grantham, when asked about his outlook, denied being a pessimist. He views himself as a realist, aiming to perceive the world as it truly is.
Grantham acknowledged his attempts to understand the world objectively, despite occasional failure. He strives to perceive reality accurately, acknowledging success and failure.