The sector, which relies heavily on debt financing, has been hit hard by rising interest rates. He added: “The occasions where people have tried to break a bubble in the stock market and the real estate market together are fairly ominous.”įears about the health of the US commercial real estate industry have grown in recent weeks. “They have had basically a lost 20 years, and in addition a fairly lame 10 years,” Grantham said. That’s what happened in Japan in the early 1990s, unleashing a long period of economic stagnation that haunts the world’s third-largest economy to this day. That could be the next big risk for banks David Paul Morris/Bloomberg/Getty ImagesĪmerican offices are half-empty. San Francisco's office vacancies have climbed to a record and are now more than six times their pre-pandemic level, highlighting the tech hub's ongoing economic struggles. (KR).) But in the short term, “almost everybody gets hurt” as asset prices come back down to Earth, Grantham said.Ī worker inside a vacant office and retail building in San Francisco, California, US, on Monday, Oct. (GMO has a US equity fund, with holdings in companies such as Apple Economists at the Federal Reserve are predicting a mild recession in late 2023 because of fallout from the banking crisis.Įven in this environment, though, there will be opportunities to make money. Strain in the financial system could therefore grow when, as he expects, the US economy enters a recession and corporate earnings begin to take a hit. But stock valuations remain “way above any long-term traditional relationship” to corporate performance. The correction in the bond market may be almost complete, Grantham forecast. It’s very hard to know which part will go.” “When the great bubbles break, they do impose a lot of stress on the system,” Grantham said. It would have been difficult to predict the implosion of Silicon Valley Bank, or the need for the Swiss government to swoop in and orchestrate an emergency rescue of Credit Suisse, he explained. In the meantime, investors should “count on being surprised,” Grantham said. They are terrible if people get everything wrong.” “The recessions are mild if everybody does everything right and there no complications. “Every one of these great bursts of euphoria, the great bubbles with overpriced markets … has been followed by a recession,” Grantham said. The recent failure of Silicon Valley Bank, for example, was triggered in part by losses on its bond holdings as interest rates jumped and prices of US government debt fell.Īs the bubble deflates, it’s all but certain to result in an economic downturn, he predicted. This widespread exuberance could lead to a particularly harsh reckoning, according to Grantham. The prices of government bonds, real estate and even cryptocurrencies also shot up. Stocks aren’t the only assets that notched excessive valuations when cheap money encouraged investors to take big risks. Morgan Stanley foresees a drop of nearly 5%. The low point might not arrive until “deep into next year,” he added.Īnalysts at Bank of America and Goldman Sachs, for their part, see the S&P 500 finishing 2023 only about 2% below Wednesday’s close. The “best we can hope for,” he said, is a fall of about 27% from current levels, while the worst-case scenario would see a plunge of more than 50%. But Grantham sees much steeper declines on the horizon. Since early 2022, when the S&P 500 hit an all-time high, US stocks have dropped about 15% as central banks have jacked up borrowing costs. A frenzy in multiple US markets spurred by rock-bottom interest rates after the coronavirus pandemic led Grantham to call “one of the great bubbles of financial history” back in 2021. The co-founder of investment firm GMO is known for his bearish views. “We’re by no means finished with the stress to the financial system.” “Other things will break, and who knows what they will be,” Grantham told CNN in an exclusive interview. Now, the famous investor warns another epic bubble in financial markets is bursting - and the turmoil that swept through the banking sector last month is just the beginning. Jeremy Grantham made his name predicting the dot-com crash in 2000 and the financial crisis in 2008.
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