Bloomberg News

Grantham Says Assets ‘Brutally Overpriced’ on Fed Policy

February 06, 2013

Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said global asset prices have climbed too high because of the U.S. Federal Reserve’s expansive monetary policy.

“All global asset assets are once again becoming overpriced,” Grantham wrote in a quarterly letter released today. U.S. companies, other than “quality” stocks with stable earnings and low debt, and most global growth equities, are “brutally overpriced,” Grantham wrote.

Grantham, who is best known for his bearish call on U.S. stocks in 2000, is a long-time critic of both Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan. In a series of his regular letters he has blamed them for creating asset bubbles by holding interest rates at artificially low levels.

Bernanke has kept interest rates near zero since 2008 to help the U.S. economy recover from the financial crisis, and has conducted three rounds of unprecedented asset purchases to drive investors into riskier assets. The central bank has indicated it will keep rates unchanged as long as joblessness is above 6.5 percent, inflation is projected to be no more than 2.5 percent and long-term price expectations are well-anchored.

Greenspan-Bernanke

The Fed, wrote Grantham in the letter, is trying to “badger” people into making riskier investments in order to push up equity prices. He said the strategy will be seen as typical of the “Greenspan-Bernanke era.”

The gambit can drive up asset prices for a time, wrote Grantham, and will ultimately result in “exciting crashes.” He described emerging-market stocks, Japanese stocks and European stocks as “only a little expensive.”

“As for fixed income -- fugetaboutit,” he wrote.

In 2000, Grantham, 74, correctly predicted that U.S. stocks would lose money in the next decade. The S&P 500 Index declined an average of 1 percent a year in the 10 years ended Dec. 31, 2009.

GMO now forecasts that U.S. large-cap stocks, excluding quality stocks, will lose 0.8 percent per year for the next seven years, adjusted for inflation, according to data on the Boston-based firm’s website. GMO expects U.S. bonds to lose 1.6 percent annually.

The firm managed $106 billion as of Dec. 31.

To contact the reporter on this story: Charles Stein in Boston at cstein@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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