Legendary investor Jeremy Grantham has warned that the US banking crisis is far from over and the world’s largest economy is on the verge of a deeper recession than anticipated. The Federal Reserve’s tightening can result in more Silicon Valley Bank (SVB)-like collapses, he has said.
The S&P 500, the index of 500 leading publicly traded companies in the US, will drop at least 25 to 27 percent to around 3,100 points and may only bottom out next year, the British market historian said in a recent interview to CNN.
He said the benchmark stock index could plummet more than 50 percent to around 2,000 points in a worst-case scenario. Grantham has been a vocal critic of the Fed and its monetary policy, voicing his opinion through several articles.
‘Back to the meat grinder’
In one of his recent write-ups, After a timeout, back to the meat grinder!”, he said, “The first and easiest leg of the bursting of the bubble we called for a year ago is complete. The most speculative growth stocks that led the market on the way up have been crushed, and a large chunk of the total losses across markets that we expected to see a year ago have already occurred.”
"Given the starting conditions of extraordinary speculative euphoria, this was all but certain. The negative surprises of last year, from war in Ukraine to the global inflation spike, were quite unnecessary to ensure a significant downturn."
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The GMO co-founder described the prospect of bubbles bursting in both the US stock market and real estate sector as fairly ominous for the global economy. "The recessions are mild if everybody does everything right and there are no complications," he said. "They are terrible if people get everything wrong."
The worst is yet to be
Grantham also cautioned that the sudden collapse of SVB in March might just be one of the several debacles this year. The collapse wreaked investor sentiment and sparked fears of further bank runs. It has stoked concerns that lenders may panic and pull back, causing a credit crunch that will hit commercial real estate and other debt-reliant sectors.
"Other things will break, and who knows what they will be," Grantham added. "We're by no means finished with the stress to the financial system."
Grantham also called for Fed Chair Jerome Powell to take lessons from Paul Volcker’s historical steps to control inflation into consideration. Powell's predecessor was dubbed the "inflation slayer" after he rapidly hiked rates to rein in runaway price increases in the 1980s.
Grantham’s warning of a deep recession is in consonance with similar warnings shared by prominent economist Nouriel Roubini, who recently cautioned investors of a painful stagflation-driven recession for the global economy due to the cold war between the US and China.
Who is Jeremy Grantham?
The 84-year-old Grantham is the co-founder of the investing firm GMO and a market historian well known for side-stepping the 2001 dot com bubble crash. He is also famous for timing the exact bottom of the 2008 crash in his piece Reinvesting when terrified.
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