In his latest letter to his clients, legendary investor and GMO co-founder Jeremy Grantham expressed a negative view of U.S. equities. In fact, he fears there will be low growth across much of the world.
Investors take Grantham’s views seriously. He predicted massive declines (before they occurred) in U.S. stocks in 2000 and Japanese stocks in 1989. So he’s been around for long enough to understand how market cycles evolve.
This expertise makes his conclusion a concern because his future views are incredibly dreary.
In his words, “The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever.”
In fact, he believes real GDP may fall to around 0.9% on average going forward – at least until 2030. After 2030, he predicts real growth will decline to 0.4%.
That’s terrible news for investors. GDP growth is a confirmation that business conditions are generally healthy. And when businesses are strong, typically stocks will be as well.
Grantham warns that manufacturing and service productivity will continue to decline in the U.S. Moreover, he says that population growth peaked years ago.
He also notes that resource costs are rising. In fact, he predicts those costs will accelerate to 9% a year, and reach the point where any gains from the economy will be completely offset by the rising costs.
But before any of those scenarios unfold, Grantham warns of a crash. He forecasts that asset price inflation will hit from class to class. And in between each rise will be “exciting crashes.”
He highlights that artificially low bond rates have already caused one bubble. I’d argue they caused more than one.
The low-rate environment left yield-seeking investors with few options. Their most obvious choice was high-yield stocks. Investors and pension funds desperately chased these investments higher during the last couple of years.
Take a look at the high-yield stocks in your portfolio. Are they at new highs? Are they well above highs from previous years? Aside from banks, Grantham is probably right that high-yield stocks have become a bubble. Though he is not saying you should sell your dividend stocks (I’m not either), understand that many are likely to be priced much higher than their financials warrant.
He says real estate, forestry and farmland will become the next investment darlings. Because rates are so low, the return on investment need not be high to achieve a gain. So investors will be left with little choice but borrowing money to buy real estate – even if those investments would be inadvisable in a normal interest rate environment.
This over-investment will spur higher and higher prices, until you guessed it … crash.
Though Grantham has a dim long-term view of America, he’s not completely bearish. He believes that emerging market stocks are “only moderately overpriced.” And he says European stocks are okay, too.
So if you agree with Grantham, steer clear of U.S. equities and fixed income.
The future may appear bleak. But I’m not convinced the U.S. is headed toward disaster. Moreover, U.S. companies have global operations, which will buffer their share value should the rest of the world outpace U.S. GDP growth. I’ve found three of these companies and review them in a special report. Click here to learn about the three growth stocks of the future.