As investors grapple with the abrupt failure of Silicon Valley Bank on Friday, many are wondering what its demise says about the market trouble that could lie ahead. Legendary investor Jeremy Grantham has some thoughts.
The cofounder of investment firm GMO believes stocks are in a speculative bubble that is slowly deflating. The era of ultra-low interest rates and ample liquidity in the market, which had pushed stocks to dramatic highs during the pandemic, is over.
Fed officials have long engaged in policies that drive up the prices of assets, other things being even, and create spectacular overpriced bubbles, Grantham said during an interview with Bloombergs What Goes Up podcast published Friday, recorded before the SVB collapse. They then break because thats what bubbles have to do. They simply break off their extreme overpricing, and we pay a very tough price.
Few benefited from the Feds low interest rate policies as much as tech companies, and Silicon Valley Bank said it had relationships with about half of all U.S. venture-capital-backed companies, billing itself as a partner for the innovation economy. The bank watched its deposits soar from $49 billion in 2018 to nearly $190 billion in 2021 as startups and tech giants profited during the pandemic. But venture funding has dried up as interest rates climbed. An announcement by SVB earlier this week that it was looking to raise billions in a share sale spooked investors, contributing to the banks downfall.
Grantham didnt blame current Fed Chair Jerome Powell alone for the current speculative bubble. Since Alan Greenspan first arrivedPaul Volcker knew what he was doingbut since then its been a long, continuous horror show, he said.
The investor previously predicted in a Jan. 24 outlook letter that the stock market would fall another 20% this year, following a brutal 2022. But on the podcast, he reminded listeners: Great bear markets can have wonderful rallies. Great bear markets can take their time.
This years losses, he believes, will be mild compared to where they will eventually bottom out late next year. I do think there is a biting chance that this year will not be down that much, he said. But in the worst case, if the world falls into a severe recession, the market could fall a stomach-turning 50% from here, he wrote in January.
Grantham isnt the only market watcher to note the era of cheap money coming to an end as central banks around the world raise interest rates. We lived in a bubble, in a dream, and this dream and bubble is bursting, economist Nouriel Roubini says in an upcoming Frontline episode entitled Age of Easy Money.
Fortunes CFO Daily newsletter is the must-read analysis every finance professional needs to get ahead. Sign up today.
