A major Bay Area bank just failed. “Spectacular overpriced bubbles” will continue to burst, warns legendary investor Jeremy Grantham

While investors grapple with the sudden collapse of Silicon Valley Bank On Friday, many are wondering what his decline says about the upcoming troubles in the market. Legendary investor Jeremy Grantham has some thoughts.

The co-founder of investment firm GMO believes stocks are in a speculative bubble that is slowly emptying. The era of ultra-low interest rates and ample market liquidity that propelled stocks to dramatic highs during the pandemic is over.

Fed officials have long “enacted policies that push up asset prices when other things are balanced, creating spectacular overpriced bubbles,” Grantham said during a speech interview for Bloomberg’s What works Podcast released on Friday, recorded before the SVB bankruptcy. “They then break because bubbles have to do that. They just break off their extreme overpricing and we pay a very high price.”

Few have benefited as much from the Fed’s low interest rate policy as tech companies, and the Silicon Valley Bank said it had connections with about half of all US venture capital-backed companies that describe themselves as “partners in the innovation economy”. The Bank watched his deposits skyrocket from $49 billion in 2018 to nearly $190 billion in 2021 as startups and tech giants benefited from the pandemic. But venture capital funding has dried up as interest rates have risen. An announcement by SVB earlier this week that it was raising billions in a share sale spooked investors and contributed to the bank’s demise.

Grantham did not hold current Fed Chair Jerome Powell solely responsible for the current speculative bubble. “Ever since Alan Greenspan arrived — Paul Volcker knew what he was doing — but it’s been a long, non-stop horror show ever since,” he said.

The investor previously forecast on Jan. 24 letter of prospect that the stock market would fall another 20% this year a brutal 2022. But on the podcast, he reminded listeners: “Big bear markets can have wonderful rallies. Big bear markets can take time.”

This year’s losses, he believes, will be small compared to where they will eventually bottom out late next year. “I think there’s a big chance this year doesn’t go down that much,” he said. But worst-case scenario, if the world goes into a severe recession, “the market could fall 50% from here,” he wrote in January.

Grantham isn’t the only market watcher noticing this the era of cheap money is coming to an end when central banks around the world raise interest rates. “We lived in a bubble, in a dream, and this dream and this bubble are bursting,” says economist Nouriel Roubini in an upcoming issue front line Consequence titled “The Age of Easy Money”.

This story was originally featured on Fortune.com

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https://finance.yahoo.com/news/major-bay-area-bank-just-205510189.html A major Bay Area bank just failed. “Spectacular overpriced bubbles” will continue to burst, warns legendary investor Jeremy Grantham

Russell Falcon

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