Veteran investor Jeremy Grantham has said credit components are worrying and that the market should brace itself for a so-called ‘anti-bubble’.
Grantham, who works for Boston-based GMO, made the comments in a quarterly update titled: ‘Not with a bang but a whimper’.
In his column, Grantham focused on the idea the world is no longer in a classic investment bubble, partly due to credit components worrying investors.
'Credit is complex and there are very often individual credit components that are worrying. Financial corporate debt looks fine, but non-financial corporate debt is scary.
'What is important is the enormous contrast between the credit conditions that previously have been coincident with investment bubbles and the lack of a similarly consistent and broad-based credit booms today.' he said.
Grantham said investor trepidation is so great that many investors are willing to tie up money in ultra-safe, long-term government bonds which guarantee zero real return, rather than buy the marginal share of stock.
'Cash reserves are high and traditional measures of speculative confidence is low, most commentators are bearish. The net effect of this nervousness is due to the last two years of a struggling US market.
'The current market is closer to an anti-bubble than a bubble in every sense, apart from the fact traditional measures of value score this market as extremely overpriced by historical standards.'
Grantham said he considers himself a ‘bubble historian’ and one who is eager to see one form and break, as he said they are the only really important events in investing.
‘I have come to believe, however, very reluctantly, that we bubble historians have, together with much of the market, been a bit brainwashed by our exposure in the last 30 years to 4 of the perhaps 6 or 8 great investment bubbles in history: Japanese land and Japanese equities in 1989, US tech in 2000, and more or less everything in 2007.’
Grantham said there has been a prevalence of bubbles in the past 30 years, which has tempted investors to see them too often. ‘Well, the US market today is not a classic bubble, not even close. The market is unlikely to go “bang” in the way those bubbles did. It is far more likely that the mean reversion will be slow and incomplete.
‘The consequences are dismal for investors: we are likely to limp into the setting sun with very low returns. For bubble historians, though, it is heart-breaking for there will be no histrionics, no chance of being a real hero. Not this time.’
Grantham said the main reason for low rates in the market is Fed policy, along with the aging population of the developed world and the mix towards middle-aged heavy savers and the drift away from high consuming young workers.
'I believe the dominant effect on low rates is Fed policy, but it seems other factors are also contributing such as the aging population,' he said.
'Whatever fraction was caused by the Fed’s actions, the important point is that we can measure the lower rates and lower imputed returns which are most definitely there.'
Grantham believes the UK will be seriously impacted by a Brexit but said there may still be a chance of a ‘no Brexit’ result.
'London’s financial business will be hurt long and hard, most corporations will lose easy access to the biggest market in the world. As for universities which receive much EU money, it will be a bone cruncher.
'Members of Parliament have an unstated constitutional and ethical duty to do what is in the best long-run interests of the UK and the majority of them know that Brexit is not that.'
Grantham said the people voted for Brexit, so it would not be kosher for the government to override it, but he also said there may be a chance Brexit does not actually happen.
'Happily, my one-third chance of a no Brexit still looks good, as the Prime Minister does her duty in frightening everyone with a cold and hard Brexit.
'Just possibly, she is combining this hard-Brexit-up-your-nose strategy - with a remarkably inclusive program (for a Conservative!) to win over enough previously Brexit voters to have a revote by referendum or Parliament by the spring without a revolution, you never know your luck.'