Seeing the same pattern that played out in every past super-bubble is what gives him so much confidence in predicting this one will implode similarly.
Grantham pins the blame for bubbles of the past 25 years mostly on bad monetary policy. Ever since Alan Greenspan was Fed chairman, he argues, the central bank has “aided and abetted” the formation of successive bubbles by first making money too cheap and then rushing to bail out markets when corrections followed.
Now, investors may no longer be able to count on that implied put. Inflation running at the fastest clip in four decades “limits” the Fed’s ability to stimulate the economy by cutting rates or buying assets, Grantham said.
“They will try, they will have some effect,” he added. “There is some element of the put left. It is just heavily compromised.”
Under these conditions, the traditional 60/40 portfolio of stocks offset by bonds offers so little protection it’s “absolutely useless,” Grantham said. He advises selling U.S. equities in favor of stocks trading at cheaper valuations in Japan and emerging markets, owning resources for inflation protection, holding some gold and silver, and raising cash to deploy when prices are once again attractive.
“Everything has consequences and the consequences this time may or may not include some intractable inflation” Grantham writes. “But it has already definitely included the most dangerous breadth of asset overpricing in financial history.”
This article was provided by Bloomberg News.