Full Transcript: Jeremy Grantham Interview
Senior Field Producer
Legendary investor Jeremy Grantham, Chief Investment Strategist of Grantham, Mayo, Van Otterloo sat down with Maria Bartiromo in an extremely rare interview.
Grantham recommended institutional clients to sell into this rally. He is convinced that stocks are overpriced and cash is now the avenue for investors.
As an investment strategist for the past 30-years, Grantham has long been known for his timely calls.
In 1982, he said U.S. market was ripe for a "major rally."
And in 1989, he correctly called the top of the Japanese economy. In January 2000, he warned of an impending crash in tech stocks which took place two months later. And in April 2007, Grantham said we are now seeing the first worldwide bubble in history covering all asset classes.
When we sat down with Mr. Grantham earlier this week, he expressed worries about various pockets of the global markets, including emerging markets and U.S. stocks. Grantham is betting on a strong cash position and being patient about when to get back into the market.
Check out the complete transcript of Maria Bartiromo’s interview with Jeremy Grantham, or watch the complete interview here.
MARIA BARTIROMO: Great to have you on the program. Thanks so much for joining us.
JEREMY GRANTHAM: Very nice to be here.
BARTIROMO: Time and time again, your writings and your predictions have been right on in terms of investing and where we are in this market. From the tech bubble to beyond. Can you talk to us about where we are today in the stock market and what trends you see developing?
GRANTHAM: What I worry about most is the Fed's activity and — QE2 is just the latest demonstration of this. The Fed has spent most of the last 15, 20 years— manipulating the stock market whenever they feel the economy needs a bit of a kick. I think they know very well that what they do has no direct effect on the economy.
The only weapon they have is the so-called wealth effect. If you can drive the market up 50 percent, people feel richer. They feel a little more confident, and the academics reckon they spent about three percent of that. So, the market went up 80 percent last year. They should be spending 2.4 percent extra of— of the entire value of the stock market, which is about two percent of GDP. And that's a real kicker.
You don't see it because of the enormous counterdrag from the housing market— and— and its complete bust. But, it would have been worse with— without this. The problem is, they know very well how to stimulate the market. But, for whatever reason, they step away as the market gathers steam, and— and resign any responsibility for moderating— a bull market that may get out of control as we saw in '98 and '99 with Alan Greenspan, as we saw in the housing market.
And— I fear that the market will continue to rise. It will be continuously speculative. After all, when you can borrow at a rate that is negative after adjustment for inflation, it's not surprising that you would borrow a lot.
BARTIROMO: So, what are the implications of— of this constant easing and stimulation? You know, it— it seems the numbers are so mind boggling: $600 billion here.
GRANTHAM: They— they (CHUCKLE) are mind-boggling.
BARTIROMO: You know? (CHUCKLE) But, give us the—
GRANTHAM: The consequences are you get boom and bust. You— stimulate in '91. You let it get out of control. You have this colossal tech bubble in '99. Sixty-five times earnings for the— for the growth stocks. Then you have an epic bust. Then, of course, they're panic struck. They race back into battle with immense stimulus with negative real rates for three years.
And you get another— rise of risk taking and everything risky— prospered in '03, '04, '05, '06, '07 until we had what I called the first truly global bubble. It was pretty well everywhere in everything. It was in real estate. Almost everywhere. It was in stocks absolutely everywhere. And— and it was in the bond market to some considerable degree.
And that, of course, broke. They all break. That's the one thing they can't control. You can drive a market higher and eventually — of its sheer overpricing, it will eventually pop. And, typically, it seems to pop at the most inconvenient time. So, we're going to drive this one up, and this time there isn't much ammunition. In 2000, the Fed had a good balance sheet. The government had a good balance sheet.
In '08, it was still semi respectable, and— and now it's not. It's not very respectable at all. So, what are they going to use as ammunition if they cause another bubble and it breaks, let's say, in a couple of years? Then we might have some real Japanese-type experiences.
GRANTHAM ON THE FEDERAL RESERVE
BARTIROMO: Where are the solutions then, if not this? What do you think ought to be done?
GRANTHAM: I think the Fed is not designed— to have effective tools to deal with the economy. It should settle for just controlling the money supply. And— if it insists, it can worry about inflation. The way you address a weak economy, particularly very substantial excess unemployment is through fiscal policy. You must either bribe man— manufacturers, corporations to hire people who have been unemployed, which they did in Germany. A lot of economists think that's perfectly effective.
Or you must go in there and hire people yourself as a government. Now, I— I believe in crowding out. So, I— I would never do it unless there was clearly quite a few million extra unemployed. I wouldn't go after too many skilled labor because there's never— enough of them to go around. And that does cause crowding out. I would go after the— what I called lightly-skilled workers.
The kind of people who were building the extra million-dollar— sorry— extra million houses in— in '05, '06 and '07. And find— and find jobs for them. We have an infrastructure that is decades behind schedule.
We could insulate every house in the Northeast. These are high-return projects, great— for society in general. And to— to allow people to sit there unemployed. Their skills are deteriorating. Their family morale goes to hell. And— it's a deadweight on society. And you have to remember when— when the government hires someone, he doesn't pay the full price like a corporation does.
He pays about half price because he pays a lot. He, the government— it, the government, pays a lot for someone sitting down unemployed. All the— all the many ways— that unemployed get— get helped plus— the government carries the atrophying of the skills. Society loses that, the longer they're unemployed.
BARTIROMO: So, what should the federal government be doing then? I mean, the housing industry, for example, missing in action. What is it going to take to get housing moving again? What is it gonna take to get businesses hiring again? If it's not the job of the Federal Reserve, what policy should we be seeing coming out of the government?
GRANTHAM: I think the Federal Reserve has— is in a very strong position to move against bubbles. Bubbles are the most dangerous thing— asset-class bubbles that come along. They're the most dangerous to investors. They're also the most dangerous to the economies of— as we have seen in Japan and in 1929 and now here. You've got to stop them.
The Fed has enormous power to move markets. And it— not necessarily immediately, but give them a year and they could bury a bull market. They could have headed off the great tech bubble. They could have headed off the housing bubble. They have other responsibilities— powers. They— they could have interfered with the quantity and quality of the sub-prime event. They chose not to.
In fact, Greenspan led the charge to deregulate this, deregulate that, deregulate everything, which was most— ill advised, and for which we have paid an enormous price. So, they can— they can stop bubbles, and— and they should. It's easy. It's a huge service. What you do now is— is— I like to say it's a bit like the Irish problem.
I wouldn't start the journey from here if I were you when you ask— the way. You— you really shouldn't allow the— situation to get into this shape. You should not have allowed the bubbles to form and to break. Digging out from a great bubble that has broken is so much harder than preventing it in the first place.