Jeremy Grantham Is Getting It Right

The Fed's a Failure and the Market Is a Bubble

Written by Jason Simpkins
Posted March 24, 2014

Jeremy Grantham is one of those guys that's worth listening to.

Like Warren Buffett or Carl Icahn...

He's so rich he doesn't need to worry about being politically correct, and he has a propensity for being right.

We like to use the phrase “Call it like you see it” at the Outsider Club.

Grantham – the co-founder and chief investment strategist of the $112 billion GMO – does just that.

And he's been railing against the Fed and the status quo for five years running.

For instance, when Janet Yellen said stocks weren't in a bubble, he was one of the loudest voices to speak up.

“Either she is ignorant about the markets,” he told the New York Times, “or on the other hand she is cynical and she is manipulating the market.”

There's more evidence for the latter, obviously. That is, the problem with the FOMC doesn't seem to be that it doesn't understand the markets, but rather that it's content to manipulate them.

So when Yellen says we're not in bubble territory, it's not because she doesn't see the obvious or hear our cries; it's because she wants stocks to keep moving higher.

But that's not all.

The Fed Is a Detriment

Grantham has also been sounding the alarm over the Fed's overreaching intervention.

“It's quite likely that the recovery has been slowed down because of the Fed's actions,” he said in a recent interview with Fortune. “The Bernanke put – the market belief that if anything goes bad the Fed will come to the rescue – has had a profound impact on people and how they act.”

As for the Fed-cheerleaders who say we would have experienced a deeper, more costly downturn had the central bank not invervened...

He's got an answer for them, too.

“There's some indication that the crash would have been worse and the downturn would have been sharper had the Fed not stepped in, but by now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.”

And so it is, in Grantham's view, that the hedge funds surfing the wave of the Fed's quantitative easing program are the real, and maybe only, winners here.

As for savers?

“Collateral damage.”

That begs the question, then, where does this all end?

Old-Fashioned Bubble Territory

Well, Grantham's investment philosophy can be summed up in one simple phrase: Reversion to the mean.

In this case, he pegs “old-fashioned bubble territory” at two standard deviations from the market's mean.

That would be around 2,350 on the S&P 500 Index – roughly a 25% increase from current levels.

That's when the music ends and the American people are left without a seat.

From one of Grantham's widely followed quarterly letters:

“We the people, of course, will get what we deserve. We acclaimed the original perpetrator of this ill-fated plan – Greenspan – to be the great Maestro, in a general orgy of boot licking. His faithful acolyte, Bernanke, was reappointed by a democratic president and generally lauded for doing (I admit) a perfectly serviceable job of rallying the troops in a crash that absolutely would not have occurred without the dangerous experiments in deregulation and no regulation (of the subprime instruments, for example) of his and his predecessor’s policy. At this rate, one day we will praise Yellen (or a similar successor) for helping out adequately in the wreckage of the next utterly unnecessary financial and asset class failure. “

Fight on,

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Jason Simpkins

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Jason Simpkins is an Editor of Wealth Daily and Investment Director of Secret Stock Files, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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