As traders grapple with the abrupt failure of Silicon Valley Financial institution on Friday, many are questioning what its demise says concerning the market hassle that might lie forward. Legendary investor Jeremy Grantham has some ideas.
The cofounder of funding agency GMO believes shares are in a speculative bubble that’s slowly deflating. The period of ultra-low rates of interest and ample liquidity out there, which had pushed shares to dramatic highs throughout the pandemic, is over.
Fed officers have lengthy “engaged in insurance policies that drive up the costs of belongings, different issues being even, and create spectacular overpriced bubbles,” Grantham stated throughout an interview with Bloomberg’s What Goes Up podcast revealed Friday, recorded earlier than the SVB collapse. “They then break as a result of that’s what bubbles must do. They merely break off their excessive overpricing, and we pay a really robust value.”
Few benefited from the Fed’s low rate of interest insurance policies as a lot as tech firms, and Silicon Valley Financial institution stated it had relationships with about half of all U.S. venture-capital-backed firms, billing itself as a “companion for the innovation financial system.” The financial institution watched its deposits soar from $49 billion in 2018 to just about $190 billion in 2021 as startups and tech giants profited throughout the pandemic. However enterprise funding has dried up as rates of interest climbed. An announcement by SVB earlier this week that it was seeking to elevate billions in a share sale spooked traders, contributing to the financial institution’s downfall.
Grantham didn’t blame present Fed Chair Jerome Powell alone for the present speculative bubble. “Since Alan Greenspan first arrived—Paul Volcker knew what he was doing—however since then it’s been an extended, steady horror present,” he stated.
The investor beforehand predicted in a Jan. 24 outlook letter that the inventory market would fall one other 20% this 12 months, following a brutal 2022. However on the podcast, he reminded listeners: “Nice bear markets can have fantastic rallies. Nice bear markets can take their time.”
This 12 months’s losses, he believes, will likely be gentle in comparison with the place they are going to ultimately backside out late subsequent 12 months. “I do assume there’s a biting probability that this 12 months won’t be down that a lot,” he stated. However within the worst case, if the world falls right into a extreme recession, “the market might fall a stomach-turning 50% from right here,” he wrote in January.
Grantham isn’t the one market watcher to notice the period of low-cost cash coming to an finish as central banks world wide elevate rates of interest. “We lived in a bubble, in a dream, and this dream and bubble is bursting,” economist Nouriel Roubini says in an upcoming Frontline episode entitled “Age of Simple Cash.”
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