Two of the world’s most respected investors, GMO’s Jeremy Grantham and Bridgewater’s Ray Dalio, offered identical warnings: The bubble in U.S. equities is unwinding, and the economy is headed for stagflation.
The two spoke in a virtual panel discussion earlier this month. They were interviewed by Jim Haskel of Bridgewater and Alex Shahidi, who is a managing partner and co-chief investment officer at Evoke Advisors, a Los Angeles-based asset manager, as part of its master speaker series.
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Grantham is the co-founder and long-term investment strategist of Grantham, Mayo, & van Otterloo (GMO), a Boston-based asset management firm. Dalio is the co-chief investment officer of Connecticut-based Bridgewater Associates, the world’s largest hedge fund, which he founded in 1975.
The market is showing signs of breaking down, according to Grantham. He said this has been the worst opening of a year for the S&P since 1939, a year before he was born.
“This is the real McCoy,” Grantham said, and market dynamics are playing out close to the way they did in 2000, when the dot-com bubble burst.
He said this was one of the “great bubbles,” which are characterized by hysterical behavior and accelerated price moves on the upside. As it unwinds, investors are shifting to blue-chip stocks, which are going up, but risky growth stocks are going down. This phenomenon is unusual, he said, but it happened in 2000. Grantham called it a “very rare indicator of impending doom.”
That behavior is a “pretty good indicator” of what happened as the housing market started to decline in 2007, Grantham said. It reminded him of Russ Prince, then the CEO of Citibank, who said that investors “have to keep dancing while music is playing.”
But investors are not idiots, Grantham said, which is why they are moving to safer stocks. “That works,” he said, “to a degree, as the bubble breaks.”
“We’re in it, dudes,” Grantham said. “Declines will be very substantial.”
Dalio commented on the macroeconomic outlook and said that this is the third year of expansion with aggressive monetary policy, which is causing inflation. Money and debt have been created to such a degree that there must be a decline in real wealth. Everyone believes that financial assets will pay for their goods and services, he said, but there will be negative real returns instead.
Like all bubbles and paradigm shifts, he said, investors have not been worried about inflation and believed that cash is safe.
“This is a punch in the face to all investors,” Dalio said. It is one of the rare scenarios when good technology companies “get hammered.”
The 2022 elections will have a big impact on economics and markets, according to Dalio, and there will be greater extremism and populists will prevail. He is also worried about the 2024 elections, fearing that neither side will accept losing. “When the causes are more important than the systems,” Dalio said, “the systems are in jeopardy.” Both the U.S. and Europe are in that situation.
We are in a period in which the supply and demand for debt and credit are making stagflation likely, Dalio said, like the 1970s. But political influences are more important. We have been used to an environment where economics ruled, and the most efficient countries got the business and that raised their standard of living. That doesn’t exist anymore, Dalio said, as manufacturing will gravitate to countries that are more ideologically aligned with the U.S.
Read the full article here by Robert Huebscher, Advisor Perspectives.
