Batten down the hatches. It looks like we may only have a year and change until the next financial crisis. Jeremy Grantham predicted the 1980s Japanese crash, the 1990s dotcom bubble and the 2007 financial crisis, and he is now saying that global financial markets will be “ripe for a major decline” in the second half of 2016. He even went as far as saying this global economic meltdown could lead to government bankruptcies.
Grantham is founder and chief investment strategist of GMO, a Boston-based $118 billion investment firm. In his recent comments, Grantham noted he anticipates that global stock markets will keep marching higher for the next few quarters, finally pulling retail investors back in and setting up for a major meltdown sometime in the last few months of 2016.
The famously bearish money manager is at heart a value investor. Grantham points out that a continued bull run could push stock markets to values that are two standard deviations away from the long-term norm by next November. He argued this could lead to a “very different” type of crisis, given may global governments are significantly more indebted now and a great deal of liabilities have been moved over to the balance sheets of central banks.
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He agrees that if central banks are able to create enough money to recapitalize themselves, this “could be a crisis we could weather”. He then goes on to say: “If not, then we’re talking the 1930s, where you have a chain-link of government defaults.”
Trying to predict an event that could cause the next crisis nearly impossible, but keep in mind that is speculative market bubbles do not burst simply because financial assets are overvalued. Some type of negative catalyst is typically needed. That said, Grantham argues that by late 2016 markets will likely be extremely vulnerable to a crash given the high stock valuations he anticipates.
“We might get lucky and withstand one more crisis and just have an equity washout, and on the other hand it might just break the system,” he commented on a worrisome note. “It would be new, novel, and it could result in national defaults.”