The credit crisis that has ravaged world markets since last summer will fester for years and result in anemic economic growth in Japan, the United States and most of Europe through 2009, according to an influential Wall Street investor.
A combination of tighter global lending standards, rooted in mounting mortgage defaults, and falling U.S. and European home prices could eat deeply into already slowing growth worldwide, Jeremy Grantham, chairman and market strategist of money manager GMO LLC, said in an interview late Tuesday.
Grantham, who had warned of the danger that the U.S. housing market posed long before others, said the current credit crisis has “got many more tentacles… than the ones we’ve seen over the last 30 years.”
“We are in a recessionary phase that will last perhaps two and two and a half years,” said Grantham, who helps oversee about $126 billion in assets at GMO.
“It will be, interestingly, unlike anything else we’ve seen.”
Grantham, often called a “perma-bear” for his dour view on U.S. equities, correctly predicted a crash two months before the technology bubble burst in 2000.
His outlook for the environment now is grim, if not dire.
He recommends investors hold cash, and if they must be invested, he favors large-cap U.S. equities.
The United States and other economies might not be savaged by negative quarters of growth, but the sentiment will be “quite novel in feel without the theatrical aspect of a real nose-dive. With any luck… we won’t have them,” he said.
Rising asset prices and a credit binge that drove the U.S. economy for 25 years is over and won’t return for years to come, he said. That “end of an era” will slow economic growth and force both U.S. consumers and companies to readjust, Grantham added.
“We had a debt bubble in almost every nook and cranny, and in different times they are deflating,” he said. Now, the world is dealing with the secondary effects of slowing consumer and corporate consumption, Grantham said.
Central bankers, who have been “really quite incompetent,” will do everything possible to prevent a vicious cycle downward of lower consumption and lower production, he said.
Grantham, who is amazed at how smart investors failed to see the housing bubble and ensuing crisis, is also surprised by those who express little concern about China’s centrally planned economy and the strong likelihood of slower growth.
“Why have they become wonderful economists?” Grantham said. “What they have done is they have become wonderfully lucky like the rest of us.”
The odds that China, a major driver of global economic growth this decade, will stumble seem extremely high, he said. A Chinese downturn would send shockwaves through many economies that depend on its voracious demand for raw materials.
A third effect of weaker production and eventually rising unemployment in the United States, Europe and Japan, and even in some emerging countries, also will take its toll.
Added together, a more prolonged and painful recession than anyone has imagined will occur, an economic downturn that will come closer in global reach to anything the world has seen since the Great Depression, Grantham said.
“The possibility of it becoming very serious on a global basis is very much higher than 2001, 2002,” he said. “That’s the scary part.”
Where should investors hide? Grantham said large-cap U.S. stocks provide “an absolute guaranteed no-brainer.”
“Their profit margins are the only profit margins in any group we look at anywhere that aren’t measurably above average at all,” he explained. “Everything else, the profit margins are way over average globally, including emerging markets — very
vulnerable, hugely mean-reverting,” he warned.
Grantham said they have lagged other asset classes over the past six years: “They’ve been left behind, exactly the time you would need them.”
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