The past month has been a fun little trip to Terror Town for a bunch of bankers, economists, journalists, and really anyone who paid close attention to the financial turmoil of 2000 and 2008. For now, the consensus is that we needn't worry about a repeat of either of those crises.
The bad news: We probably don't have a clue what's coming next.
"Count on being surprised," said Jeremy Grantham, an investor who made his name predicting both the dot-com crash in 2000 and the financial crisis in 2008.
In an interview with my colleague Julia Horowitz, Grantham warns that there's another bubble bursting in financial markets. And last month's banking pain was just the start.
"Other things will break, and who knows what they will be," Grantham said. "We're by no means finished with the stress to the financial system."
Back in 2021, he declared the buying frenzy in US markets — fueled by rock-bottom interest rates — "one of the great bubbles of financial history."
And like all bubbles, it has to burst sometime.
See here: In early 2022, the S&P 500 hit an all-time high. Since then, US stocks have dropped about 15% as central banks have jacked up borrowing costs. According to Grantham, the downward spiral isn't over.
His best-case forecast: US markets fall another 27% from current levels.
Worst-case: We fall more than 50%, not hitting the bottom until "deep into next year."
Of course, Grantham, the co-founder of investment firm GMO, is known for his bearish views. Analysts at Bank of America and Goldman Sachs, for their part, see the S&P 500 finishing 2023 only about 2% below Wednesday's close. Morgan Stanley expects a drop of nearly 5%.
The 2021 euphoria in stocks, bonds, real estate, and even crypto, could lead to a particularly harsh reckoning, according to Grantham.
"Every one of these great bursts of euphoria, the great bubbles with overpriced markets ... has been followed by a recession," Grantham said.
"When the great bubbles break, they do impose a lot of stress on the system ... It's like pressure behind a dam. It's very hard to know which part will go."
In Grantham's estimation, 2023 has echoes of 2000 and 2008. But this time, bubbles in the stock market and the real estate market are poised to burst simultaneously — and yeah, that's about as bad as it sounds.
Read Julia's full story here for more on how we got here, who's to blame, and why Jay Powell needs to channel his inner Paul Volcker.
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