Jeremy Grantham on Bubbles and the Outlook Ahead

Published on April 19, 2010

In an interview with The Financial Times, Jeremy Grantham discusses a study on various financial bubbles that his firm has recently completed.  Mr. Grantham found 34 examples of bubbles that fit his definition as a “forty year event” statistically.  Of these 34 bubbles, 32 have moved back to trends prior to the bubble forming.  The two bubbles currently outstanding are the U.K. and Australian housing bubbles which Mr. Grantham believes are driven by low rates on floating rate mortgages.

Mr. Grantham is critical of the Federal Reserve under Alan Greenspan and Ben Bernanke’s leadership and attributes recent bubbles in the United States to errors in monetary policy:

It is not usual that you get three bubbles in a ten or twelve or thirteen year period.  Normally one bubble will chew up twenty years because it leaves such a painful experience people don’t queue up to put their hands on the same stove and burn themselves again.  But under Greenspan’s incredible leadership, he managed to give us the tech bubble and then by keeping interest rates at negative levels for three years drove up the housing bubble and then finally the risk bubble — everything risky — was inflated by ’07 and Bernanke has happily picked up the mantle and seems totally unconcerned about creating yet another bubble.

Where might the next bubbles form?  Mr. Grantham is concerned about equities in emerging markets and commodity prices.

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Jeremy Grantham on Bubbles and the Outlook Ahead