The stock market should have collapsed! Legendary investor Grantham: Investors are too superstitious about the Fed

Spark Global Limited reports:

Jeremy Grantham, co-founder and chief strategist of GMO and a legendary investor who successfully called the past two market crashes, says investor confidence in the Fed has become so unshakable that even the highest inflation in 30 years is not enough to trigger asset sell-offs. He said:

“We’ve never seen anything like this. All bull markets before this one had low inflation. The US consumer price index rose 6.2 per cent in October, which would have been enough to cause a crash in any market before 1925 or now. But this time, confidence in the Fed was so strong that when they said it was temporary, we believed them.”

Rising energy, housing, food and auto prices have pushed up consumer prices, putting pressure on Fed officials to consider an early end to near-zero interest rates and possibly taper bond purchases at a faster pace than announced last week.

Grantham, 83, said the Fed overstimulated the economy, inflating the tech bubble in 2000 and the housing bubble before the 2008 financial crisis, and today they are creating “madness” in the stock market through the movement of Meme stocks.

Grantham said:

“What did they learn? Nothing. In my view, the Fed has not done one thing right since Paul Volcker.”

On the same day, Wharton Finance professor Jeremy Siegel predicted that the Fed would soon adopt a more hawkish monetary policy stance in response to inflationary pressures in the US economy. Segal says:

“We’re going to see the stock market like inflation until the Fed gets serious about it, and the Fed officials are not.”

He added:

“I don’t think we’re going to see a bumpy ride until the Fed changes direction and says, ‘We have to take this more seriously. Maybe it will be announced at the December meeting, maybe a little later.”

Mr. Siegel called the U.S. CPI for October a troubling report. He has been warning for months that inflation will be higher and more persistent than the Fed and its chairman, Jerome Powell, are predicting.

The Fed will hold its final policy meeting of the year on Dec. 14-15, which means there is one more CPI report for Fed officials to mull over.

If November’s CPI figures remain as high as October’s, Siegel believes Powell and the Fed will come under intense pressure to take a more aggressive stance. That could mean speeding up the timetable for tapering, or adjusting the Fed’s thinking about when it might make its first increase from near-zero interest rates.

Mr. Siegel said he thinks the market as a whole is fairly valued, adding that he expects stocks to continue to perform well until the Fed takes a more hawkish stance.

Allianz chief economist Mohamed El-Erian also sounded a warning Wednesday about the Fed’s downplaying of U.S. inflation as’ transitory. ‘

Mr Erian said such economic, social and political positions were becoming a “real problem”, with Labour Department data showing the US consumer price index rose at its fastest year-on-year pace since 1990 in October, suggesting us inflation was clearly “hotter” than expected.

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