A stark warning from Wall Street

Kim Chang-gyu
The author is the economic news editor of the JoongAng Ilbo.

Jeremy Grantham — the founder and chief strategist of white-shoe fund company GMO — has been warning of the bursting of a super bubble in U.S. stocks accompanied by an economic downturn. The investment guru leading a flock of doomsayers on the U.S. market and economy forecast that the repercussions of high interest rates will drag the market down and spark a recession that could run “perhaps deep into next year.” Since the United States is done with the era of loose monetary policy and cheap borrowing costs, the ramifications of fiscal tightening will seep through the economy to cause a slump until next year, he warned.

If the market enters an entrenched recession, the bubbles in stock and real estate assets will also burst, he said. The 85-year-old veteran investor gained a reputation as a reliable pessimist. Grantham sold off Japanese stocks before the real estate market crash in Japan in 1989 and predicted the dot-com bubble burst in 2000 as well as the global financial crisis in 2008.

His latest grim prophesy on the U.S. economy was mostly brushed aside in the financial markets until recently, as U.S. economic data, including growth and employment rates, remained solid. But the atmosphere has started to change. JPMorgan Chase CEO Jamie Dimon criticized the U.S. Federal Reserve’s economic outlook 18 months ago as being “100-percent dead wrong,” adding he was “quite cautious about what might happen next year.”

In its outlook in March last year, the Fed projected the core consumer price index would rise to 2.8 percent through 2023, but the rate is approximately 1.1 percentage points higher now.

“Fiscal spending is more than it’s ever been in peacetime, and there’s this omnipotent feeling that central banks and governments can manage through all this stuff,” Dimon said. The CEO, who recently said the U.S. fund rate could soar to 7 percent, warned of similarities to the 1970s, pointing to the period of great inflation and recession.

The deficit budget-financed spending during the U.S. engagement in the Vietnam War fueled inflation. The Fed raised the base rate by some 20 percent to bring inflation down, but this consequently led to a serious recession. The United States is undergoing the same pattern of drawing back the colossal liquidities from Covid-19 through sharp rate hikes to shock the economy. BlackRock Chairman CEO Larry Fink agreed. “The ‘70s were all about bad policy. Today is about bad policy again,” he said. Other billionaire investors Bill Ackman, the CEO of Pershing Square Capital Management, and Bill Gross, the “bond king” of the Pacific Investment Management, joined the pessimistic chorus of warning about a consequential downturn.

Skeptics see the signs already progressing in the fourth quarter. The U.S. GDP rose by a surprising 4.9 percent on the annualized rate in the third quarter, doubling the gains of 2.2 percent in the first quarter and 2.1 percent in the second quarter. But many experts expect the pace to slow significantly to around 1 percent in the fourth quarter. The U.S. personal savings rate against income sank to 3.8 percent in the third quarter from 5.2 percent in the second quarter. After-tax income reflecting the inflation rate also fell 1 percent. The slowdown in income as Americans feel the real strains from expensive borrowing rates while their savings from the pandemic period are thinning could bring a stop to the thriving economy. Yet policymakers remain defensive, with Treasury Secretary Janet Yellen assuring that Americans are safe from recession.

The environment for external trade-reliant Korea is going from bad to worse. Its largest trade market — China — has been wobbly. The United States, Korea’s second largest trader, also looks worrisome. The Ukraine war has already lasted 18 months. The war in Gaza could lengthen as Israeli troops move in.

Internally, household debt is snowballing despite rises in interest rates. Real disposable income of Korean households fell by the most in 17 years in the second quarter. Since high prices and interest rates will likely stay high, spending cannot be expected to recover in the near future. On top of that, the property market has stagnated with offerings piling up.

When it rains, it pours. International rating agencies Fitch and S&P projected our economy will squeeze out a meager growth of 1.0 percent and 1.1 percent, respectively, this year. But Finance Minister Choo Kyung-ho has raised the figure to 1.4 percent.

Market participants tend to be more pessimistic than policymakers at the inflection point of an economy. But investors are responsible for the outcome of their bets. They must not be all fearsome of the looming storm, but they can face a disaster if they are not ready against the worst. A recession always follows when a big bubble bursts. Those who prepare for danger can find new opportunities. The wintery season is just around the corner.