Jonathan Chancellor | 26 November 2012

Global bear Jeremy Grantham says USA experienced 1-in-1200 year property bubble

Global bear Jeremy Grantham says USA experienced 1-in-1200 year property bubble

The United States gross domestic product (GDP) annual growth rate of 3% that has prevailed for the last century has gone forever, according to global bear and GMO co-founder and chief investment strategist Jeremy Grantham.

His latest quarterly client update says most businesspeople (and the Fed ) continue to assume that economic growth will recover to its old rates.

"Going forward, GDP growth for the US is likely to be about only 1.4% a year, and adjusted growth about 0.9%," he forecasts, because the GDP as constructed fails to account for the impact of rising commodity costs of finite natural resources.

"Critically, the tech boom and bust and the following housing boom and housing and financial busts helped camouflage the recent unpleasant economic development lying below the surface: the steady and important drop in long-term US growth," he says.

He says investors should be wary of a Federal Reserve whose policy is premised on the idea that 3% growth for the US is normal.

"Remember, it is led by a guy (Ben Bernake) who couldn’t see a 1-in-1,200-year housing bubble!

"Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!"

Grantham has yet to advise historians just what took place 1,200 years before 2007, i.e. 807 A.D.

Grantham, from a US investment fund, doesn’t mention Australia in this letter to clients, unlike previous ones, when he brought international attention to the Australian property market.

‘The UK and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary," he said in 2010.

His latest reference was in February this year when he appeared to be tiring of Australian housing price bubble argument while not conceeding he'd made any wrong call.

"Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion.

“Tell an Australian and you’ll have World War III.

“Been there, done that!” said the commentator in his February quarter newsletter.

 He described the overpriced US housing market in 2006 at "statistically a 1-in-1,200-year outlier level" in his latest November newsletter.

He says US population growth, which peaked in the US at over 1.5% a year in the 1970s ,will bob along at less than half a percent.

"This is pretty much baked into the demographic pie," he notes.

He says the US housing bubble led directly to the building of at least 2 million extra houses, employing an extra 3  million to 4 million workers.

"There was also unprecedented borrowing against increased housing values."

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