According to Jeremy Grantham, co-
founder and chief investment strategist at
asset management firm GMO, the US
financial system is not out of danger yet.
The high-profile failures of Silicon Valley
Bank and Signature Bank last month
highlight the need for continued caution.
Despite assurances from US officials that
the financial system is sound, Grantham
warns that more chaos could unfold, and
investors need to prepare for a potential
crisis.
Grantham predicts that the Fed's low-
interest-rate policies over the past several
years have contributed to an "everything
bubble" in which investors pursued risky
investments and untenable businesses.
He believes that the Fed's low interest
rates during the pandemic created a
significant financial bubble, which must
be deflated through interest rate hikes,
similar to the policies of former Fed Chair
Paul Volcker.
Grantham has been critical of the Fed's
handling of the situation and feels that
the central bank has not done enough to
prevent bank failures or consider other
factors. Other industry experts, including
JPMorgan Chase CEO Jamie Dimon and
BlackRock CEO Larry Fink, have also
criticized the Fed for not stress testing
banks to prepare them for high-interest-
rate scenarios and the potential for a
banking crisis.
Grantham warns that when bubbles burst,
they impose a lot of stress on the system,
leading to far-reaching consequences in
the financial markets. The next bubble in
the market could burst, and the banking
crisis caused by the Fed would be part of
that chaos, leading to further pain for the
economy.
Despite the potential risks, veteran
investor Warren Buffett believes that
depositors will continue to remain safe in
the event of a full-blown banking crisis.
However, a market crash may not even be
the worst part, according to Grantham,
who warns that more pain may follow for
the economy in the aftermath.
Grantham's warning to investors comes
amidst growing concerns about the state
of the financial system and the potential
for a crisis. Investors must remain
vigilant and take appropriate measures to
safeguard their portfolios against
potential risks, including diversification
and risk management strategies.
This story was originally featured
on Fortune.com
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