Legendary investor Jeremy Grantham says Biden's $1.9 trillion stimulus plan would make the stock market bubble even worse

• Jeremy Grantham has reiterated his concerns of a stock market bubble.
• He told Bloomberg that President Joe Biden's proposed relief package would make the bubble worse.
• Grantham predicted at least some of the $1.9 trillion in federal spending would end up in stocks.
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The legendary investor Jeremy Grantham warned investors during a Bloomberg interview that the $1.9 trillion in federal aid President Joe Biden is seeking from Congress would further inflate a bubble in the stock market.

The GMO cofounder told Erik Schatzker that he had "no doubt" some of the federal money would end up in the market. He said the "sad truth" about the last federal coronavirus relief package enacted in 2020 was that it didn't increase capital spending and didn't increase real production but certainly flowed into stocks.

The plan that Biden is proposing contains a new round of $1,400 direct payments, robust state and local aid, and funds for vaccine distribution. Grantham said that if a $1.9 trillion package were passed, it could lead to the dangerous end of the bubble.

"If it's as big as they talk about, this would be a very good making of a top for the market, just of the kind that the history books would enjoy," Grantham said.

"We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust," he added.

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Grantham has long warned of what he sees as a ballooning bubble in the US stock market. In his investor outlook letter in the beginning of January, he detailed how extreme overvaluations, explosive price increases, frenzied issuance, and what he called "hysterically speculative investor behavior" all demonstrated that the stock market was in a bubble that not even the Federal Reserve could stop from bursting.

"When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years," Grantham told Bloomberg.

Grantham also said the combination of fiscal stimulus and emergency Fed programs that helped inflate the bubble could increase inflation.

"If you think you live in a world where output doesn't matter and you can just create paper, sooner or later you're going to do the impossible, and that is bring back inflation," Grantham said. "Interest rates are paper. Credit is paper. Real life is factories and workers and output, and we are not looking at increased output."

He told investors to seek out stocks outside US markets, as many other countries haven't seen the huge bull market the US has. He called emerging markets stocks "handsomely priced."

"You will not make a handsome 10- or 20-year return from US growth stocks," Grantham said. "If you could do emerging, low-growth and green, you might get the jackpot."

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