Stock market crash: this billionaire says we are living in “dreamland”!

This legendary American investor worries about rising rates triggering the next stock market crash. But this won’t stop me from buying cheap stocks…

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With under two months left of 2021, it’s unlikely we will see a 2021 stock market crash. However, fears are building among market pundits of a correction or crash in stocks in 2022. The latest commentator to warn about elevated asset prices is Bill Gross. The American billionaire co-founded investment manager PIMCO 50 years ago. He then become one of the world’s most acclaimed bond-fund managers, before leaving in 2014. Although Gross retired in March 2019, he still enjoys sharing his market opinions. Right now, he’s worried about investors sleepwalking into a “dangerous dreamland.

Stock market crash: are we living in dreamland?

The global economy has rebounded strongly from the pandemic recession. However, central banks — notably the US Federal Reserve — continue to pump vast sums into financial markets. For example, the Fed spends $120bn each month buying US government bonds and mortgage-backed securities. This helps to keep US bond prices high and yields low, reducing borrowing costs for the government, businesses, and consumers. But Gross worries that this liquidity has fuelled asset bubbles, increasing the risk of a stock market crash.

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Gross believes the combination of fiscal stimulus, bond-buying, and ultra-low interest rates has driven investors to excessive exuberance. He argues that this euphoria has spread from bonds, stocks, and real estate to digital assets such as cryptocurrencies and NFTs (non-fungible tokens). In an interview with the Financial Times today, Gross said, “It’s dangerous. It’s all dreamland that’s been supported by interest rates that aren’t where they should be”.

Gross also worries about high inflation (rising prices). In October, US inflation hit 6.2% a year — its highest level in 30 years. The Federal Reserve’s inflation target is just 2% a year. Normally, central banks react to soaring inflation by lifting interest rates (as happened in the 1970-80s). However, with government, corporate, and personal debt at all-time highs, higher interest rates might snuff out economic growth. Hence, Fed Chair Jay Powell argues that high inflation is ‘transitory’ and will head back towards the target late in 2022.

Why I don’t fear market meltdowns

Gross argues that central banks should bite the bullet by starting to raise interest rates now. Otherwise, failure to act today could mean rates might go higher later in the economic cycle. But tightening too fast, too soon could cause ructions that could trigger a stock market crash. Thus, the Fed will have to walk a tightrope in 2022. Gross adds, “They [the Fed] can’t do much. I think [Powell] is captive to the financial markets, and so he will gradually creep out of buying bonds, and next year he maybe gradually raises interest rates”.

One thing is very clear: the Covid-19 pandemic has warped and distorted global asset prices and stock markets. Then again, the strong bounce-back this year is a ‘base effect’ that will gradually fade during 2022. This explains why yields on long-dated government bonds haven’t shot up alongside short-dated yields. Even so, Gross ended with this warning, “One of these days, one of these years, or one of these decades, the system will collapse, because capitalism depends on savers saving and investing”. Yikes!

As asset prices reached sky-high levels, I’ve also been worrying about the next stock market crash. But then I remember Warren Buffett’s wise words — and how previous crashes actually enhanced my family wealth. That’s why I’ll keep buying cheap UK shares for now!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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