Legendary investor Jeremy Grantham says the US Federal Reserve is killing the recovery of the world's biggest economy and the ''next bust will be unlike any other''.
Grantham - the cofounder and chief investment strategist at the US$112 billion ($131 billion) Boston-based fund manager GMO - said he wouldn't invest his clients' money in US stocks for at least the next seven years because of the Fed's ''misguided policies''.
Grantham has a solid track record, having called both the internet bubble and then the US housing bubble. In November he said he believed the US sharemarket could rise another 30 per cent, although he believed it was overvalued, before crashing again.
''We invest our clients' money based on our seven-year prediction,'' Grantham told Fortune magazine.
''Over the next seven years we think the market will have negative returns. The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before.
''Assets are overpriced generally. They will become cheap again. That's how we will pay for this. It's going to be very painful for investors''.
Grantham said the Fed's US$85 billion a month bond buying programme had failed to stimulate the economy, saying that there was no proof that more debt creates growth.
''It's quite likely that the recovery has been slowed down because of the Fed's actions,'' he said.
''Go back to the 1980s and the US had an aggregate debt level of about 1.3 times GDP. Then we had a massive spike over the next two decades to about 3.3 times debt. And GDP over that time has slowed.''
When questioned to provide evidence backing his claim, Grantham said while there was ''some indication'' the crash and downturn would have been sharper had the Fed not intervened, there's ''no proof on the other side that the economy is any stronger from quantitative easing''.
''By now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.
''In the economic crisis after World War I there was no attempt at intervention or bailouts and the economy came roaring back.''
When asked if the Fed could be blamed for bailouts when they were an act of Congress, Grantham pointed his finger firmly at former Fed chairman Ben Bernanke.
''I don't like to get into the details. The Bernanke put - the market belief that if anything goes bad the Fed will come to the rescue - has a profound impact on people and how they act.''
Grantham said record low interest rates had also failed to deliver growth.
''My view of the economy is not principle-based. Higher interest rates would have increased the wealth of savers. Instead, the have become collateral damage of Bernanke's policies.
''The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle?
''There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It's anecdotal evidence, but we have never had such a limited recovery.''
- Sydney Morning Herald