GMO's Inker Blames the Fed for the Asset Bubble

Why is it so challenging to determine precisely where we are in the market cycle? The reason for the difficulty, according to Ben Inker, the head of asset allocation at GMO, is because the U.S. has never had this amount of monetary and fiscal stimulus at the same time. The result is that low-risk assets have lower return expectations, but high-risk assets soar. There are obvious signs of froth — GameStop, Bitcoin and Tesla, for example - but even “small cap value” has been in demand. Inker believes an asset bubble has developed, which he blames on Federal Reserve monetary policy.

GMO is a legendary Boston-based institutional investment firm that manages about $60 billion in assets. During the dot-com implosion, GMO’s U.S. Aggressive Long/Short Strategy achieved better than 80% cumulative net returns for clients.

We discuss Inker’s theory as to why value investing, as it is currently practiced, tends to underperform. He suggests several proactive changes that value investors need to make, and explains why traditional price-to-book measures of value fail to capture the worth of intangibles, such as intellectual property, processes, expertise and networks. Inker explains why what is paid for an asset ultimately determines the success of that investment. Many regard Inker as GMO founder Jeremy Grantham’s heir apparent.

A list of his favorite books is here; A transcript of our conversation is available here.

You can stream and download our full conversation, including the podcast extras on iTunesSpotifyStitcherGoogleBloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Doug Braunstein, founder and managing partner at Hudson Executive Capital. The firm manages $1.6 billion in assets, and has underwritten several successful SPAC offerings. Previously, Braunstein was Chief Financial Officer at JPMorgan Chase & Co., where he was a member of the bank’s Executive Committee. He served as head of JPMorgan’s Americas Investment Banking and Global M&A.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”

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