Another surge in equity markets would increase wealth inequality still further since equities are disproportionately held by the rich. By contrast, small savers on the whole hold their money in deposits whose value is eroded by inflation. They would be clobbered yet again. Moreover, the further that equities are driven up in the next few years, the greater will be the ensuing adjustment.
I suppose that governments and central banks would initially try to take other measures to restrain inflation in the hope that they could avoid raising interest rates. But in the end this wouldn’t succeed. At some point in the future, there lies not only an upsurge in inflation but also an increase in real interest rates, feeding through into bond yields. As and when this happens, it would undermine equity valuations.
In an ideal world, the central banks would tighten policy only gradually, allowing bond yields to rise only gradually, perhaps accompanied by real equity values deflating only gradually, without a market crash or major financial dislocation. But achieving that is going to be a superhuman task. On the whole, when there is an economic transformation or a sea change in policy, markets do not respond gradually.
Over recent years, global equity markets have enjoyed a bonanza. Prices have shot up way beyond what you might reasonably consider justified by real economic performance. It may not be yet, but I suspect that at some point this pattern will reverse, with global equity markets underperforming the real economy.
In short, I suspect that for the immediate future, Grantham will be proved wrong. But looking further out, I have a nasty feeling that he will be proved right.
Roger Bootle is chairman of Capital Economics.