Jeremy Grantham, the money manager who oversees $157 billion as chairman of Grantham, Mayo, Van Otterloo & Co., says investors should shun...

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Jeremy Grantham, the money manager who oversees $157 billion as chairman of Grantham, Mayo, Van Otterloo & Co., says investors should shun stocks and hold cash during the worst financial crisis in more than 60 years.

“Don’t be a hero,” Grantham said in an interview from his office in Boston. “Move to cash and let the other guys fish around for the bargains in the wreckage.”

Dubbed a “perma-bear” for his dour view on U.S. equities for more than a decade, Grantham correctly predicted a crash in technology stocks two months before the bubble burst in March 2000. Now, he tells his firm’s investors that if they want to risk investing in stocks, they should stick with the “highest-quality” large U.S. and emerging-market shares.

“This is the most important U.S. financial crisis since World War II,” he said.

Surge in defaults

A surge in defaults of loans made to the riskiest borrowers has sparked a worldwide credit crisis, leading to $133 billion in write-downs by banks and investors balking at all but the safest debt securities.

Grantham said the financial crisis is likely to push the U.S. economy into a recession. Conditions are worse than the savings-and-loan crisis of the 1980s, when the failure of thrifts cost U.S. taxpayers more than $160 billion, he said.

“The S&L crisis was parochial in comparison,” Grantham said. “This is the first one that is global; it has tentacles everywhere.”

Grantham said he expects stocks to reach a bottom in 2010.

“There are plenty of bad things left in this cycle,” he said.

The fund manager has been predicting a weak U.S. equity market since 2006. The Standard & Poor’s 500 Index returned 16 percent in 2006 and 5.5 percent in 2007.

Stock and bond funds managed by Grantham’s firm returned 19 percent on an asset-weighted basis in the three years ending Nov. 30, double that of the S&P 500, according to data tracked by Morningstar in Chicago.

Funds advance

The funds advanced 15 percent in the first 11 months of 2007, compared with the 6.2 percent gain in the S&P 500 during that period.

Grantham, who helped start Grantham, Mayo, Van Otterloo in 1977, said credit problems are likely to spread beyond subprime mortgages to commercial real-estate loans and debt used to finance private-equity transactions.

“Private-equity deals will be in trouble,” Grantham said. “They were underresearched and overleveraged, and we had reached a level where the junkiest possible companies were selling at high prices.”

Grantham, in a recent quarterly letter to investors, wrote that private equity “is the most underappreciated risk of all and is likely to be the center of another phase in the crisis.

The cost of bonds and loans used to pay for buyouts has doubled since June, according to Merrill Lynch data. That will limit the fees and profits that leveraged-buyout firms generate from buying and selling companies.

Cerberus Capital Management Chairman John Snow and Carlyle Group co-founder David Rubenstein are among the executives at the World Economic Forum in Davos, Switzerland, who are saying that lack of credit is hobbling the pace of leveraged buyouts.

Snow said banks need to “purge” about $200 billion in loans that haven’t found buyers before LBOs can resume. Rubenstein said the pace of takeovers of large companies will slow in 2008 because of a lack of debt investors.