Grantham: Fed Policy Has Resulted in Overpriced Global Assets

Jeremy Granthams Q4 letter is, as always, worth a read.  I found this paragraph of particular interest regarding Fed policy and the tendency towards disequilibrium:

“Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit! Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.

When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two. That’s the problem. A clue to timing would be when we begin to hear more passionate new era arguments: profit margins will always be higher; growth will snap back to 3% for the developed world; and new ones I can’t think of … maybe “when the discount rate is this low the Dow should sell at, perhaps, 36,000.” In the meantime, prudent managers should be increasingly careful. Same ole, same ole.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • MacroTrader

    So the market should go lower but could go higher? Very insightful.

  • Hammertime

    Those that say there is “no inflation” are clearly smoking too much dope. Inflation is obviously manifest in asset prices. The FED is condemning our young people to poor asset returns for decades. Assholes.

  • barak

    it’s more like “the market can go higher, but excepting the risk at this point is unwise”.

  • Tom Brown

    I suspect MMers would say that they’re not being overpriced fast enough! … that the Fed needs to make money easier.

  • Mercator

    What the Fed is saying is… “Compounding is not longer an investment strategy. Move on, and trust us. We’ve got this one”. Just like they had a handle on housing.

  • bart