JEREMY GRANTHAM: THIS IS THE LAST HURRAH
The latest Grantham quarterly is a real gem. It sounds to me like he has been reading too much TPC (more likely, I have been reading too much Grantham!). He calls out just about everyone involved in the economy in the letter. He claims Bernanke is clueless and is repeating the mistakes of Greenspan. He calls Geithner and Summers the captains of the USS Disaster. He says the homebuilders are reckless and that the mortgage borrowers and consumers are idiotic. He hammers the big banks and CEO pay. In essence, he argues that very little has changed in the last 18 months and that the market is now well overbought and at risk of a substantial downturn that is based on the weak real economy and realization that stimulus can’t get us out of this mess. The main takeaways:
- The market is 25% overvalued
- He hopes for “some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again.”
- “The U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19).”
- “All in all we are likely to have learned little, or rather to act, through lack of character, as if we have learned nothing. In doing so we are probably condemning ourselves to another serious financial crisis in the not too-distant future.”
I hope investors will take particular note of point two above. This Federal Reserve is destroying the dollars in our pockets as they implement the exact same boom/bust policies that helped create this mess in the first place. We absolutely must do something to help change the system and limit the power of these reckless and destructive bankers. Grantham has some suggestions in his letter, but it’s the investors who need to take power back from the Fed and the bankers.
Grantham says the market is overvalued by 25%. Smithers says it is overvalued by 40%. (He hasn’t been invested since about 1990). Ken Fisher says the market will rise 20-25% by the end of the year (He is almost always 100% invested.) Saut is still near-term bullish.
Who has the best track record of the the punidts?
Grantham is the best of the lot. Hands down.
Fisher’s track record is not good. There are no solid numbers on Saut. Grantham is the only one with a long-term track record. If memory serves me, he remained bearish all through the 03-07 bull only to turn bullish when the market tanked late last year. To his credit, the economy has essentially played out exactly as he thought it would over the last 10 years. He is one of the great investment minds around in my opinion.
How is Grantham on timing? If he was bearish from 2003 to 2007, he was probably underinvested through the whole cyclical bull market. Does anyone know how he was invested during the post tech bust cyclical bull market? Did he further reduce exposure before the end of 2007?
He made one large reinvestment in October 2008 which took him “to about halfway between neutral and minimum equities”. (Neutral apparently being about 65% equities in most cases.) His piece from March 4 on “Reinvesting When Terrified” is absolutely excellent.
His current outlook for 7-year asset class return forecasts has below average real returns for US and foreign equities (an equal mix of US and foreign equities excluding specific high quality issues might deliver about a 3.75% real return which still compares very favorably to bond returns.) Grantham is most bullish on US “high quality” stocks of any asset class. He thinks high quality stocks can exceed the long-term historical real return on US equities of 6.5% over the next 7 years.
If interest rates on bonds stay low, what will put downward pressure on equities?
The answer: “the gravitational pull as US stocks reach +30%-35% overpricing in the face of an extended difficult environment.” When will that happen? His best guess is early in the first few months of 2010. Sometime before the end of next year equities will once again approach fair value or drop below.
Nevertheless, Grantham has only pulled back from neutral equity position (at 65%) to 62%. Not very far considering his bearish outlook. He seems to feel the craziness has some room yet to run.
Grantham strikes me as equally sensible as Benjamin Graham.
In answer to your request about Jeremy Grantham and timing, see on GMO’s website his interview with Steve Forbes titled Grantham’s big call. He bailed out of Emerging Markets equities in 2008 at just the right time and saved his clients a ton of money.
I disagree about Fisher’s track record. He’s got a track record you can check in a few places, including on Forbes but also in his 2006 books he prints his long term track record. It easily beats the S&P 500 by a wide spread. I just read a article Steve Forbes wrote about him, and he said Fisher beat the S&P on average by 5% a year since 1997. Fisher missed the bear call in 2008 but has been bullish this year when a lot haven’t been (like Grantham), and boy has that turned out to be the right thing to be.
Grantham is right of course, but it is all about timing…
Grantham’s best guess on timing is that the market will run out of steam in the first few months of next year as it reaches 30-35% overpricing (i.e. 1,115 to 1,160). He places fair value on the S&P 500 at 860. (In March, he put fair value at 900).
He predicts that stocks will fall below fair value by the end of next year, but he sees “no need for a new low”, although that history books “would be slightly happier with, say, 550.”
It appears that Grantham stayed out of the market from 1998 until October 2008. Back then he placed fair value at 950.
Underweight, not out.
Actually, I hope the Fed screws things up royally so we can finally abolish them.
when you screw up royally, can we abolish you?
If you don’t want to register, here is the link.
http://www.gmo.com/websitecontent/JGLetter_ALL_3Q09.pdf
“The stock market overvalued by 25%” ???? Overvalued by a “mere” 25% ??? According to my information the overvaluation is some 80 % !!! I repeat, 80% !!!
Willy2,
Grantham is talking about a fair value based on long-term trends. When interest rates and inflation were high from 1973 to 1982 the market traded below its longer-term fair value for years. The market didn’t anticipate that there would be years of lower inflation ahead. Also, treasury yields were huge and stocks needed to complete with Treasuries. From about 1985 until October 2008, the S&P500 traded above the long-term trend almost continuously – going into bubblish territory from 1996-mid-2002 and mid-2003 to mid-2008.
Unless interest rates skyrocket, it would be very surprising to see the S&P 500 at your fair value estimate of about 600 (P/E of about 11) for any length of time. With interest rates low, what would keep the market from trading above its long-term fair value for some time to come?