Excellent thoughts from Jeremy Grantham’s latest quarterly letter. He remains a long-term bear, but had some awfully unfortunate timing when he turned short-term bullish last quarter….Always worth a read, however:

“So, how will this unusual struggle resolve itself? Despite growing nervousness and despite a slowing economy, I am so impressed by the power of low rates and Greenspanism (for lack of a better or shorter description) that I would still  put odds of 45% (down from 50% last quarter) for the market to rise to over 1400 (down from 1500 to 1600 last quarter) by October of next year, accompanied by a speculative spin. On the other hand, I also have to recognize that the 21% I put on a quick and rapid decline to fair value looks even more likely today, perhaps closer to 30%. If the market does indeed continue down the current sell-off path, it should result in some unusual movement in the Russell 2000 (small cap index) and possibly even the junky stocks, which might give up their unusual relative strength in a real hurry. I can imagine a situation, for example, where the Russell 2000 gives up a relative 10% in two to three weeks as the aggressive investment world finally has second thoughts on the wisdom of continuing to speculate and changes its mind in its usual rapid way. (Remember, you read it here first.) High quality is perhaps not so promising in this respect, but could still win by several percentage points if the world becomes more circumspect. It would be more typical for quality to outperform over several years.”

Read the full letter at GMO.