Jeremy Grantham: Avoid U.S. Stocks, ‘Heavily Overweight’ Emerging Market Equities

When I last blogged about “Crash Prophet” Jeremy Grantham right after Thanksgiving, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (currently overseeing $74 billion in client assets) had just mentioned in a Wall Street Journal interview that although U.S. stock prices were high, profit margins were also are unusually high, lending support to high valuations. In addition, low interest rates make equities more attractive than fixed-income investments. As a result, he didn’t forecast a crash is stock prices as much as a decades-long reversion to anywhere near the long-term average.

Now, regular readers of Survival And Prosperity know I like to read and pick apart Grantham’s quarterly letters on the GMO website. And his third quarter letter has just been released. Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and U.S. Secretary of State John Kerry, penned the following about U.S. equities in “Career Risk and Stalin’s Pension Fund: Investing in a World of Overpriced Assets (With a Single Reasonably-Priced Asset)”:

The trend line will regress back toward the old normal but at a substantially slower rate than normal because some of the reasons for major differences in the last 20 years are structural and will be slow to change. Factors such as an increase in political influence and monopoly power of corporations; the style of central bank management, which pushes down on interest rates; the aging of the population; greater income inequality; slower innovation and lower productivity and GDP growth would be possible or even probable examples. Therefore, I argue that even in 20 years these factors will only be two-thirds of the way back to the old normal of pre-1998. This still leaves returns over the 20-year period significantly sub-par. Another sharp drop in prices, the third in this new 20-year era, will not change this outcome in my opinion, as prices will bounce back a third time

Near-term major declines suggest a much-increased value of cash reserves and a greater haven benefit from high-rated bonds.

My assumption of slow regression produces an expectation of a dismal 2.5% real for the S&P and 3.5% to 5% for other global equities over 20 years, but also a best guess of approximately the same over 7 years.

(Editor’s note: Bold added for emphasis)

Grantham’s thoughts on where one might invest?

My conclusion is straightforward: heavily overweight EM equities, own some EAFE, and avoid US equities.

(Editor’s note: Bold added for emphasis)

Referring to an exhibit, he pointed out:

1) developed ex-US is well below its 20-year average and 40% below the US; and 2) Emerging is 65% below its high in 2007.

There were also these nuggets from the letter:

Pension funds should brace themselves for a disastrous 1% to 3% return in the next 10 years.

(Editor’s note: Bold added for emphasis)

And:

My view on Resources is that the cycle has turned, global economies are doing quite well by recent standards, and oil prices are likely to rise for three years or so.

(Editor’s note: Bold added for emphasis)

Yet another insightful letter from Grantham, which you can read here in its entirety on the GMO site.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: A qualified professional should be consulted prior to making a financial decision based on material found in this weblog. If this recommended course of action is not pursued, then it must be understood that the decision is the reader’s and the reader’s alone. Christopher E. Hill, the creator/Editor of this blog, is not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented on the site.)

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Short Pause In Blogging

As I will be writing through the holidays (save Christmas Day and New Year’s Day, when only well-wishes will be offered), there will be a short pause in blogging while I gather new material and tackle a number of administrative tasks related to Survival And Prosperity.

Posting will resume on Monday, December 18.

Thank you for your patience and continued readership,

Christopher E. Hill
Editor

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Thursday, December 14th, 2017 Housekeeping No Comments

Martin Armstrong: ‘The West Has To Learn That Marx Was Just Wrong’

The final post of last week concerned recent material from my research suggesting socialism is becoming popular among Millennials. I ended with this:

Before moving on to a different topic, I must emphasize these last two posts shouldn’t be construed as some sort of attack on Millennials, Democrats, or socialism. Rather, their purpose was to get an idea of where the country might be heading when “America’s largest generation” start flexing their collective political muscle. And what might be required for “protecting and growing self and wealth” when that happens.

I’m going to add just one more thing before departing this subject. And it’s related to getting that “idea of where the country might be heading.”

Back on November 28, 2017, economist Martin Armstrong discussed China in a post on his company’s website. The creator of the Economic Confidence Model included the following in the piece:

What makes the US economy the biggest? The American consumer and lower taxes than Europe. When you leave more money in the hands of the people, they spend it creating jobs for everyone. Europe is following Marx. They think the government is better equipped to spend other people’s money. That produces corruption, not economic growth.

As long as China keeps its tax rate low and allows the people to spend the benefits of their labour, then it will continue to rise economically and displace those in the West who are blinded by power and pursue this Hunt forever more Taxes. The West has to learn that Marx was just wrong. The strongest economic growth unfolds when people are allowed to spend their own money.

(Editor’s note: Bold added for emphasis)

Again, this post is not an attack on socialism/Marxism. But considering the track record of Marxist states in dealing with “self and wealth,” it only makes sense those serious in “protecting and growing” these things would keep a close eye on the direction the collective political mindset of America’s youth is heading. And act accordingly.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Armstrong, Martin. “Renminbi v the Dollar.” Armstrong Economics Blog. 28 Nov. 2017. (https://www.armstrongeconomics.com/international-news/china/renminbi-v-the-dollar/). 10 Dec. 2017.

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Millennials Turning To Socialism?

Early this morning I blogged about findings from a new Harvard University poll which suggest the U.S., with Millennials at the helm, could be headed “left” and towards stricter gun control.

Recent material I’ve come across in my research also suggests socialism is becoming popular among Millennials.

The AFP’s Maggy Donaldson wrote on November 10:

While working as an electrician Lee Carter received a literal shock, through one hand and across the chest, that jolted him into politics and turned him on to what was a dirty word in America for nearly a century: socialism.

His struggle to obtain compensation for the workplace injury inspired him to run for office, and this week Carter ousted a top Republican incumbent to nab a spot in Virginia’s House of Delegates, becoming one of over a dozen unabashed socialists newly elected to US state and municipal seats one year after Donald Trump took the White House.

The 31-year-old former Marine is part of a growing cadre of Americans, particularly millennials, pledging their allegiance to the Democratic Socialists of America, the nation’s fastest growing leftist group that was originally founded in 1982 as a foothold for Marxists.

Riding the wave of democratic socialist Bernie Sanders’s spirited White House bid against primary rival Hillary Clinton, the organization is helping propel socialism out of the shadows.

In the years prior to the Sanders campaign, the DSA’s number of card-carrying members hovered around 6,500- and has nearly quintupled since 2016’s presidential race to more than 30,000.

Its median age has dropped from about 60 to 35, according to organizers, some of whom have playfully referred to the surge among youth as a “socialist baby boom.”

(Editor’s note: Bold added for emphasis)

There’s also this November 2 media advisory from YouGov (international market research and data analytics firm) and the Victims of Communism Memorial Foundation (D.C.-based nonprofit “devoted to commemorating the more than 100 million victims of communism around the world and to the freedom of those still living under totalitarian regimes”):

Annual Poll Release Shows Americans Still Have A Lot To Learn About Communism

New Poll Reveals Troubling Facts and Encouraging Trends About Millennials in America

This year’s centennial anniversary of the Bolshevik Revolution has caused many to reflect on the legacies that Marxism and communism have left on our cultural memory. It has been a full century since Vladimir Lenin’s Bolsheviks seized power in Petrograd and communism made its bloody debut on the world stage. Authors, activists, and politicians alike are asking the question: what has America learned from one hundred years of communism?

When the Victims of Communism Memorial Foundation published our inaugural study on American attitudes toward socialism and communism last year, the results revealed some disturbing trends in American society.

We just completed our second annual study, tracking how opinions about communism among Americans have changed since 2016. The results aren’t very encouraging.

For starters, as of this year, more Millennials would prefer to live in a socialist country (44%) than in a capitalist one (42%). Some even said they would prefer to live in a communist country (7%). The percentage of Millennials who would prefer socialism to capitalism is a full ten points higher than that of the general population.

It seems that the majority of America’s largest generation would prefer to live in a socialist or communism society than in a free enterprise system that respects the rule of law, private property, and limited government. This is even more disconcerting when coupled with the fact that, despite Millennials’ enthusiasm for socialism and communism, they do not, in fact, know what those terms mean.

One remarkable finding of our study is that, to a high degree, Americans favor absolute protections for free speech, regardless of their views of communism or socialism. Communists and socialists more broadly have historically and ideologically favored state regulation of the press, speech, and popular assembly. Our results suggest that Millennials who favor socialism and communism have not thoroughly considered the implications of their political beliefs.

Communism isn’t back: It never left. We simply forgot about it. And as it rears its ugly head once more, openly and shamelessly, we seem far less prepared to meet the challenge in this century as we did in the last.


Victims of Communism Memorial Foundation, “What is Socialism?”
YouTube Video

Before moving on to a different topic, I must emphasize these last two posts shouldn’t be construed as some sort of attack on Millennials, Democrats, or socialism. Rather, their purpose was to get an idea of where the country might be heading when “America’s largest generation” start flexing their collective political muscle. And what might be required for “protecting and growing self and wealth” when that happens.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Donaldson, Maggy. “Once taboo, socialism finds comrades among US millennials.” Agency France-Presse. 10 Nov. 2017. (https://www.yahoo.com/news/once-taboo-socialism-finds-comrades-among-us-millennials-051949477.html). 7 Dec. 2017.

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Harvard Poll: Millennials Prefer Democrats To Control Congress, Stricter Gun Control Laws

I spotted the following headline on the Washington Examiner website yesterday:

“Harvard: Millennials now biggest voting group in U.S., 2-1 Democratic”

Considering this Gen Xer always strives to get a good picture of where the country might be heading and Millennials surpassed Baby Boomers last year as the nation’s largest living generation, I thought I’d go to the source and see what this is all about. From Harvard University’s Institute of Politics website:

“Two-thirds of youth fearful about America’s future, prefer Democratic control of Congress, Harvard youth poll finds”

CAMBRIDGE, MA – A new national poll of America’s 18- to 29-year-olds by Harvard’s Institute of Politics (IOP), located at the Kennedy School of Government, finds that two-thirds of young Americans (67%) are more fearful than hopeful about America’s future. Less than one year before the 2018 midterm elections, likely young American voters cite preference for Democratic control of Congress, 65% to 33%.

The Fall 2017 poll, the IOP’s 34th major public opinion poll since 2000, also shows that President Trump’s approval ratings continue to decline, heightened concern about the state of race relations in the country and increased support for stricter gun control laws.

(Editor’s note: Bold added for emphasis)

Key findings included:

4. Democratic control of Congress preferred 2:1; Democrats more engaged, Republicans less so, compared to 2014 midterm cycle; motivation among Democrats +9 since January

Among 18- to 29-year-olds who are likely to vote, 65% would prefer to see Democrats control Congress after the 2018 midterms. One third of young voters (33%) prefer Republican control. Independent voters prefer Democratic control by over 30 points (66% to 32%). Across most measures, young Democrats in our poll are more engaged politically than they were at a comparable time in the 2014 midterm cycle, while Republicans are less engaged. The percentage of Democrats who consider themselves politically engaged has increased 8 points, from 24% to 32%, while Republican engagement is down 7 points, from 31% to 24%.

(Editor’s note: Bold added for emphasis)

Among the additional findings:

7. 61% of young Americans believe gun laws should be more strict, representing a marked change since 2013 when less than half (49%) felt the same way.

(Editor’s note: Bold added for emphasis)

These poll findings suggest the U.S., with Millennials at the helm, could be headed “left,” with more gun control laws being enacted.

That being said, I did observe the following in the poll’s “Topline Report” which could raise questions about the findings/claims made:

6. When it comes to voting, with which party do you consider yourself to be affiliated?

Net: Democrat… 38%
Net: Republican… 22%

Independent/Unaffiliated… 39%
Lean Democrat… 10%
Lean Republican… 6%

7. When it comes to most political issues, do you think of yourself as a…?

Net: Liberal… 37%
Moderate… 28%
Net: Conservative… 32%

Critics might point out the “shortage” of Republican, Republican-leaning Independent, and Conservative poll respondents.

Still, the findings of this new Harvard poll only increases my suspicions of what could be in store for America down the road.

More on that later. In the meantime, you can read about the poll on the Institute of Politics’ site here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Related Reading On Offshore Safe Deposit Boxes Blog

Survival And Prosperity readers may have noticed not only was this blog “rebooted” on November 1, but Offshore Safe Deposit Boxes and it’s sister site Offshore Private Vaults as well.

And right now I’m in the middle of a series of posts on OSDB about physical gold and storing it overseas.

Posts so far this week have included “Nomad Capitalist’s ‘10 Tips For Buying Gold In 2018’” and “Mark Nestmann: Offshore Your Physical Gold”.

For the remainder of the week I’ll be blogging about gold coins, carrying these out of the U.S., and a comparison of several offshore jurisdictions for storing precious metals and other valuables.

Feel free to stop on by my Offshore Safe Deposit Boxes blog should you be interested in any of this related material.

Christopher E. Hill
Editor

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Wednesday, December 6th, 2017 Commodities, Housekeeping, Investing, Precious Metals No Comments

Peter Schiff: When Stock Bubble Pops, Trump ‘Going To Have To Take The Blame’

As I mentioned in that last post, the U.S. economic expansion is now the third-longest since World War Two.

And if the next recession hits on President Trump’s watch, a number of Americans will blame him for it.

The same goes for a stock market crash.

Peter Schiff, the CEO of Euro Pacific Capital, touched on this in a recent interview with the folks over at Financial Argument, “a daily show that will cover issues surrounding the economic collapse.” From their exchange posted on YouTube.com on November 26:

FA: I wanted to start off with the stock market. I mean, we’re seeing it continually move up. And before Trump was President, he was out there saying that there’s bubbles in the stock market, there’s bubbles in housing, there’s bubbles everywhere. Now that he’s President, he really doesn’t say this anymore. And he’s saying that the stock market’s going up because of me, and it’s fantastic. When you look at the stock market, does it make any sense whatsoever, and can actually Trump take credit for this?
SCHIFF: Well, first of all, there was a bubble before Trump was elected. Clearly. And Trump pointed that out himself. That was one of his talking points on his stump speeches. There was a big, fat ugly bubble in the stock market. And if Trump wants to take credit for the bubble getting bigger, I would agree. I think there has been a lot of optimism, a lot of enthusiasm, among investors. And that has resulted in higher stock prices. But I think where Trump is getting into trouble is by claiming that the stock market going up is no longer a bubble. That now this is just a real bull market that reflects the improvement of the fundamentals since he’s been elected. That’s not the case. This is simply more air into the same bubble. And this bubble is going to burst, and I think unfortunately now that Trump has branded it- just like it was one of his buildings, he’s put the big “Trump” marker on it- when this thing pops, he’s going to have to take the blame.

(Editor’s note: Bold added for emphasis)


“PETER SCHIFF- Worst Stock Market Crash of a Lifetime Ahead of Us 2017-2018”
YouTube Video

Schiff, who correctly-called the housing bust and economic crisis last decade, speculated on the Federal Reserve’s future moves and a coming recession. From the discussion:

FA: The Fed is keeping everything steady as she goes right now. They’re not raising interest rates. They’re slowly unwinding their balance sheet. Are they backed into a corner?
SCHIFF: They’re not slowing unwinding their balance sheet. They talked about slowly unwinding the balance sheet. But the balance sheet hasn’t unwound at all. It’s as high as it’s ever been. I think this is all a bunch of talk. There’s no way they’re going to be able to shrink that balance sheet in any significant way because it would drive interest rates up and weaken the economy and affect asset prices. In fact, I think the next major move in the Fed’s balance sheet is another big leg up when they have to launch the next round of quantitative easing. Obviously, the U.S. economy is going to go back into recession. I think we’d already be in recession had Trump not won the election. And I do think that the enthusiasm surrounding his victory and the optimism, I think, probably postponed the recession for a year or two. But, it’s going to hit, and then, how is the Fed going to respond? Well, we know. In fact, Donald Trump has appointed a new Fed chairman to follow Janet Yellen that he’s confident will do exactly what she did. Or exactly what Bernanke did. Which is slash interest rates, and print more money, and buy government bonds, and buy mortgages, or buy whatever they have to buy to keep everything from imploding.

Here’s what Schiff had to say about a potential economic crisis in 2018:

I do think we’re going to see a downturn. We could see a crisis, but chances are the crisis itself will happen later.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: A qualified professional should be consulted prior to making a financial decision based on material found in this weblog. If this recommended course of action is not pursued, then it must be understood that the decision is the reader’s and the reader’s alone. Christopher E. Hill, the creator/Editor of this blog, is not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented on the site.)

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