Productivity

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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Project Prepper, Part 2: Leaving Chicago, Cook County, And Illinois

Sorry for not posting yesterday. I’ve had a lot on my mind since Election Day.

I’m guessing that goes for many of you as well.

Anyway, in an effort to “Lean Forward,” I’ve been working on “Project Prepper” ever since announcing its launch last month. I wrote back on October 24:

As a result of my research and this blog, I’m now aware of the myriad of man-made and naturally-occurring threats to my life and lifestyle (and those of my loved ones), and think it’s probably wise to acquaint myself more with “prepping” via a sustained “hands-on” program of learning and doing, which I’ll call “Project Prepper.”

Through a series of posts on this blog which I suspect should last for quite some time (years?), I’ll be able to share my preparedness experiences with you.

By doing this, I’ll also be able to make more progress in providing readers of this blog those possible solutions I talked about earlier in the post.

Regular readers of Survival And Prosperity know that one major threat to life and lifestyle I’ve been warning about since Memorial Day Weekend 2007 is a U.S. financial crash.

And based partly on what I’ve witnessed locally and on the national level over the past several days, I think this has a good chance of materializing during President Obama’s second term in the White House.

Even if an economic crash doesn’t happen in this time frame (Washington and the Federal Reserve have been effective at delaying our financial “day of reckoning” so far), it’s something I’ll be taking into serious consideration as I continue putting together Project Prepper.

That being said, events that have unfolded at the local level on up for some time now have convinced me that my future lies outside of Chicago, Cook County, and Illinois. Which is a shame, because as I’ve mentioned before, my family has deep ties to the area. So much so a number of family members are familiar with the tale of one ancestor who fought courageously to save his tailor shop (at least the contents of it) from the approaching flames of the Great Chicago Fire back in 1871.

141 years later, another looming disaster looks to be in store for me and my loved ones if I don’t take action, and soon.

It’s bad enough Chicago, Cook County, and Illinois was already overrun by too many residents that live their lives in pursuit of the Ubi East Mea (“Where’s Mine?”) mentality and politicians who have been quick to pander to these individuals with “free” things in exchange for votes- long before last Tuesday’s election results revealed the rest of America is now marching down this same path.

But combine this with poor financial health, a bleak economic outlook, and growing attacks on the finances and freedoms of productive, law-abiding residents as politicians rob Peter to pay Paul in their attempt to remain in office- and you’ve got one hell of a mess coming to this area of the Midwest in the next few years.

Eventually, I predict the productive residents will split town (this happened before in Chicago in the late 60s-early 70s in some neighborhoods), there will be no more money for “freebies,” and the “Where’s Mine?” brigade will riot. Athens-style.

As I’ve been telling those close to me for some time now, “First you’ll see the strikes. Then the larger protests. Until finally, the riots.”

History shows you don’t want to be in the city when the riots break out.

And I don’t plan on being here in Chicago when the coming civil strife erupts either.

In my next Project Prepper post, I’ll talk some more about my “quest” for sanctuary.


Gareth Emery feat. Lucy Saunders, “Sanctuary” (2010)
YouTube Video

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Global Economic Collapse And Population Crash By 2030?

Because my Internet service provider has a relationship with Yahoo!, Yahoo! News stories are featured prominently on my home page. And every once in a while, they come up with something real good. Actually, bad in this case, if what’s predicted actually happens. Mark Strauss wrote in the April 2012 issue of Smithsonian Magazine and on Smithsonian.com:

Recent research supports the conclusions of a controversial environmental study released 40 years ago: The world is on track for disaster. So says Australian physicist Graham Turner, who revisited perhaps the most groundbreaking academic work of the 1970s, The Limits to Growth.

Written by MIT researchers for an international think tank, the Club of Rome, the study used computers to model several possible future scenarios. The business-as-usual scenario estimated that if human beings continued to consume more than nature was capable of providing, global economic collapse and precipitous population decline could occur by 2030.

(Editor’s note: Italics added for emphasis)

The article is an interesting read. Although, I’ll admit I was a little turned off as soon as the “R” word- regulate- was used. But I do understand where they’re coming from as it concerns “the expansion of humanity’s ecological footprint.”

And take a look at the chart that’s provided on the Smithsonian website. Look how close the trends predicted in the 1972 study are to the observed trends from 1970 to 2000. Yet, I have to ask, why do the observed trends stop at the millennium and not at say, 2010? Lack of data? Or something else?

You can find the article on Smithsonian.com here.

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Quotes For The Week

Two for you this week…

The Fed is about the worst economic forecaster you can imagine. They are academics. They never go to a local pub. They never go shopping- or they lie. But basically they are a bunch of people who never worked a single day in their lives. They’re not businessmen that have to balance the books, earn some money by selling goods, and paying the expenditures. They get paid by the government. And so these people have no clue about the economy.

-“Doctor Doom” Marc Faber, investment adviser and publisher of the monthly investment newsletter The Gloom Boom & Doom Report, in a March 16, 2012, podcast on ChrisMartenson.com

A lot of the problems we’re facing today is that people have forgotten how to work hard. It’s a generational thing. If you go to a fast food restaurant or a department store in the United States, you’ll see senior citizens working behind the counter or greeting customers. They’re doing it because they have a work ethic. They want to work, and they’re doing jobs that young people don’t want to do. Young people don’t want to work because they will get benefits, can have a baby and not bother to work and that’s going to affect the productivity and profitability of businesses. We live in a culture where people are used to support and handouts. And we can’t afford to sustain them.

-Jim Rogers, well-known investor, author, and financial commentator, in an interview with Gulf News (UAE) that appeared on its website on March 13, 2012

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Quote For The Week

Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything. You know, I keep making a point. You know, there’s a difference between Ben Bernanke and Harry Houdini. Ben Bernanke’s not a magician. We’re on the verge of a great, great depression. The Fed knows it. We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer. And all the Fed tweaking, and all the interest rate tweaking, and all of the tax adjustments, are absolutely not going to be able to save us if we cannot get across the labor that’s in line with the rest of the planet, and we can’t get our productivity levels high enough to justify the wages that we’re already getting paid. It’s not that complicated.

-Peter Yastrow, market strategist for Yastrow Origer and the world’s largest LIBOR (London Interbank Offered Rate) trader, on CNBC on June 1, 2011

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Survival And Prosperity
Est. 2010, Chicagoland, USA
Christopher E. Hill, Editor

Successor to Boom2Bust.com
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(Memorial Day Weekend 2007-2010)

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