crude oil prices

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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Jeremy Grantham: U.S. House Prices ‘Might Beat The U.S. Equity Market In The Race To Cause The Next Financial Crisis’

Last night I finally got the chance to read the latest quarterly investment letter from “crash prophet” Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (currently oversees $99 billion in client assets). Grantham divided up May’s installment (covering the first quarter of 2016) into two parts. Part I, “Always Cry Over Spilt Milk,” was a recap of a paper he wrote six months ago. Part II was entitled “Updates,” in which Grantham provided these investing nuggets:

The tone of the market commentators back in January, when I was writing my last quarterly letter, seemed much too pessimistic on global stock markets, particularly the U.S. market, and I said so.

This relative optimism was an unusual position for me and the snapback in these markets has validated, to a modest degree, my thinking at the time. I still believe the following: 1) that we did not then, and do not today, have the necessary conditions to say that today’s world has a bubble in any of the most important asset classes; 2) that we are unlikely, given the beliefs and practices of the U.S. Fed, to end this cycle without a bubble in the U.S. equity market or, perish the thought, in a repeat of the U.S. housing bubble; 3) the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500, about 10% above current levels, and would normally require a substantially more bullish tone on the part of both individual and institutional investors; 4) it continues to seem unlikely to me that this current equity cycle will top out before the election and perhaps it will last considerably longer; and 5) the U.S. housing market, although well below 2006 highs, is nonetheless approaching a one and one-half-sigma level based on its previous history. Given the intensity of the pain we felt so recently, we might expect that such a bubble would be psychologically impossible, but the data in Exhibit 1 speaks for itself. This is a classic echo bubble – i.e., driven partly by the feeling that the substantially higher prices in 2006 (with its three-sigma bubble) somehow justify today’s merely one and one-half-sigma prices. Prices have been rising rapidly recently and at this rate will reach one and three-quarters-sigma this summer. Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices – much more dangerous than inflated stock prices in my opinion – might beat the U.S. equity market in the race to cause the next financial crisis

(Editor’s note: Bold added for emphasis)

Note that bit about “the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500.” 2,300 remains the same threshold from the last time I blogged about Jeremy Grantham on Survival And Prosperity (it had been 2,250 prior to this). As I type this, the S&P 500 is at 2,064.

In addition to U.S. stock and housing prices, Grantham talked about crude oil. From the newsletter:

My belief remains that a multi-year clearing price for oil would be the cost of finding a material amount of new oil. This appears to be about $65 a barrel today, and costs are drifting steadily higher as the cheapest old oil is pumped. My guess is that the price of oil will indeed be as high as $100 a barrel again within five years

(Editor’s note: Bold added for emphasis)

Once again, another insightful installment from the British “crash prophet.”

You can read the entire piece on GMO’s website here (.pdf format)

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

(Editor’s notes: Info added to “Crash Prophets” page; 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. 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 contained herein.)

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Jim Rogers Interviewed By The Sovereign Society

Earlier this week I finally got the chance to listen to a three-part interview of investor, author, and financial commentator Jim Rogers by The Sovereign Society’s editorial director JL Yastine. Released on The Sovereign Investor Daily website over three days beginning February 9, 2016, their exchange provided significant information about Rogers’ investing views, activity, and strategy going forward. From the Singapore-based investor each day:

February 9

• Revealed he shorted “top” tech stocks
• Discussed outlook for U.S economy
• Implicated Federal Reserve and Washington, D.C., as “culprit” for financial woes, saying:

If you have to have a single culprit- and it’s rare that you can have a single culprit in something like this- it would be the Federal Reserve and Washington, D.C. The Federal Reserve has printed staggering amounts of money. This had interest rates at historic lows. They have never been this low. At the same time, Congress, of course, has spent billions of dollars we don’t have. So with the Fed and Congress running up staggering debts and printing lots of money, we’ve had an artificial situation for eight years now, and we’re going to pay the price. And we’re starting to pay the price now.

• Going forward, the former trading partner of George Soros predicted:

Somewhere along the line, the market will be down 13 percent, 23 percent, you pick the number, the Fed will get a huge number of phone calls saying you’ve got to save the world. These are academics and bureaucrats as you know working for the Federal Reserve- they don’t know what they’re doing. And so they will panic, and they will do something to save us all, whether it’s lower interest rates again, or print more money, or buy more- who knows what they’ll do? They’re going to do something to try to save the markets when the problems come. The markets will rally, the markets will have a nice rally, but that rally will not last, because we’re getting past to the point of no return. There’s not much we can do now given the massive amounts of money that’s been printed.

February 10

• Talked about the U.S. dollar, noting:

I own the dollar. I expect it to go higher. It could well turn into a bubble before it’s over, depending how bad the financial turmoil is.

• Talked about crude oil, revealing:

I don’t see enough panic yet in oil for me to step in. It does seem to be making a complicated bottom.

• Discussed China, saying:

I stopped buying stocks anywhere in the world last August… I see horrible problems in the world’s financial markets for a couple of years, so I’ not buying anywhere, including China…

I do own renminbi… and if it goes down a lot, I hope I’m smart enough to buy more.

• Shared thoughts on gold, insisting:

I’m not a mystic about gold. In my view gold is nothing more than another asset that can be bought and sold. I do own it. I hedged some of my gold about the time I spoke to you. But if it goes down more, I hope I’m smart enough to buy more.

February 11

• Shared an “endgame” forecast:

It’s not going to end very nicely at all… It’s going to end very badly, for all of us. We had our financial problem in 2008 because of debt. Well, the debt now is much, much, much higher than then. The Federal Reserve alone balance sheet is up 600 percent in eight years. So the debt is skyrocketing everywhere. It’s going to end badly. The next financial crisis we have, or semi-crisis, is going to be worse than 2008 in most parts of the world.

• Shared expectations of how the markets will play out, saying:

What I expect to happen is, the U.S. dollar is going to go higher. Gold will go lower. Markets will go lower. At some point, like I said, the dollar will get overpriced, maybe even a bubble. At which point I hope I’m smart enough to sell my U.S. dollars. Gold often goes down when the dollar goes up. So the dollar will be up, gold will be down, and I will say “A-ha! I’m going to sell my dollars now and buy gold.” But it might be something else. It might be renminbi. If the renmibi’s down, and the renminbi’s convertible by then, then maybe I will buy renminbi when I get out of my dollars. Gold, in my view, will probably wind up in a bubble before this is over. But in the meantime I’m waiting to buy it lower, because the bubble is maybe a few years away.

• Gave advice for protecting wealth in “the coming hard times”

On that last bullet point, since I don’t want to steal The Sovereign Society’s thunder, head on over to the corresponding links to watch the entire interview. Great stuff.

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

(Editor’s notes: Info added to “Crash Prophets” page; 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. 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 contained herein.)

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Citi: ‘The World Appears To Be Trapped In A Circular Reference Death Spiral’

Citi (Citigroup Inc.), the New York City-based investment banking and financial services corporation, hasn’t exactly been a torchbearer of good economic news lately. Back on December 1, 2015, Citi strategists wrote in their 2016 outlook:

The cumulative probability of U.S. recession reaches 65 percent next year…

(Editor’s note: Bold added for emphasis)

Citi’s 2016 recession probability call was the most bearish of several recent ones I pointed out last week:

• Janet Yellen- 10%
• Societe Generale- 10% and rising
• CNNMoney survey of economists- 18%
• Bloomberg survey economists- 19%
• Morgan Stanley- 20% in a worst-case scenario
• Bank of America/Merrill Lynch- 20%
• Citi- 65%

And Citi struck again today. Katy Barnato reported over on the CNBC website this morning:

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned…

“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.

“Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”

(Editor’s note: Bold added for emphasis)

All hope is not lost though, said Stubbs. Head on over to Barnato’s article here to read all about it.

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. 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 contained herein.)

Source:

McGeever, Jamie. “CITI: There’s a 65% probability the US goes into recession next year.” Reuters. 2 Dec. 2015. (http://www.businessinsider.com/r-watch-for-us-recession-zero-interest-rates-in-china-next-year-citi-says-2015-12). 5 Feb. 2016.

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Jim Rogers Predicts Gold ‘Ending In A Bubble Maybe Three Or Four Years From Now’

I read an insightful article the other day about well-known investor, author, and financial commentator Jim Rogers on Agrimoney.com. In it, Mike Verdin shared what Rogers, the former investing partner of George Soros in the legendary Quantum Fund, thinks about certain investments opportunities. The Singapore-based investor is “pessimistic about stocks for the next couple of years,” and is still bullish on agriculture. But it’s what Rogers, who predicted the commodities rally that began in 1999, said about gold and crude oil that I found most interesting. From the January 28, 2016, piece:

He foresees a rally in gold “ending in a bubble maybe three or four years from now”.

And oil prices around $30 a barrel are unsustainable.

“People cannot explore, drill at $30 a barrel” and expect a satisfactory return on their investment.

And with old wells being pulled offline, “there is not going to be any oil” unless higher values make new sources viable.

He compares current weakness in commodity prices to that in shares during their late-20th century bull run.

“In the 1980s and 1990s, stocks went down 40-80%, and people said ‘that’s the end of that’.

“But it was not the end. We have seen before in other asset classes” the reversal in commodities he believes will prove short-term…

Good stuff, which you can read all about on Agrimoney.com here.

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

(Editor’s notes: Info added to “Crash Prophets” page; 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. 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 contained herein.)

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Jim Rogers: Crude Oil Price Rebound Near?

Well-known investor, author, and financial commentator Jim Rogers is watching the price of crude oil very closely these days. Jonathan Burgos reported on the Bloomberg website Thursday night:

Oil is holding near $45 while the bad news keeps coming. For investor Jim Rogers, that’s usually a sign a rebound is near.

The Organization of Petroleum Exporting Countries is still pumping near-record amounts of oil, China’s imports have slowed and U.S. crude stockpiles remain about 100 million barrels above the five-year seasonal average. Yet, U.S. benchmark prices have held steady for more than four weeks since plunging to a six-year low at the end of August.

“When there’s bad news and something doesn’t decline, it usually means it’s at a bottom and will be turning,” Rogers, who correctly predicted a commodities rally in 1999, said in an interview in Singapore on Thursday. “Whether we’re at a turning point or not, I don’t know yet, and I’m watching this very closely.”

(Editor’s note: Bold added for emphasis)

The former investing partner of George Soros in the legendary Quantum Fund added that recent production cuts will help stabilize the price of crude oil. It’s an insightful piece, which you can read in its entirety on Bloomberg.com here.

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

(Editor’s notes: Info added to “Crash Prophets” page; I am 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 herein)

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Sunday, October 4th, 2015 Commodities, Crash Prophets, Energy No Comments

Jim Rogers Predicts Crude Oil, Russian Ruble Comeback But Warns On U.S. Dollar

On Tuesday, The Economic Times (India) released an interview of well-known investor, author, and financial commentator Jim Rogers on its website. Discussing weakness in the crude oil market in light of the recent nuclear “deal” with Iran, the former investing partner of George Soros said:

Not here to stay, but certainly when you have a big collapse in anything, it hits a bottom, then there is a big rebound. We call it in America a dead-cat bounce. Then you have a test, a second test to the low.

This is going to lead to the second test to the low. There is always a reason for the second test and now we are having it, but is oil going to stay down forever? No. Remember that known reserves around the world are in decline, except for fracking. This is good news for people who consume, bad news for people who produce. But it is not the end of the story…

(Editor’s note: Bold added for emphasis)

Rogers thinks the Russian ruble, a currency he’s been bullish about for some time now, will benefit from a crude oil comeback. Sputnik, the international news service owned and operated by the Russian government, referenced a recent interview of the Singapore-based investor on Gazeta.ru. From the news outlet Tuesday:

Concerning the current rouble situation Rogers said, “Russia has low debt, unlike Greece, as well as convertible currency, which is quite unique for the new markets. So fundamentally its position can be called normal. It is being pressured by lower oil prices, but as soon as the black gold finds the stable point the situation will improve for the rouble.”

(Editor’s note: Bold added for emphasis)

Sputnik added:

He also mentioned the dollar saying that the US currency is in a terrible situation as the US national debt and trade deficit are huge.

“If we simply write out on paper the facts that lie behind the ruble and the dollar, without naming the currency, then everyone will want to buy rubles and no one will buy dollars. But as soon as you name them then, of course, people buy dollars.”

He added that he hopes he will be smart enough to get rid of dollars before the collapse happens. “Everything seems perfect, until one day it ceases to be so. It was the same with Britain, France, Spain and Greece. Often stocks manage to go up for a few years before hitting bankruptcy.”

(Editor’s note: Bold added for emphasis)

Last I heard, Rogers still owned greenbacks. I blogged back on November 11, 2014:

Despite the above warning, Rogers shared with Reuters back on October 23 that he still owned the U.S. dollar. He explained:

I have no confidence in the long-term strength of the U.S. dollar. I only own it because I expect all this turmoil to happen. And in times of turmoil, people flee to the safe-haven of the U.S. dollar. It’s not a safe-haven, but they think it’s a safe-haven, so people will own it. That’s why I own it.

Now what I expect to happen is, the dollar will go up stronger and stronger over the next year or two, at which point- some point- I’ll have to sell it. I have no idea what I’ll do with my money then because the world has got this terrible, terrible unsound foundation in all assets.

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

(Editor’s notes: Info added to “Crash Prophets” page; I am 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 herein)

Sources:

“Crude prices may sink on more Iran oil, but will rebound as known reserves are declining: Jim Rogers.” The Economic Times. 14 July 2015. (http://economictimes.indiatimes.com/opinion/interviews/crude-prices-may-sink-on-more-iran-oil-but-will-rebound-as-known-reserves-are-declining-jim-rogers/articleshow/48066869.cms). 17 July 2015.

“US ‘Shot Itself in the Foot’ by Pushing Russia Toward China – Jim Rogers” Sputnik. 14 July 2015. (http://sputniknews.com/business/20150714/1024625814.html). 17 July 2015.

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