Jeremy Grantham

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 On U.S. Bonds, Stocks, And A Market Crash

Regular readers of Survival And Prosperity may have noticed I retired the “Crash Prophets” page earlier this month (too much time to update). For those not familiar with this section, it’s where I compiled the investment activities/recommendations of “crash prophets” Dr. Marc Faber, Jeremy Grantham, Jim Rogers, and Peter Schiff (designation earned by being smart enough to spot the 2008 economic crisis and warning of future financial turbulence). Despite the retirement, I will continue to blog about the latest from these soothsayers.

And this morning I want to talk about Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (currently overseeing $74 billion in client assets). In case readers missed it, a couple of weeks ago Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and U.S. Secretary of State John Kerry, took part in an interview with The Wall Street Journal. The “crash prophet” discussed the booming U.S. stock market, a potential crash, and U.S. bonds. John Coumarianos wrote on the WSJ website on November 5:

With the S&P 500 up more than 15% this year, it may be time for a reality check. To that end, we spoke with Jeremy Grantham, co-founder and chief investment strategist at Boston-based money manager Grantham, Mayo, Van Otterloo & Co. and a noted spotter of market bubbles.

He thinks U.S. stocks and bonds will fail to generate inflation-beating returns over the next seven years, but he doesn’t see an imminent crash in share prices…

Mr. Grantham has already cemented his legend by arguing that U.S. stocks were overvalued in 2000 and again in 2007, anticipating the market’s two most-recent crashes. He also noted before the 2008-09 financial crisis that the relationship between home prices and income had become unglued, and said at least one large financial institution would fail.

By Mr. Grantham’s lights, U.S. stock prices are again high, with an overall Shiller price/earnings ratio (share price relative to the past decade of real average earnings) over 30, compared with its average of 16.8 since 1880. But profit margins also are unusually high, lending support to the high valuations, he says. And the Federal Reserve’s policy of keeping interest rates low supports share prices by making fixed-income investments less attractive as an alternative to stocks.

So this time, instead of a crash, stock valuations may take decades to revert to anywhere near the long-term average, Mr. Grantham says…

(Editor’s note: Bold added for emphasis)

The actual interview proved insightful, with Grantham communicating his bullishness on foreign stocks. The exchange can be read in its entirety here on The Wall Street Journal website.

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: ‘Still No Signs Of An Equity Bubble About To Break’

Right before the weekend, Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (currently overseeing $99 billion in client assets), penned an article on the Barron’s website entitled “Jeremy Grantham Warns on Immigration, Brexit.” As part of this piece Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and U.S. Secretary of State John Kerry, talked about U.S. stock prices. He wrote:

Despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break, indeed cash reserves and other signs of bearishness are weirdly high.

In my opinion, the economy still has some spare capacity to grow moderately for a while. All the great market declines of modern times- 1972, 2000, and 2007- that went down at least 50% were preceded by great optimism as well as high prices. We can have an ordinary bear market of 10% or 20% but a serious decline still seems unlikely in my opinion. Now if we could just have a breakout rally to over 2300 on the S&P 500 and a bit of towel throwing by the bears, things could change. (2300 is our statistical definition of a bubble threshold.) But for now I believe the best bet is still that the U.S. market will hang in or better, at least through the election

(Editor’s note: Bold added for emphasis)

“2300 is our statistical definition of a bubble threshold”

2,300 on the S&P 500 was the same bubble threshold Grantham indicated in his last quarterly investment newsletter contribution. He wrote in May:

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…

As I type this Monday afternoon, the S&P 500 stands at 2,167.

An interesting article by Grantham, which you can read in its entirety here on the Barron’s website.

By the way, I noticed there’s a comment attached to that piece from “Christopher Hill.” That is not from me.

By 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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Jeremy Grantham Made Commander Of The Order Of The British Empire

Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (currently oversees $99 billion in client assets), was recently made a Commander of the Most Excellent Order of the British Empire by Britain’s Queen Elizabeth II.

Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and U.S. Secretary of State John Kerry, was awarded the CBE for his philanthropic service.

Regular readers may recall that the last time I blogged about the “crash prophet” (May 12), he warned about U.S. stock prices (“the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500”) and housing prices (“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”).

Survival And Prosperity would like to congratulate Mr. Grantham on his CBE.

Christopher E. Hill
Editor

(Editor’s notes: 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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Robert Shiller On State Of U.S. Housing Market

Yale University Economics Professor Robert Shiller appeared on Bloomberg Television this morning. The Nobel Prize winner, who correctly-called the dot-com and housing busts of the last decade, discussed the state of the U.S. housing market. Dr. Shiller told viewers:

People are needing houses. They’re buying them. There are not enough houses out there- the inventory is low. So they push the price up. And it’s a modest price increase. Nothing scary or exciting. This could go on for some time

(Editor’s note: Bold added for emphasis)


“Shiller: Not Enough Houses, Low Inventory”
Bloomberg Video

No mention of another “housing bubble” in the works. Whereas fellow “crash prophet” Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co., uttered this warning in his latest investment newsletter:

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)

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.)

Latest edition of Shiller’s classic…

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Tuesday, May 31st, 2016 Bubbles, Crash Prophets, Housing No Comments

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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Jeremy Grantham: ‘U.S. Market Will Rally Once Again To Become A Fully-Fledged Bubble Before It Breaks’

Last week, I blogged about 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 $104 billion in client assets). While it was an interesting read, I noted that I was a little disappointed that Grantham, whose individual clients have included former U.S. Vice President Dick Cheney and U.S. Secretary of State John Kerry, didn’t talk about two themes he’d brought up in recent newsletters. I wrote:

Two things I’m dying to know from Mr. Grantham right now:

1. Does he still expect “the stock market to continue to march higher in the coming year, eventually sucking in retail investors and setting up a serious decline around the time of the US elections in late 2016”?

2. Does he/GMO “still believe that bubble territory for the S&P 500 is about 2250”? The S&P was really marching towards 2,250 for a while before the index went south.

Last night, I saw that Grantham penned a piece on the Barron’s website that answered those questions (for the most part). From the article:

Looking to 2016, we can agree that uncertainties are above average. But I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the slow-burning but huge positive of much-reduced resource prices in the U.S. and the availability of capacity both in labor and machinery. So even though I believe our trend line growth capability is only 1.5%, our spare capacity and lower input prices make 2.5% quite attainable for this year. And growth at this level would make a major market break unlikely. As discussed elsewhere, this situation feels at worst like an ordinary bear market lasting a few months and not like a major collapse. That, I think, will come later after the final ingredients of a major bubble fall into place

(Editor’s note: Bold added for emphasis)

Concerning the U.S. stock market, Grantham wrote:

The U.S. equity market, although not in bubble territory, is very overpriced (+50% to 60%) and the outlook for fixed income is dismal… I still believe that, with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks. That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps. Good luck in 2016…

(Editor’s note: Bold added for emphasis)

In the section entitled “U.S. equity bubble update,” he added:

On the evaluation front, the market is not quite expensive enough to deserve the bubble title. We at GMO have defined a bubble as a 2-standard-deviation event (2-sigma). We believe that all great investment bubbles reached that level and market events that fell short of 2-sigma did not feel like the real thing. (In our view, 2008 was preceded by an unprecedented U.S. housing bubble – a 3-sigma event.)

Today a 2-sigma U.S. equity market would be at or around 2300 on the S&P, requiring a rally of over 20%; even from the previous record daily high it would have required an 8% rally…

On the more touchy-feely level of psychological and technical measures, the U.S. market came closer to bubble status but, still, I think, no cigar

(Editor’s note: Bold added for emphasis)

So to answer my two questions from last week:

1. Grantham believes U.S. stocks will rally once again to become a bubble (no mention of “a serious decline around the time of the US elections in late 2016” though).

2. He also believes bubble-territory for the S&P 500 is no longer 2,250, but a tad higher “at or around 2,300.”

As highlighted at the bottom of the “Crash Prophets” page, Jeremy Grantham has an impressive track record with his financial forecasts:

• In 1982, said the U.S. stock market was ripe for a “major rally.” That year was the beginning of the longest bull run ever.
• In 1989, called the top of the Japanese bubble economy
• In 1991, predicted the resurgence of U.S. large cap stocks
• In 2000, correctly called the rallies in U.S. small cap and value stocks
• In January 2000, warned of an impending crash in technology stocks, which took place two months later
• Saw the 2008 global financial crisis coming. In April 2007, said we are now seeing the first worldwide bubble in history covering all asset classes.

As such, it’s difficult to dismiss this latest one.

Check out Grantham’s piece on Barron’s website here if you have time. I only scratched the surface, and it’s an insightful read.

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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