Jeremy Grantham’s latest quarterly letter arrives and as usual it is chock full of insight. Grantham touches on every single financial theme we’ve discussed recently: valuation, inflation/deflation, Fed’s role in blowing bubbles, gold, commodities, bonds, etc.
While Grantham is worried about valuations in equities he is holding the course and continuing to recommend high quality US stocks. This is mainly due to the presidential cycle. He points out that in the past 19 cycles, the third year (2011) of the cycle has never been touched by a bear market and only once provided a negative return (-2%). Volatile stocks do especially well in this period, having outperformed lesser volatile stocks by 18% p.a. (since 1964).
Grantham is continuing to be optimistic about emerging markets, even though he sees them developing into a bubble eventually. But he is staying away from bonds, seeing them as manipulated and dangerous in a ‘mean reverting world’.
When it comes to commodities and gold, Grantham prefers the former believing the latter to be one step removed from the large rocks that sit on Polynesian islands and are considered legal tender.
Finally, Grantham is unmoved by the vituperative response he has received for calling the Australian real estate market a bubble. He is not sure when the ‘ref will blow the whistle’ but he is adamant that it is a bubble and it can’t continue.
For more, see the complete letter below:
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