Jeremy Grantham declares most of the easy money made in his latest quarterly letter from GMO. I respect Grantham as one of the few ‘elder statesmen’ of the stock market because he approaches it with an impressive amount of perspective and discipline. No doubt, a result of having survived many market cycles.
He was one of the few who warned that the bubble was everywhere in 2007 and then surprising to many who were accustomed to his jeremiads against the market, he turned bullish in March 2009: Reinvesting When Terrified.
Here are a few choice excerpts from his latest missive on the US equity market:
Fair value on the S&P is now about 860 … This places today’s market at almost 25% overpriced
Having reinvested back in March to be almost neutral in equities, we have recently taken just a few chips off the table and recommend that anyone who was neutral weighted in equities or even overweighted (lucky you!) do the same.
Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets
As many have already done before him, Grantham compares the spring rally to the ‘last hurrah’ which saw the Dow Jones counter rally in the aftermath of the 1929 crash:
As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher.
Price, however, does matter eventually, and what will stop this market (my blind guess is in the ﬁrst few months of next year) is a combination of two factors. First, the disappointing economic and ﬁnancial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on proﬁ t margins as the quick ﬁx of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difﬁcult environment.
But, like Doug Kass of Seabreeze Partners, Grantham doesn’t believe that we break the 666 low on the S&P 500 but that it will last as a long term inflection point. Turning to other markets, Grantham continues to favor emerging markets, even as their valuation pushes against his own value instinct. Finally, he finishes off with an special comment on the question of redesigning the financial system in the aftermath of the 2008 meltdown. The whole thing is longer than his usual quarterly updates but well worth the read.
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