Jeremy Grantham’s latest Quarterly Letter is divided into 6 essays dealing with a variety of diverse issues. You can read the whole letter below.
Grantham finally moved decisively into the deflation camp, joining other well known analysts like Robert Prechter and David Rosenberg. This is a point that we’ve been discussing for a while and had mentioned previously as the deciding factor in almost every single asset pricing question: The Ultimate Question: Deflation Or Inflation?
What stood out even more in this latest missive from Grantham was his reference to the probability branch he outlined in his April 2010 letter (Possible Race to the Old Highs). Back then he estimated the probability of a sustained economic recovery at 30%. Today he thinks a 25% is “generous”.
But the remaining paths describe the friction playing out in the equity markets, especially the question of a ‘Double Dip‘:
Well, what we are seeing now is a tussle between the 50% sustained speculation branch and the branch where two or three things go wrong and crack conﬁdence. This struggle is an unusual one, and has created market effects I have never seen before, and you have not either. This market might well be called a fearful, speculative market. Low rates, although they tend to produce a feeding frenzy at the aggressive end of institutional investors, merely produce a feeling in ordinary individual investors somewhere between dejection and desperation. They hate to park money in cash at negative real returns, and yet they are still thoroughly nervous, so surveys reveal, about normal equity investing. These investors did not need the recent slowing in growth and sovereign debt problems to become nervous.
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