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Jeremy Grantham’s Quarterly Letter: What A Decade! at Trader’s Narrative





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GMO Quarterly Letter Jan 20101
Jeremy Grantham’s first quarterly letter of the year arrived and with it the usual pithy insights we’ve come to expect. Grantham starts off by sharing his opinion on the two most recent important events on the political front: the Volcker rule proposed a few days ago by Obama and the Supreme Court decision on campaign finance. I’m glad to find he shares my take on both:

In a remarkable development, a Volcker plan for Glass-Steagall-lite has been proposed by the Administration. One minute Paul Volcker, the only financial administrator not called Brooksley Born who has shown any real backbone in the last 30 years, is so out in the cold that his toes must have frozen off, and the next – hey, Presto! – his ideas are put forward lock, stock, and barrel and Geithner and Summers are left scrambling to take some credit for the plan and pretend they hadn’t been dissing Volcker up until eight seconds ago for what they thought were his antique and unnecessary ideas that were far too harsh on our poor banking system. Wow!… Viva Volcker!

Five Supreme Court justices today announced that not only are corporations people and that their money is free speech – this is old hat and a very ugly hat at that – but now, there should be no limit to the money they spend to influence political outcomes.

He then continues into an overview of the economy and the stock market. He acknowledges the uncharted waters we find ourselves in due to the extraordinary set of circumstances we’ve just traversed: two back to back asset bubbles with a third on its way; wiping out $20 trillion in wealth; deterioration in government budget and Fed balance sheet; and the stratospheric moral hazard due to bailouts.

My view of the economy’s future is boringly unchanged: “Seven Lean Years.” I still believe that after the initial kick of the stimulus, we will move into a multi-year headwind as we sort out our extreme imbalances.

Even so, Grantham believes that high quality US equities will proffer the highest returns among major asset classes for the next 7 years. But even then at a projected 6.8% per annum, there isn’t much to celebrate (emphasis his):

The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful. Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.

Believe it or not, they can outperform on the upside, and these times tend to be: later in bull markets, or when they are relatively cheaper than the rest of the market, or both. (More quantitatively, high quality stocks have outperformed in more than 40% of up months and approximately 60% of the time when they were relatively very cheap, as they are now.)

So not surprisingly, GMO believes that bonds here are much too expensive and will provide very poor returns going forward. Their estimates range from -0.6% p.a. for short term T-Bills to 1.1% for long term US government bonds. While retail investors have been pouring money into fixed income as an asset class, I’ve already mentioned a few times before why I believe today’s bond buyers will be disappointed.

Finally, while acknowledging the ‘animal spirits’ that are once again running amok in the stock market - courtesy of an ever accommodating Federal Reserve - Grantham reiterates the valuation target that we’ve heard from several other reputable sources (like David Rosenberg of Gluskin & Sheff):

Whenever the Fed attempts to stimulate the economy by facilitating low rates and rapid money growth, the economy responds. But it does so reluctantly, whereas asset prices respond with enthusiasm.

…all investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six months ago. I thought last April that the market (S&P 500) would scoot up to 1000 to 1100 on atypical relief rally. Now it seems likely to go through 1200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced, although the high quality component is still relatively cheap.

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5 Responses to “Jeremy Grantham’s Quarterly Letter: What A Decade!”  

  1. 1 Ed Mullins

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    Babak, regarding the Supreme Court decision, is MoveOn.org a person? Are unions persons? Grantham’s logic is flawed. If you want to disarm corporations from political free speech, then do it for all organizations. P.S. Not long ago Grantham said mad-made global warming was “settled” science. Really??? When he ventures into public policy he is nutty. Best that he sticks with his circle of competence, namely investment prognosis.

  2. 2 Babak

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    Ed, I wondered the same thing which proves the flaw in the logic of the SCOTUS not Grantham. After all, if corporations are “persons” then can one hold office? How about Exxon for President? or Wal*Mart?
    btw, I completely agree that politics and money should be separated and elections and campaigns should be federally funded (this is how it is done in many democracies around the world by the way).

  3. 3 MachineGhost

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    The bigger question though is, if Grantham can so thinly disguise his anti-capitalist and/or anti-corporatist sentiments by chastizing a pro-freedom Supreme Court decision, what assurances are there that he will forecast the macroeconomic picture correctly? Knee-jerk reactions are about anything but perceiving reality clearly.

  4. 4 Babak

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    MachineGhost,
    Grantham is more astute than you or I put together when it comes to investing. I realize that the recent SCOTUS decision cuts along political lines but if you drop the idologue schtick for a minute and actually look at the decision you’ll realize how wrong it is and just how harmful it will be. You might also put down your “freedom fries” long enough to read what the Founding Fathers wrote about corporations. Basically the US is headed towards the dystopian future satirized in “Idiocracy”. Have you seen the movie?

    If you’re curious about Grantham’s political leanings it might help to know that he’s been managing Cheney vast portfolio for many years now. Yes, Dick himself trusts his money with Grantham.

    As for my own personal political leanings, at a young age (thankfully) I was inoculated from giving my allegiance to any specific political party (and sport team). As any citizen should I try to inform myself of the issues and make up my own mind independent of what either side is saying or telling me to think. I think democracy was intended to work like that rather than two polarized camps that simply rage at each other because of an us/we divide.

  5. 5 MachineGhost

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    I have examined the decision and surrounding circumstances and I’m quite at a loss how most people see it as a negative to uphold free speech rights as opposed to giving that power away to unelected bureaucrats. It isn’t even a political issue but a basic, inalienable rights issue. It doesn’t matter if speech is from a corporation or an alien mothership, all speech ultimately comes from sentient individuals and corporations are composed of a multitude of different sentient individuals. Every sentient indiivdual has an agenda. The form of their organization is irrelevant.

    Is the implication that Walmart and Whole Foods would be on the same page just because they are corporations? The answer should be obvious. Are Americans so fat and stupid now they cannot think for themselves and see the agendas of those that speak politically, including corporations? I mean, if being too fat and stupid to think is the real underlying motivation for decrying being bombarded with more political speech so the “free market” can better optimize the allocation of political capital, it says a lot about the state of Americans nowadays compared to the heady days of spending nearly all day standing and listening to Abraham Lincoln debate. The decline in critical thinking skills is what we all should be worried about not having to process even more information to arrive at better decisions!

    I could be wrong, but I assume the split for the decision down conservative vs liberal lines merely has to do with the typical hallucinotion liberals have about the Godlike, omniscient powers of corporations and government. Liberals always tend to forget that it is human beings that ultimately make decisions and take actions, not a faceless, artificial entity. It’s not the big ol’ bad omniscient IRS that comes after you, its an failable and flawed human being masquearindg as an “IRS Agent” assigned to your case. When you think in terms of the latter, you reclaim back your personal power and ability to make rational decisions instead of kowtowing to a fantasy.

    But then again, I’m sure 95% of most people didn’t realize the “campaign finance laws” were being used against ordinary individuals and small potato oganizations to restrict any support, criticism and whisteblowing against politicians, bureaucrats and others of their ilk. This should be no surprise. This is what ALWAYS happens when you give politicians and bureacurats the power to control, regulate and ban anything, most especially political speech. The case was just a microcosm of all that was going wrong with “campaign finance reform”. In other words, someone finally decided to “take on Ciity Hall” after 100 years of political oppression — and they won!

    Now, granted, a knee-jerk reaction to how the mainstream media and chattering pundits presented the case (very slanted and lacking any real depth) is probably rationalizable, but it seems rather inexcusable for someone of Granthan’s statute. If I, who is less relatively successful and is apolitical, can come to the correct conclusion based on all the facts to optimize the public’s interest, why can’t Grantham? Either way, he’s lost some respect in my eyes, but I sadly understand this is par for the course when it comes to people that have any statutre in society. Money and/or fame is not a substitute for intelligence or critical thinking skills. One can always hope.

    And BTW, the total lack of understanding and ridiculous fear-based reactions to this case is a prime example of why the Founders were incredibly wise in having the judicial branch be separate. To me nowadays, it is always amazing when government works as it was originally intended.

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