Jeremy Grantham: Last Hurrah and Seven Lean Years
By Barry Ritholtz - May 10th, 2009, 11:45AM
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GMO’s Jeremy Grantham investment letter in May 200 lays out likely possibilities for the direction of the markets and the economy going forward. He outlines what is a high probability outcome of where we go from here.
It is the single best thing I have read this year on the markets, the economy, and the Fed. Grantham manages to take Common Sense and raise it to a brilliance not many market commentators can lay claim to.
His eloquent, sparse writing paint a compelling picture of what we should expect over the next few years. Bottom line: Investors should brace themselves for less than stellar returns.
This is your weekend homework assignment . . .
May 10th, 2009 at 12:14 pm
Aye carramba!
The wknd homework assignment requires a username and password. At this point I’ve got like 7,256 of each.
~~~
BR: Anything that is free I always set up the same way:
May 10th, 2009 at 12:32 pm
Strange link setup. Download the newsletter without logging in if you go to:
http://www.gmo.com/America/
May 10th, 2009 at 1:10 pm
It makes so much sense, it must be wrong.
May 10th, 2009 at 1:21 pm
SB,
right? that + the requisite b*tch*ng about the log-in, virtually guarantees that, only, a scant few will pay it Any heed..
otherwise, it’s a fine example of why there’s an active Market for his Insights. Grantham is one the few un-addled Voices left in the, now, NAU..
http://www.cfr.org/content/publications/attachments/NorthAmerica_TF_final.pdf
http://www.sourcewatch.org/index.php?title=North_American_Union
May 10th, 2009 at 2:14 pm
http://finance.yahoo.com/news/Experts-say-GM-bankruptcy-apf-15193961.html?sec=topStories&pos=main&asset=&ccode=
Experts say GM bankruptcy almost inevitable
Down goes Frazier!
But this is such old news…
Franklin, now ’splain to me again how they are going to save their bacon?
May 10th, 2009 at 2:21 pm
here’s the Grantham letter in PDF
http://www.gmo.com/websitecontent/JGLetter_1Q09.pdf
May 10th, 2009 at 2:38 pm
Grantham’s analysis is largely predicated on the following (page 2, col 1):
“…we could easily get a prodigous response to the greatest monetary & fiscal stimulus by far in U.S. history”.
I agree with this, and I believe that we’ll get a trough-to-peak rally in the S&P (during Obama’s first term) well in excess of 50%. The question is one of timing, of course. What is missing from Grantham’s analysis is any discussion of the possibility of overstimulation by the Fed. If the Fed doesn’t end its “cash for trash” and “QE” programs soon, crude oil could get to $150 by the summer of 2010. The Fed is going to have to take its collective foot off the gas pedal; the longer it waits, the harder it’s going to have to hit the brakes.
As for the stock market short term, I still think that we’ll get a partial retracement of the recent rally, the retracement going at least 50%.
May 10th, 2009 at 2:41 pm
read this a couple of days ago. I thought it was very good. He’s very thoughtful.
May 10th, 2009 at 2:48 pm
it might also be worth noting that he dropped his fair value estimate on the S&P to 880.
One thing that might be interesting to watch at GMO is the forecasted asset class returns they have there. Doesn’t seem like they have been changes, and he does talk about increasing equity exposure in the letter as well.
For obvious reasons there is a lot of discussion lately about the death of buy and hold. I would think if they have any sort of long term buy and hold strategy with the equity purchase it’s one that involves a lot of dividends. I’ve seen some mention of dividends lately but that will probably become much more common over the next decade.
May 10th, 2009 at 2:58 pm
I particularly liked these notions:
“Let me end this section by emphasizing once again the
difference between real wealth and the real economy on
one hand, and illusionary wealth and debt on the other. If
we had let all the reckless bankers go out of business, we
would not have blown up our houses or our factories, or
carted off our machine tools to Russia, nor would we have
machine gunned any of our educated workforce, even our
bankers! When the smoke had cleared, those with money
would have bought up the bankrupt assets at cents on the
dollar and we would have had a sharp recovery in the
economy.”
The fear was that the over-extended and reckless rich (and their minions) would have suffered irreparable damage. So the Fed Govt was used to prevent this. The object lesson that is not being learned is ‘borrow as little as is humanly possible.” And don’t borrow from US banks, or banks outside the US. Mars might be ok.
May 10th, 2009 at 3:02 pm
His analysis is also predicated on the dollar remaining the global reserve currency. I doubt this will remain the case in even a few years.
And the Japanese experience seems misunderstood. IMHO, what they did showed that maintaining crippling levels of debt with zombie banks, ZIRP and QE caused/ prolonged their Depression. Why do people keep citing the reason for their failure as not enough stimulus? This smells like a logical fallacy.
Anyone familiar with the Austrian school of economics would not be surprised at what happened.
The US and UK economies depend on consumers bingeing on credit. We aren’t going to see a return to 2006/07 levels of credit excess for many years. And wages are falling. So how exactly will we be better off than the “producer” economies, who at least have the option to develop their internal credit-consumption markets if we stop buying their teddy bears? Particularly as multinationals like IBM are relocating the few remaining productive staff/ jobs from the US/ UK to Asia.
The lower wages also mean debt will become increasingly difficult to service.
For as long as these forces remain, Grantham has his decoupling thesis upside down. The US will be affected differently to producer economies. It will be worse off.
May 10th, 2009 at 3:04 pm
What he says makes sense. I especially agree that putting money into the failed banks was dumb. As he says, direct government investment in infrastructure has a much better record of success. Moreover,
as he also says, if infrastructure investment doesn’t work, at least, at the end, one has the infrastructure. The money flowing into AIG, Citi, Goldman etc. serves only to make already impossible arrogant bankers even more loathsome.
However, does anyone have any explanation/excuse for the lousy record of the mutual funds his company manages for John Hancock and Evergreen. (I can’t afford to buy into his hedge funds.) They all lost a lot of money in 2008, which would indicate that his company’s forecasts are mediocre at best. Exotically given that all the funds are load funds, and there are a number (not a large number but maybe several dozen) of no-load equity funds that lost less money in 2008. I.e, they lost, say, 20%-20% where a comparable CMO fund lost perhaps 35%-40%.
I’m not being argumentative. I really do wonder why I should pay attention to someone with–judging by results- a mediocre record of prediction. I mean, he did better in 2008 than, for example, Ken Heebner, but did poorly in absolute terms.
May 10th, 2009 at 3:09 pm
“My guess is that the S&P 500 is quite likely to run for a
while, way beyond fair value (880 on our revised data),
to the 1000-1100 level or so before the end of the year.”
But just in case it doesn’t – let me save my reputation
“The market may well oblige by coming down
sharply again in the near future, and I for one continue
to believe there is still about a 1 in 3 chance it will do so.
There is also perhaps a 1 in 5 chance that the market will
come down much further”
So he covered the markets going up, the markets coming down as well as the markets testing the March lows.
Very insightful indeed!!!
May 10th, 2009 at 3:56 pm
Some of the analysis here leaves me wanting…the fact is the greatest monetary and fiscal stimulus in history is being undertaken to try and prop up some 30Trillion or more in excess credit the economy can’t service. When placed in proper perspective, the stimulus is woefully inadequate and will always be such. You would have to create a whole second economy, as big as the current one, and you would still be short. Anjan, you make a lot of sense.
May 10th, 2009 at 4:13 pm
I agree with many of the critiques expressed by others herein. Not only the pedestrian analysis, but the meandering prose leaves me wanting. How is this any better than the trenchant analysis of David Rosenberg, formerly of Merrill Lynch? I don’t think for a minute that Mr. Grantham has agreed with 90% of the last 30 years of monetary or fiscal policy and, yet, his analysis seems to condone it. John Mauldin has been much better at attempting to paint a picture of what lies ahead. And is there any asset class other than equities that Mr. Grantham focuses? I did, however, find this little nugget interesting:
To be honest, I believe that most of you readers are likely to be grandparents before you see a new inflation-adjusted high on the S&P.
Do you think Warren Buffett or the Berkshire faithful have read this?
May 10th, 2009 at 5:25 pm
Steve Barry @ 3:56
That $30T need not be provided all at once. In principal, the Fed could provide that over the course of many years. In the meantime, a lot can happen in the stock market (or no net change over time). For example, someone who shorted the Nikkei 225 in July of 1992 and held until September of 2000 did no better than breaking even.
May 10th, 2009 at 5:35 pm
@DL: I see two different issues…they can always do a low volume pump of the market…the stimulus is not going to be the panacea Grantham makes it out to be. BTW, I think the current low volume pump has finally run its course, with II Bulls at July 2007 levels and NDX Bulls at 86%.
May 10th, 2009 at 5:38 pm
He misreads 1932 completely. He attributes the jump that year to misinformed investors jumping in early. But that more accurately describes the spring 1930 rally.
Two things distinguish the bottom in 1932. First, stocks, commodities and real estate had all fallen to fantastically low levels. Second, there was a real recovery in demand for things like autos and commodities (and bonds) that PRECEDED the bottom in stocks.
That piece read like the work of someone who has reached a conclusion and then looks to back it up using a hash of isolated data points and a semi-literate look at history. The last page pretty much seals that, and is just the type of thing that appeals to Barry.
May 10th, 2009 at 5:53 pm
“Here comes the crash”, Fortune, November 15, 2004
“Talk to Jeremy Grantham about the stock market, and you get the impression the sky is about to fall…
….
Avoid U.S. stocks. ‘Don’t try to get blood out of stones,’ he says. Grantham believes U.S. stocks will take the brunt of the hit over the next few years.”
He wasn’t wrong, I guess, he just wasn’t right.
~~~
BR: Remember, he was recommending rotating out of stocks and into bonds and commodities (timber especially).
The bonds have been a home run, and he did not overstay his welcome in commodities. I will bet you his 1, 5 and 10 year performance is better than 95% of all money managers . . .
May 10th, 2009 at 5:54 pm
I think he only said one thing he didn’t hedge on, but it was a great thing, “Debt is accounting, not reality.” So few people understand this.
May 10th, 2009 at 5:56 pm
SB @ 5:35
“…the stimulus is not going to be the panacea Grantham makes it out to be”.
Maybe so, but at the same time, the stock market P/E, in the year 2009, may not get to the extremes it did at the bear market lows of 1974 or 1982. (Look at the valuations at the end of the last bear market).
…………………….
“…I think the current low volume pump has finally run its course…”
I agree; unfortunately I also felt that way at SPX 850, at 875, and at 900.
May 10th, 2009 at 6:37 pm
@Bob
“Here comes the crash”, Fortune, November 15, 2004……..
He wasn’t wrong, I guess, he just wasn’t right.
kinda like Barry’s Dow 6K call back in 2006….just two years early I guess
May 10th, 2009 at 7:04 pm
Hasn’t he forgotten one large item? The US, UK, etc…were not so much in “DEBT” in the previous crashes.
Debt is more than accounting this time around.
May 10th, 2009 at 7:32 pm
BR – thanks for posting this. Saw a TechTicker discussion earlier but getting to the whole thing is very handy. Nice piece of work. And thanks to nenmoonia for making it easier to get to.
My own take, particularly in the long-run, is nearly identical to his and comes at it from a top-down macro-econ perspective segueing thru earnings and PEs. You can see the charts and graphs here:
http://llinlithgow.com/bizzX/2009/05/from_economy_to_markets_more_b.html
for the whole thing or just the chart that looks at business cycles, profits and the SP500 since 1950 here:
http://llinlithgow.com/bizzX/MktCharts/LTMktPerform/SPXvsEcon50-08.jpg
However, one quibble (not sure if I’m talking my book here or not)…but the headline economic news is NOT at all backed up by a careful look at the economic data which was much weaker. YoY real GDP for example dropped ~.9% in Q4 but dropped -2.6% in Q1. The same bad news is true for every other major economic data series, including real Consumption on a YoY basis:
http://llinlithgow.com/bizzX/2009/05/real_data_interlude_ii_qtq_vs.html
So in my interpretation consumption’s decline is slowing and will continue which will take down real wages and lower demand. The 1rst derivative is still negative and the market is priced IMHO for a soon-to-appear positive turn. Which increases the chances of this rally petering out before picking back up at the end of the year as Grantham argues.
FWIW.
May 10th, 2009 at 8:05 pm
Steve,
>> 30Trillion or more in excess credit the economy can’t service.
Who created that 30T? Not the USG. At least, not entirely. Rather, private industry created it. Why? Because their animal spirits were elevated.
I’m not sure it’s necessary for the USG to print 30T. Maybe, like before, the USG only has to print some smaller amount (e.g., 1-2T) to stop the fire sales. Once the fire sales stop, asset prices stabilize. Suddenly, maybe that 30T doesn’t need a complete “replacement”.
Consider that the debt/GDP ratio was already huge in 2001-2004, yet animal spirits recovered. Maybe we can repeat? Possible?
May 10th, 2009 at 8:58 pm
i like Grantham. Just like i used to like Louis Lapham. Or H Warren Wind. Of course this is different because we are talking about real money. More or less. Here’s my take. This market is going straight up until you cant stand it anymore. And, as usual when the last dumb ass jumps breathless onto the train someone will pull the emergency cord and a lot of people will spill their drinks. Solution in my view is twofold, compound interest and the rest of the world. Heres a side light. Twenty guys living off the grid in Utah grow beards and emigrate to Mecca, where having rented donkeys they shit on sacred ground. The smell kills several thousand of the faithful. The perps are beheaded, and all the donkeys in the kingdom are interrogated and later executed as co- conspirators. After a media campaign against women drivers the kingdom decides to invade Lost Wages because the donkey jocks won some money playing blackjack. Steve Win is forced underground and a long time mafioso is installed to unite Lost Wages. Gratuities are generous. After a long occupation, and an orderly transition of power marked by labor unrest and large losses at baccarat the kingdom decides to shift their focus back to Utah, the home of the dude ranch where the riders went to grammar school and which is controlled by a religious minority which has contributed to the world view that the kingdom is skeptical, but in some ways joined at the hip, to. Just a take on the world we live and invest in. Thru the looking glass. Nobody is special. It is amazing that so many people get up and go to work every day. Keep the joy.
May 10th, 2009 at 9:19 pm
I read this piece on Friday and agree that it’s a great one.
It does appear to be the rare synthesis of brilliance rooted in common sense. That, or it just falls in line with what my own thought process has been (though Grantham proves to be far more eloquent and well supported with historical data).
May 10th, 2009 at 9:25 pm
THIS MARKET IS GOING STRAIGHT UP UNTIL YOI NEED MEW DENTAL CAPS.
May 10th, 2009 at 9:26 pm
As if we needed yet another example of why the intellect of Barry Ritholtz is to be respected, please read his reply to Chief Tomahawk at the head of this thread. Why didn’t I think of that? Can’t wait to ride these coattails….
May 10th, 2009 at 9:27 pm
Nice spelling but better than my previous Onion worthy post. TWM might be a helluva deal at 20.
May 10th, 2009 at 9:28 pm
@catman
I’m laughing out loud. That sums up my feelings as well. But, just a clarification. Are you suggesting Mortgage-Equity-Withdrawal Dental Caps and have those been trademarked?
May 10th, 2009 at 9:32 pm
As stated by a very few of us more than eight months ago, no plan is the best plan.
“Let me end this section by emphasizing once again the
difference between real wealth and the real economy on
one hand, and illusionary wealth and debt on the other. If
we had let all the reckless bankers go out of business, we
would not have blown up our houses or our factories, or
carted off our machine tools to Russia, nor would we have
machine gunned any of our educated workforce, even our
bankers! When the smoke had cleared, those with money
would have bought up the bankrupt assets at cents on the
dollar and we would have had a sharp recovery in the
economy. Moral hazard would have been crushed, lessons
learned for a generation or two, and assets would be in
stronger, more effi cient hands. Debt is accounting, not
reality. Real economies are much more resilient than they
are given credit for. We allow ourselves to be terrifi ed by
the “fi nancial-industrial complex” as Eisenhower might
have said, much to their advantage.”
May 10th, 2009 at 10:47 pm
I wonder if these old timers are missing something, like: $624T Derivative market? And population? And entiltement programs that have become unsustainable? And decrease in wages except for the top earners? And inflation does exist the fed is just better at hiding it by convincing us that $500,000 houses are a good thing? But if I can’t afford the mortgage because I can’t get 3 jobs to cover the nut before taxes then how can the price be justified? And what about commodities? They can’t wait to get oil back up to $100 a barrel. Then what? Is Grantham kidding comparing this to 1930’s? Things are sooooo….much different today in sooooo….many ways that even China AND Brazil won’t be able to pull the world out.
May 11th, 2009 at 12:01 am
Some one posted some very good trading rules a while back. Upswing, then a consolidation, and a continuation in the same direction. If you look at a DJIA chart, this rule is working perfectly so far. The second ramp should be appx the same size as the initial blastoff. So that would mean Dow to at least 9600. There are also inverse HS all over the place that broke out near the end of April that have not reached their targets. Voodoo? Hey at least its working and we’ve all seen these patterns play out to both the upside and downside since ‘00. Remember ‘06? It works a lot better than sitting around for years waiting for some one like Bob Bronson to finally get something right.
May 11th, 2009 at 12:27 am
Right after I read this, I read John Mauldin’s recent release, and then John Hussman’s recent release…and my head is spinning. 3 people agreeing about where the economy is headed, but all 3 have completely different views of where the market is going. Grantham says it’ll go up. Mauldin says it’ll go down. Hussman says it’ll go sideways.
I think at this point I’ll just stick to what I’ve been thinking all along: until housing stabilizes, I don’t see how our economy will see more than one ‘outlier’ quarter of positive growth anytime soon. And by ’stabilizing’, I mean the case/shiller going back up to -5% Y/Y. I say 440 is a nice S&P bottom…and I think July 2010 seems like a nice month for that bottom to occur.
I’m glad I read this article. It has helped me see the other side…the possibility that all of an hour ago I saw no possibility of whatsoever. This will be very interesting if we break through the 200DMA this week. I know the P/E is completely useless at this point, but it’s at 65 right now. Throw in the low volume, and the 200DMA that is intersecting the massive level of resistance at 944, and one just wouldn’t think that this rally could last much longer.
May 11th, 2009 at 1:21 am
For such a thorough piece of analysis, it contains one glaring factual error (Page 7, col 1):
Demonstrably untrue. The Brits got porked in the *** after WWII. Truman yanked lend-lease instantly, and the UK had to come to Washington cap-in-hand looking for aid, receiving a measly $3bn or so under what some might describe as usurious terms.
How odd tha
May 11th, 2009 at 1:23 am
For such a thorough piece of (otherwise outstanding) analysis, it contains one glaring factual error (Page 7, col 1):
Demonstrably untrue. The Brits got porked in the *** after WWII. Truman yanked lend-lease instantly, and the UK had to come to Washington cap-in-hand looking for aid, receiving a measly $3bn or so under what some might describe as usurious terms.
What an odd mistake!
May 11th, 2009 at 3:14 pm
grantham is apparently not willing to share any real economic insight
he is describing where the car might go based on where it has already mostly been in the past
he is describing the contour of the body but not how it works, why it will go the speed it will go
what are the real factors affecting US & world growth and how are these likely to unfold?
it is easy to skirt those issues when you do not have a clue
he is not acutely aware of the situational economic factors
a truly lacklustre report based on little effort
very little original thought, and i can see he listens intently to marc faber to get ideas
he ingeniously paints a picture of himself more or less sitting on a fence: “the mkt can go down,
the mkt can go up, the mkt can go down and then up, the mkt can go up and then down” Bravo!
With forecasting like that, you may as well just take your money play the lottery
His verbosity on asset allocation is a ruse to deter you from realizing too quickly a simple
fact: he hasn’t a clue
but of course he still needs to put something out that would hopefully be construed as acceptable. Bravo! You and Alan Greenspan can share the same intellectual prison cell.
Here, I’ll rip a page from Granthams forecasting manual:
Of course things may work out exactly the way he is guessing. Or they may not even be close to that.
Then again they could fall somewhere in between … at some point over the next million years or so.
May 11th, 2009 at 4:19 pm
The cause of deflation is lower demand and in both the U.S. in 1932 and Japan in 1990, Grantham correctly mentions both countries cranked up the money supply. Cranking up the money supply even as massively as we and the rest of the world is doing has NEVER been shown to be a cure for deflation. He is assuming it is going to work, and the rest of his predictions are based on that assumption.
In fact, most people who talk about the stimulus expect it to be a cure and lead to massive inflation, but they never mention real estate as an asset class that would inflate. If real estate were to go up, our banks would be saved. That is the whole goal of the stimulus.
But it is not that easy. Even if credit were available, are consumers going to go back to buying houses like they did in 2005 and 2006? I doubt it. They know now that home prices can go down.
In addition, there is the demographic problem. People in the U.S. are getting older, and they don’t need the big homes that they did when they had children. Add it all up, and I just don’t see a resurgence in demand for homes.
My guess is the American consumer is much more willing to do with less than anyone anticipates. I don’t think economists have picked up on how much this round of deflation has affected consumer psychology. You can give the consumer credit but you can’t make him buy. My bet is deflation is here to stay.
May 11th, 2009 at 4:47 pm
[...] back. Betting evenly on a down slope now or later this year I was left with neither bargain nor homework. I then, felt obliged to sink myself in work (yes day work) late into the night. some posts on that [...]
May 14th, 2009 at 12:43 pm
[...] Ritholtz highlighted a great downloadable PDF from Jeremy Grantham of GMO titled The Last Hurrah and Seven Lean [...]