Tuesday, April 1, 2014

Jeremy Grantham on the Stock Market

Yesterday, in the comments, JP brought our attention to an article about Jeremy Grantham.

As a money manager and investment strategist Grantham commands considerable respect. When he talks, people in the investment world pay very close attention.

In an interview with the Sydney Morning Herald Grantham explained that he would not put his clients’ money into stocks right now. He is expecting what the Bible called the seven lean years that followed seven fat years. 

In truth, we haven’t had seven fat years yet, but there’s still time.

To be more serious, Grantham looks at the markets within a seven-year time frame. If he does not believe that the market will be higher in seven years, he does not invest in it.

To Grantham’s mind, the fault lies with the Federal Reserve:

Over the next seven years we think the market will have negative returns. The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before.

Assets are overpriced generally. They will become cheap again. That's how we will pay for this. It's going to be very painful for investors.

Grantham believes that Federal Reserve interventions have slowed down the economic recovery. He does not believe that debt creates economic growth.

The Herald reports its conversation:

When questioned to provide evidence backing his claim, Mr Grantham said while there was ''some indication'' the crash and downturn would have been sharper had the Fed not intervened, there's ''no proof on the other side that the economy is any stronger from quantitative easing''.

''By now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.

''In the economic crisis after World War I there was no attempt at intervention or bailouts and the economy came roaring back.''

In Grantham’s words:

My view of the economy is not principle-based. Higher interest rates would have increased the wealth of savers. Instead, the have become collateral damage of Bernanke's policies.

The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle?

There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It's anecdotal evidence, but we have never had such a limited recovery.

In fairness, legendary investor Jim Rogers and legendary bond market analyst Jim Grant have been saying the same thing for years now. They have consistently asserted that Fed policy would stifle the recovery and cause more long-term damage.

One notes that Grantham does not hold the Obama administration’s policies responsible for any of it.  Apparently, he is a Democrat.


Bizzy Brain said...

Am surprised Grantham didn't follow up his pessimism with a pitch to buy gold.

Ares Olympus said...

Bizzy, Is Grantham a gold-bug?

It's a powerful claim to say the market won't be higher in 7 years than now, but very credible given our year 15 seesaw and third bubble peak. But it does get tricky how to define your baseline - if by 2020 stocks are seesaw, but still up 100% from current peaks, while CPI is up 50%, that's still a better return than under your mattress.

On metals, I have some silver coins my dad bought, and I guess I'll need them to cross the border into Canada after the military takeover or whatever force will hold social order together through the next crisis.

I find it entertaining when people say gold will be $20,000/oz, and perhaps it'll be true when it costs $100 to by an apple, so it may or may not be sensible to buy silver at $1000/oz now to buy 200 apples someday, you never know how hungry you'll be.

It is interesting to anticipate a large market correction and try to hold "cash" long enough to take advantage of the new low, but betting on the low is just as hard as betting when to exit a high. OTOH, if you're putting your money on local property when everyone is else selling, and you're the only one with cash, it seems a good deal.

I like the tsunami analogy of money - sometimes the tsunami wave comes in at a low, and miles of sea floor are exposed (temporary deflation in a buyers market), but you have to move quick to take advantage. Meanwhile holding cash won't work if the wave comes in as a high tide, and money printing steals the value of all your cash before you can buy things you think will be worth something when the dust settles.

I like the idea of investing - that there are times that "losing less" is the best you can do, so for those with assets to sell, looks like a good time, and even if you sit on it for 7 years, its still security, whatever happens, and if you didn't need it anyway.