Jeremy Grantham: Slowly Invest in Global Equities

Jeremy Grantham of GMO is out with his January letter (.pdf) covering 4Q08, and the whole thing is well worth reading (posted in full below). Grantham comments on his current 'disillusionment' with our political and financial leadership, and on Barack Obama's 'missed opportunity' in his choice of financial advisors.

Here are excerpts from Grantham's current recommendations for investors:

Slowly and carefully invest your cash reserves into global equities, preferring high quality U.S. blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day.

In fixed income, risk finally seems to be attractively priced, in that most risk spreads seem attractively wide. Long government bond rates, though, seem much too low. They reflect the short-term fears of economic weakness and the need for low short-term rates. We would be short long government bonds in appropriate accounts.

As for commodities, who knows? There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower confidence bets.

In currencies, we know even less. It is easy to find currencies to dislike, and hard to find ones to like. There are no high-confidence bets, in our opinion.

For the long term, research should be directed into portfolios that would resist both inflationary problems and potential dollar weakness. These are the two serious problems that we may have to face as a consequence of flooding the global financial system with government bailouts and government debt.

Jeremy Grantham Letter_4Q08

Hat tip: Todd Sullivan

Comments

[GloomBoom.com:]

Invest slowly? What a joke. Wait until 2011 and see if these companies are still around. Buy gold!!

Jan 24 02:10 PM

[sleepless_o...:]

Jeremy Grantham, if one has a five to ten year horizon, you have presented a good analysis.

GloomBoom, if one has a five to ten month horizon, you have offered a valuable comment.

Jan 24 02:22 PM

[klarsolo:]

GloomBoom, when do you think you should start investing again? When all the problems solved and the economy is in full swing? Let me know if you think you can still get in then at current prices or 50-60 % higher.

Jan 24 03:03 PM

[bigmoney:]

what will the pending Alt-A / Option ARM situation do to equities?

Jan 24 05:29 PM

[Ricard:]

During January 2008, Mr. Grantham pulled his clients out of everything, citing that in such conditions, any risk was too great to take. Prescient. For the past 3-4 months, he's been advocating slowly easing into emerging market equities and high quality blue chips, along with his S&P 600 to Bust argument. After watching him on a rare PBS interview, I am inclined to agree with his judgment. I've been selling puts and holding onto cash awaiting a further decline in equities.

Jan 24 05:44 PM

[ron_paulite:]

Yes, buy Gold.
But note that the Dow-Gold ratio now is about 9 times;
meaning Gold is not that cheap anymore.
The Dow-Gold ratio can go down all the way to below 2 as it did the stock market crashes in 1932 and 1980.
Even if the Dow-Gold ratio goes down only to 5 times, that would mean $1,000 Gold and 5,000 Dow. Both very possible targets.
So yes, Gold has some more upside but be beware that the upside is limited unless all the hell break loose, i.e. Dow-Gold ratio below 2 as in 1932 and 1980 -- which is also highly possible -- meaning Gold higher than $2000 and Dow lower than 4,000.

Jan 24 06:26 PM

[cool hand luke:]

Invest slowly? check this out...Thermogenesis (KOOL).

Jan 24 07:02 PM

[Anthony Alfidi:]

More ARM resets will destroy equities. Banks will be forced to curtail lending again as they write down more mortgages, which means last fall's credit crunch will be back. Decelining corporate earnings will lower the denominators of the P/E ratios for major indexes . . . equities will look overpriced again . . and will adjust accordingly.

The DJIA at 5000 may look about right sometime in 2009.


On Jan 24 05:29 PM bigmoney wrote:

> what will the pending Alt-A / Option ARM situation do to equities?
>

Jan 24 10:49 PM

[investor88:]

Jeremy says sp500 at 600 is good level for investing. Logical enough. Take a stab at sp500 at 600 with stop would not hurt.

Jan 25 03:23 AM

[donzelion:]

For U.S. and developed market blue chips, there is fairly reliable information available, and research could be well-spent. However, for emerging markets, unless you know enough so that investing would amount to insider trading (and hence be illegal), you're pouring money into a black box of uncertainty.

Which means, either
(1) expect research to disclose information about companies in foreign countries that their own auditors failed to detect (invest when you know more than an auditor), or
(2) buy emerging market ETFs.

I like dividend weighted ETFs for emerging markets - DEM, rather than EEM or VWO - because a company can do a number of things to manipulate its market capitalization when nobody is looking - but it's awful hard to pay out dividends if you don't have cash on hand (and don't want to take out loans to do it).

Jan 25 03:28 AM

[prudentinve...:]

I agree with all Mr. Grantham's recommendations, except that I would not touch any bond at current prices if it matures in more than 2-3 years. The inflation risk is just too great as soon as we are past the current, likely brief, period of price stability. This is not yet priced into long bonds of all types, which would need to be about 12% for taxable bonds with a "real AAA" to realistically cover the inflation risk.

The market most likely has much farther to fall, and, for what my prognosis is worth, probably to around SP600, or even less. But I still agree with Mr. Grantham's advice to slowly and carefully invest in stocks, because there is also some risk, around 20% in my judgment, that reinflation can catch on sooner than 2010. This reinflation may not increase the real value of all stocks you buy today, but may well increase some nominal values relative to (devalued) cash.

Jan 25 09:27 AM

[mrresponsible:]

Grantham apparently is betting that the dollar will decline.

Jan 25 10:16 AM

[Top Gun:]

As governments manipulate everything, we cannot logically invest - that is allocate capital to fuel the economic engine. Mr. Grantham echos my thoughts, which makes me feel a whole lot better. Doesn't solve the problem, though.

We do not have a game changing place to invest, and the choices we do have are not big enough to offset the credit induced asset bubble currently in place. I think time, maybe 3-5 years, is the only thing that will get us back on track. This shouldn't be looked at as failure unless wee see hunger, homelessness and social strife - then we have failed as a society. This is our first chance to prove we have conquered those things.

Jan 25 11:31 AM

[applesauce:]

It is hard to invest when the Government changes the playing field every other weekend. Recently people sell on fridays afraid of what they will wake up to on the following Monday.

Jan 25 02:24 PM

[Teutonic Kn...:]

I concur as well; not only does the Obama economic team looks pretty "Old" - full of old Clintonian hands, his entire team has little Obama's much touted cut for CHANGE. Hopefully we are not being run by a voice behind the throne.


On Jan 24 06:26 PM ron_paulite wrote:

>
> Yes, buy Gold.
> But note that the Dow-Gold ratio now is about 9 times;
> meaning Gold is not that cheap anymore.
> The Dow-Gold ratio can go down all the way to below 2 as it did
> the stock market crashes in 1932 and 1980.
> Even if the Dow-Gold ratio goes down only to 5 times, that would
> mean $1,000 Gold and 5,000 Dow. Both very possible targets.
> So yes, Gold has some more upside but be beware that the upside is
> limited unless all the hell break loose, i.e. Dow-Gold ratio below
> 2 as in 1932 and 1980 -- which is also highly possible -- meaning
> Gold higher than $2000 and Dow lower than 4,000.
>
> I agree with Jeremy. Obama economic team is a disappointment, filled
> with Yes men who didn't see this crisis coming or see it but lacked
> the backbone to call it. Obama should get some outsiders like
> Peter Schiff, Ron Paul, George Soros, etc. Peter and Paul called
> this bubble burst three years ago, went on TV to talk about it and
> were ridiculed for their doomsday views every time. Yes, you may
> accuse them of being too extreme or too pessimistic, but you cannot
> accuse them of lacking backbone. And yes, Paul Volcker has some
> backbone. He did what was necessary but unpopular in the 70's to
> tame inflation. Lawrence Summers, Tim, etc., are all spineless
> yes men. Hopeless. I don't have much hope in Obama.
>
>
>

Jan 25 08:34 PM