Jeremy Grantham: Collapse is Over, But Monumental Challenges Remain

by: Jeremy Grantham

In his latest market commentary, fund manager Jeremy Grantham of Grantham, Mayo Van Otterloo strikes both a bullish and bearish tone - and is must-reading as always. Grantham's essays are particularly difficult to excerpt, since they are dense with meaning and develop thoughts gradually, but here are a couple paragraphs in any case. And don't miss Grantham's "Appendix of Well-Informed Guesses" that summarizes his current forward thinking. (The entire commentary is embedded below.):

The financial and economic collapse that I described as “the most widely predicted surprise in the history of finance” about 18 months ago is behind us. More precisely, we believed that bubbles had formed in global profit margins, risk premiums, and U.S. and U.K. housing prices, and that all three were “near certainties” to break, with severe consequences for the economic and fi nancial system. All have thoroughly burst and are in their overcorrection phase with the single exception of U.K. house prices, which I’m confident will do their duty...

If we are looking for any further drawn-out negatives, I suspect we could add the more touchy-feely factor of confidence. We have all lost some confi dence in the quality of our economic and fi nancial leadership, the effi ciency of our institutions, and perhaps even in the effectiveness of capitalism itself, and with plenty of reason. This lack of confi dence will not make it easier for animal spirits to recover. This does not mean necessarily that we haven’t already seen the low, for, in my opinion, it is almost 50/50 that we have. It is more likely to mean a long, boring period where making fortunes is harder and investors value safety and steady gains more than razzle dazzle. (The flaky, speculative nature of the current rally thus bears none of the characteristics that I would expect from a longer-term market recovery.)

Jeremy Grantham, Quarterly Letter