In his latest quarterly letter to shareholders, legendary manager (and longtime bear) Jeremy Grantham of Grantham, Mayo Van Otterloo recommended investors shun stocks and hold cash in "the most important U.S. financial crisis since World War II." Grantham warned that it could take until 2010 to fully clean up the mess caused by this "sloppy-debt-issuing crisis":
Be particularly alert to potential problems beyond subprime mortgages. If U.S. house prices decline by over 20%, which we believe is likely, and if there is a recession, which we believe is very possible, then there will be painful defaults in regular mortgages. Commercial real estate debt is likely to have some write-downs as office estate prices decline and borrowing terms become more onerous. Write-downs and defaults in other debt will also be plentiful. Private equity deals in particular will probably turn out very badly indeed. In my opinion it is the most underappreciated risk of all and is likely to be the center of another phase of the crisis.
The longer-term problem is that all debt standards fell so that losses will accumulate right across the entire credit system. In the end perhaps only government intervention and public funds will stabilize the system... Markets are well into a massive repricing of both risk and asset prices but it has far to go outside the original subprime area, where repricing may have already run its course.... This of course will be a painful process and will be a considerable drag on economic activity. Unfortunately, it is likely to take several years. To house clean completely by the end of 2010 would be a reasonable target... By the end of this credit crisis, perhaps better defined as a sloppy-debt-issuing crisis, we will be lucky if the amount of write-downs does not start with a “T.”