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Jeremy Grantham, "one of the grandest of thinkers and most eloquent of oracles," tells Barron's that today's bear market is like none we've seen -- the difference being unprecedented financial globalization and a first-ever global bubble in virtually all asset prices. Grantham scoffs at the idea government-supplied stimulus can stop the bear; he foresees the S&P 500 (currently 1,334) at 1,100 by 2010.

On monetary and fiscal stimulus: Grantham notes that increased debt has failed to stimulate the economy: Over the past 35 years, during which debt jumped from 1.2x to 3.1x GDP, GDP growth decelerated from 3.5% to 3%. This leads him to conclude that recent Fed actions can be seen as nothing other than an overreaction to the decline in global stock markets. He notes that after 9/11 "the greatest stimulus in American history, an unparalleled series of interest-rate cuts", cumulated "in two, almost three, years of negative real returns".

On private equity: He worries about further decline in the leveraged-buyout arena, noting firms are still assuming they can boost margins by 15%, when in fact it's possible margins could decline by 20-30% as profit margins revert to their historical mean and then get compressed further by a recession. He calls private-equity "the next shoe to drop."

On the housing market: Grantham says housing still has 20-25% to fall before it hits normal levels, which will in turn take a toll on consumer spending.

On valuations: "Everything is expensive. All we are trying to do is extract some relative money, or by going short, actually make some real money." Specifically:

  • For a currency trade, he suggests going long the yen, Singapore dollar and Swiss franc against the dollar and the pound. [Editor: note the following ETFs: PowerShares DB US Dollar Bullish Fund (NYSEARCA:UUP), CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY), CurrencyShares Swiss Franc Trust (NYSEARCA:FXF). Singapore has no currency ETFs, but does have exposure to its equity markets through iShares MSCI Singapore Index Fund (NYSEARCA:EWS) and Singapore Fund (NYSE:SGF).]
  • For equities, Grantham suggests a combined position of 50% long U.S. quality stocks, 50% long emerging markets hedged with a 100% short position in the Russell 2000. [Editor: Grantham defines "quality stocks" as those with high and stable returns and low debt; the closest ETFs are the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) or the S&P 500 Index ETF (NYSEARCA:SPY). For emerging markets, use the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM), the SPDR S&P Emerging Markets ETF (NYSEARCA:GMM) or the Vanguard Emerging Markets ETF (NYSEARCA:VWO). For the Russell 2000, use the iShares Russell 2000 Index ETF (NYSEARCA:IWM).]
Source: The Fed Won't Save Us, But Here's How to Make Money - Barron's Interview with Jeremy Grantham