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 (UUP), CurrencyShares British Pound Sterling Trust (FXB), CurrencyShares Japanese Yen Trust (FXY), CurrencyShares Swiss Franc Trust (FXF). Singapore has no currency ETFs, but does have exposure to its equity markets through iShares MSCI Singapore Index Fund (EWS) and Singapore Fund (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 (DIA) or the S&P 500 Index ETF (SPY). For emerging markets, use the iShares MSCI Emerging Markets ETF (EEM), the SPDR S&P Emerging Markets ETF (GMM) or the Vanguard Emerging Markets ETF (VWO). For the Russell 2000, use the iShares Russell 2000 Index ETF (IWM).]
