"Be prepared for a strong market and continued outperformance of everything risky" while "living on borrowed time as a bull," the legendary market pessimist advises. “By Oct. 1 you should probably be thinking much more conservatively."
Grantham frets that rising resource prices could cause serious inflation in some emerging countries this year which, in theory, could stop the progress of the bubble he says is forming in domestic equities.
“In practice, it is unlikely to stop our market until our rates have at least started to rise,” he writes. “Given the whiffs of deflation still lingering from lost asset values, the continued weak housing market, weak employment, and very contained labor costs, an inflationary scare in the U.S. seems a ways off.”
Other Grantham predictions include:
- Be prepared for a strong market and continued outperformance of everything risky.
- But be aware that you are living on borrowed time as a bull; on our data, the market is worth about 910 on the S&P 500, substantially less than current levels, and most risky components are even more overpriced.
- The speed with which you should pull back from the market as it advances into dangerously overpriced territory this year is more of an art than a science, but by Oct. 1 you should probably be thinking much more conservatively.
- As before, in our opinion, U.S. quality stocks are the least overpriced equities.
- To make money in emerging markets from this point, animal spirits have to stay strong and not much can go wrong. This is possibly the last chapter in a 12-year love affair. Emerging equities seem to be in the early stages of the “Emerging, Emerging Bubble” that, 3½ years ago, I suggested would occur. How far a bubble expands is always anyone’s guess, but from now on, we must be more careful.
- For those of us in Asset Allocation, currencies are presently too iffy to choose between. Occasionally, in our opinion, one or more get far out of line. This is not one of those occasions.
- Resource stocks, as in “stuff in the ground,” are likely to be fine investments for the very long term. But short term, they can really ruin a quarter, and they have certainly moved a lot recently.
- We think forestry is still a good, safe, long-term play. Good agricultural land is, as well.
- What to watch out for: Commodity price rises in the next few months could be so large that governmental policies in emerging countries might just stop the global equity bull market. My guess, though, is that this is not the case in the United States just yet.