Widely watched investor Jeremy Grantham has turned decidedly negative in his portfolio recommendations and remains disenchanted with U.S. economic leadership.
In his newly released quarterly letter to investors, asset manager GMO’s chief investment strategist has revisited his attention-getting early 2009 letter predicting “seven lean years.” At that time Grantham forecast 2% average annual GDP growth, down from a normal 3.5% rate. But economic performance since that time has been so weak that it would now take an economic miracle to reach a 2% annual growth rate, he says.
“Even to average 1.5% growth for the seven years from 2007 to 2014 would take 3% a year growth, which seems at the upper end of a reasonable range,” Grantham writes.
Grantham (left) says that U.S. economic conditions – with a few notable exceptions – have markedly deteriorated since his 2009 letter. Among a long list of negatives, Grantham says “the lower GDP forecasts inherent in the seven-lean-year environment would guarantee, if they materialize, much higher U.S. deficits than currently forecast” (emphasis his).
Grantham discusses U.S. private and public indebtedness at length, going so far as to say that “the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary,” echoing author and financial analyst Nicole Gelinas, who has addressed this topic as well.
Grantham argues “the extra 4% to 5% of home ownership that resulted from sustained overstimulation must revert to its economically justified level,” meaning “house prices are unlikely to roar back.” Rather, “a multi-year sustained overrun on the downside has normally followed the breaking of a major bubble like the one just witnessed.”
Grantham sees another bubble-like recent development – “freakishly high corporate profits” – as likely to end badly: “A sub-average economic recovery, threatening to become painfully sub-average, has not stopped corporate profits from quickly rising to a level that is about as high as they have ever gotten.”
Following the U.S. debt ceiling agreement, which has initiated a new era of decelerating government spending, Grantham expects pressure on profits to intensify.
In his signature commentary on issues of leadership, Grantham discusses the propensity of Western political leaders to kick the can down the road. Calling his comment “Danger: Children at Play,” Grantham laments that the U.S. government allowed a sharp rise in its debt-to-GDP ratio over the past 10 years, then forced a last-minute choice between a cut in government expenditures at a time of economic weakness versus allowing a technical default that would damage the dollar and signal to the world “that the U.S. … is not a serious country and is probably past its prime.” Decrying both congressional Republicans “blackmailers” and “President No-Show,” Grantham argued our debt-ceiling performance makes the U.S. look like a “Banana Republic.”
Noting how his native Britain’s imperial rule extended across the globe in his youth, the Boston-based investor said the rapid dissolution of the British empire just 20 years later is a warning to the U.S. of the speed of change: “It would be a shame to see my adopted country also fall away from a leadership position in which it has been a working demonstration not just of entrepreneurial drive and effective government, but also of social justice and international leadership and assistance.”
From that macro-view down to the portfolio level, Grantham advises investors to keep their heads down, now and for the foreseeable future. “We are now very modest buyers for the first time since mid-2009,” he says. Global markets and the U.S. particularly had been doing remarkably well until recently, he says, remarking: “What a terrible mistake it always is to expect stock markets to reflect economic reality in the short term … The market has this always disturbing habit of ignoring the obvious and ignoring it some more, until, in the blink of an eye, it doesn’t.”
Grantham sees most global equities as ranging from “unattractive” to “very unattractive” – valuing the S&P 500 at “no more than 950.” At the top of his buy list, though, are forestry and farmland; hydrocarbons, metals and fertilizer; U.S. and overseas “quality stocks;” emerging markets; and Japanese stocks, which he believes are due for regression to outperformance. He advocates cash as a safe haven and resource for opportunistic buying. The main risk ahead, Grantham warns, is the market staying below long-term averages for several years.
In his January 2011 letter, Grantham was bullish on stocks, but warned of danger to come: “Be prepared for a strong market and continued outperformance of everything risky” while “living on borrowed time as a bull,” he advised. “By Oct. 1 you should probably be thinking much more conservatively.”