Doomsayer Jeremy Grantham: ‘7 Lean Years’ Too Optimistic

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.”