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.”