This is a guest post from Tom Cleveland
In eras long past when the future was highly uncertain, the masses would seek out the scions of their day for enlightenment. The Oracle of Delphi comes to mind, but in these turbulent economic times we need not seek counsel from the strange interpretations of resident priests. Instead, we can prevail upon the wisdom of a few selected market professionals that have accumulated years of experience and a positive track record in their market-based predictions. Jeremy Grantham is just such an individual.
Mr. Grantham is one of our esteemed, elder statesmen, investor, and Chairman of the Board of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm with over $100 billion in management. He and his firm have correctly forewarned others about no less than 34 asset bubbles that have transpired over the past several decades. He predicted the Internet crash two months before its collapse and warned investors about the most recent recession and real estate market debacle. In a recent interview with a popular cable commentator, Mr. Grantham shared his current thoughts on the state of global markets.
Here is a summary of a few of his more salient insights:
- The Fed’s $600 Billion Quantitative Easing Program: The Fed should be in the business of destroying asset bubbles before they form, not creating them from the outset. Their proposed program worries him the most since it will weaken the Dollar and threaten currency wars across the globe. It will be difficult to accuse the Chinese of manipulating their currency while we are manipulating ours. Commodities have skyrocketed, an obvious bubble, and stocks are overvalued, another “boom and bust” cycle in the making;
- What is going on with commodities? The simple fact is that there are not enough of them to go around. The hard metals, like Gold, Silver, Copper, and Palladium have witnessed steep run-ups that are unsustainable, an indication that the global economy is in recovery. However, the run-ups in the soft commodities, cotton, corn, rice, and wheat, have also gone through the roof. A weakening dollar only makes a bad situation worse, bordering on disaster. Currency manipulation is just another form of tariff;
- What about Emerging Markets: Mr. Grantham began advising investors back in 2000 to invest in the developing world. The value appreciation over the past seven years has been 3.3 times that of the S&P 500 Index, and there may be a few more good years to go. The developed world is mired in 2% growth targets while developing countries are in the 6% plus inflation range. Population demographics favor emerging countries as well;
- Are Stocks and Bonds worth buying? Both are overvalued in his estimation. Fair value for the S&P 500 Index is in the 950-range. Old blue-chip stocks that pay regular dividends are cheaper than the rest of the market;
- And what of the Dollar? He believes it is a cheap currency at the moment, but if a true currency war erupts around the globe, then anything could happen and forex software may be stressed by the volatility. QE2 and any following programs, coupled with low interest rates, force investors to take risks for their returns. If it leads to increased domestic employment, that is a good thing, but it will redistribute wealth from retirees to the rich that save and spend less, an especially bad idea at the moment.
Currently Mr. Grantham is advising clients to be in cash, with some blue chips and emerging markets, and to be patient. Investment opportunities will come in short order.
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