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The Jeremy Grantham Interview

madhedgefundtrader's picture





 

Jeremy Grantham, of the esteemed Boston money management firm, GMO, LLC, is not a person who suffers fools gladly (click here for their site at http://www.gmo.com/America/About/MissionStatement.htm ).

I learned this the hard way, way back in the Jurassic Period, or some 30 years ago, when I pitched him to become a client of Morgan Stanley’s nascent international equity desk. Grantham, Mayo Van Otterloo, as it was then known, was a newly formed, very astute early player in the great international equity boom of the eighties, and we were desperate to get his business at any cost. In the end, a beautiful, and smart as a whip female associate made the connection, and our firm was more than richly rewarded.

When Jeremy made a rare appearance into the sunlight last week with a media interview, my ears perked up. The diminutive Englishman is brilliant, is one of a few who possess a truly global view, is as rich as Croesus, but keeps at it for the shear love of mastering the three dimensional chess game that is international finance. In other words, he’s a lot like me.
He also articulates my own views of all asset classes with more precision and clarity than I can myself. So I thought it wise to parse the crumbs of wisdom carefully that fell off his table.

Jeremy worries most about the Federal Reserve, which has been manipulating the economy for the last 20 years. Whenever they feel the economy needs a kick, they deploy their only weapon, the “wealth effect”. If they can drive asset prices up, people feel richer, more confident, and spend and invest more. The stock market went up 80% last year, and consumers spent about 2.8% of that gain, or some $280 billion, which adds 2% to GDP, so it is a real kicker. But you can’t see this clearly because of the enormous counter drag from the housing market.

Jeremy believes that the long term US trend growth is only 2% a year. Unless we’re really lucky, we’re going to have another crash. The recent moves in American stocks have been purely speculative. While the S&P 500 went up 20%, the junky part went up 120%.

The Fed is now using quantitative easing to trick us into buying one overpriced asset, stocks, because the alternative, bonds, is even more overpriced. The third alternative is to not play the game and hold cash. Cash gives you optionality, in that if you get a crash in the S&P 500 down to 900, which is where he sees fair value, then you have the money to do something about it. If you are fully invested, you don’t.

With interest rates at zero, the Fed has made cash so ugly that they are forcing you to speculate. Jeremy fears that the market will continue to accumulate risk. Real interest rates are negative, so it is not surprising that people are borrowing money to do this. The consequence is that you get booms and busts. Everything risky prospers. Then shear overpricing causes markets to break.

If you want to go with the flow, don’t fight the Fed, but be very nimble on your feet. You can play with a pretty good chance of winning for a few more quarters. The time to start acting conservatively is now.

The problem is that this time there is not much ammunition for the current heady market conditions to last much longer. In 2000, the Fed and the government had good balance sheets. Now they don’t. When this one breaks, we may have some real Japanese type deflationary experiences. When the wealth effect gets given back, plus interest, the markets crash. All of the employment is given back too, as jobs are lost.

As a card carrying value manager, Jeremy despises playing in a world of overpriced assets, where we are now. The Fed is driving the S&P 500 from very overpriced to dangerously overpriced. For the next seven years, he expects the US stock market to deliver only an annual 1% return, plus the inflation. If you push it up over 20% from here in the next year, it enters bubble territory, ready to inflict serious pain. He’s already started to sell for major institutional clients.

Jeremy is convinced that we are already in a currency war. Depreciating your currency is the same as raising import tariffs, which occurred in the 1930’s. This offers some miniscule short term gains, but at the price of large long term costs.

Regarding commodities, it will become devastatingly clear that we are running out of everything. Commodity prices declined for 100 years, but the fall stopped about five years ago. Maybe only oil was flat. The birth rates of China and India can’t be borne by the declining quantities of commodities. We have a chain link of crisis to look forward to, where panic buying spills from one commodity to the next. 

Commodity prices could be peaking here short term. If there is a big break next year, it would be a terrific buying opportunity. If you can bring yourself to adopt a long horizon, say ten or 20 years, then locking up resources in the ground is a terrific idea. The oil industry has doubled since 2000, not because they were brilliant, but because oil prices increased four times. It has clearly broken out now to the upside.

Jeremy argues that it is the great movements between asset classes that makes you money. He over weighted emerging markets back in 2000, which have since outperformed the S&P 500 by 330%. The case for emerging markets is so crystal clear that they will continue to outperform until they command premium price earnings multiples. Their economies are growing at 6% a year, while the US is eaking out a measly 2%. The developed world is now slowing down further. Emerging markets are starting to approach that excess premium, but we still have several years to go until it is fully priced in.

If Jeremy had a gun to his head and had to do something with the $92 billion he advises, he would have a heavy overweight in big US blue chips. The old fashioned super blue chip franchises, like Coca Cola (KO), are much cheaper than the rest of the market. He also would have a modest overweight in emerging markets, which are a bit overpriced, but have plenty of potential. Beyond that, he would have higher than normal levels of cash to put to work when the major blow ups occur. He has a big allocation in patience.

That is a quality that investors and traders alike seem to find in permanently short supply.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 


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Tue, 11/23/2010 - 03:15 | Link to Comment alexwest
alexwest's picture

so humble...

#The diminutive Englishman is brilliant, is one of a few who possess a truly global view, #is as rich as Croesus, but keeps at it for the shear love of mastering the three #dimensional chess game that is international finance. In other words, he’s a lot like me.

so you are

# brilliant

#one of a few who possess a truly global view

#rich as Croesus

let me SIR do not agree.. you are stupid as SARA PALIN ASS..

at least after reading you so called analysis thats my impression..

alx

 

Tue, 11/23/2010 - 02:31 | Link to Comment Deus Ex Populo
Deus Ex Populo's picture

By just posting the link to the Bartiromo interview of Grantham ( http://www.zerohedge.com/article/jeremy-grantham-fed-has-spent-last-20-y... ), MHFT could have spared himself (and us) about 1100 words, his sheer/shear display of literary ineptitude, and the small helping of self-aggrandizement we've become so accustomed to finding in his iconoclastic out-of-consensus missives.

 

The weak synopsis given here scores at a B level for what it is - a freshmen level rewritten version of a 30 minute video.

 

Mon, 11/22/2010 - 18:19 | Link to Comment revenue_anticip...
revenue_anticipation_believer's picture

MHF is your $900/yr 'shear' per subscriber proving out, back-testing OK?  Or is it 'sheer' walking the walk, talking the talk, amusing always...

Mon, 11/22/2010 - 18:05 | Link to Comment revenue_anticip...
revenue_anticipation_believer's picture

delightful, excellent narrative as usual, always johnny on the spot, huh! Love the cute Jesus story .....from a while back....cannot find it, so long long ago..

Hold USA CASH for the moment, eh?  

http://www.voanews.com/english/news/a-13-2005-10-18-voa46-67514017.html

http://www.sciencedaily.com/releases/2008/04/080414203459.htm

http://en.wikipedia.org/wiki/San_Andreas_Fault

how about a sell/buy pair for some leverage, while waiting, preparing for the S.F. "big one"....short SF CRE real estate, long Mumbai CRE,  or such thing?

Mon, 11/22/2010 - 16:05 | Link to Comment the grateful un...
the grateful unemployed's picture

I question his call on Blue Chips. I see the current economic malaise as a war between corporate and non-corporate businesses. Profit margins started to decline, and Wall Street bankers directed money to those companies listed on the NYSE, and applied the rule of usury to the rest. The political class, (which is all in on the corporate side) did their part to help, boosting stock valuations, which freed up more money for buybacks, and made credit for the corporate class almost free. 

The decline of blue collar America was built as the age of entrepreneurship, but the moneyed interests pulled the rug out from under grass roots economic development (while spouting propaganda about green shoots). Many government employers, also forced workers to assume the position, of independent contractor. 

At the same time they created massive mortgage fraud, (which kept consumers spending, at zero APR, while the same guy was paying 20% interest to meet his business financing needs. 

The future of the corporate business model is gloomy, because of (foreign) competition, and the lost allure of mass produced products, the head of Coke said, a few years ago, that someday, there will a Coke for everyone. Such a statement contradicts the corporate premise of a uniform product distributed to a diverse global market. There is no one size fits all anymore.

The second premise (or promise) in corporate distribution, includes access to all products at all times. If consumers in India have their own Coke product, should that be available in all stores? The basis of uniform products and distribution comes into question, and raises new challenges to the benefits corporations gain through synergy, or will the special brand of Coke for India, be made in Mexico because its' cheaper? 

The death knell to the corporate model is the demise of big government, which needs access to massive amounts of uniform products. (think military uniform, a pun to be sure) As governments shrink, the role of corporations in government shrinks, and the ability to lobby for benefits disappears. Without corporate welfare, there is no corporation.

And for a long time corporations were thought of as public trusts. That is if they did something wrong, blew up an oil well for instance, the government would forgive the mistake, to the degree that the corporation could stay in business and continue to supply our needs. SCOTUS has taken the view that corporations are individuals, and have rights, but they also have accountability.

In the future businesses which have real profit margins will suffice. that is products with value added like alternative energy solutions. That's where i would be looking. businesses which function as middle men, the people at Coke take some sugar and some water, and then brand themselves, they are really middlemen, in that sense of the word. I want to see value added, and to that end a true VAT, is acceptable, which excludes the vast majority of consumables.

 

Mon, 11/22/2010 - 15:51 | Link to Comment jeff montanye
jeff montanye's picture

he may be a lot like you but i bet he knows the difference between sheer and shear.

Mon, 11/22/2010 - 15:00 | Link to Comment doolittlegeorge
doolittlegeorge's picture

reread your "Liar's Poker."  It's called a "Confidence Game" (another great book btw) and surprisingly to the author of Liar's Poker "he had to right another one called The Big Short." Clearly "he should be working on a third" because "this is government business now." 

Mon, 11/22/2010 - 13:53 | Link to Comment ATG
ATG's picture

The diminutive Englishman is brilliant, is one of a few who possess a truly global view, is as rich as Croesus, but keeps at it for the shear love of mastering the three dimensional chess game that is international finance. In other words, he’s a lot like me

You can play with a pretty good chance of winning for a few more quarters. The time to start acting conservatively is now

Classic MHFT gobble

Looks like Mr Market was maybe dry cleaned and crease pressed early courtesy of FBI, margin calls and Sinn Fein

TD ZH WR Flash crash anyone?

Market does often turn around holidays

http://www.youtube.com/watch?v=FKCnHWas3HQ 3:02

 

 

Mon, 11/22/2010 - 11:46 | Link to Comment Bill Lumbergh
Bill Lumbergh's picture

I think the aforementioned content was already posted via a video on ZH.

Mon, 11/22/2010 - 11:38 | Link to Comment Orly
Orly's picture

Excellent.

Thanks.

 

Mon, 11/22/2010 - 16:01 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Orly, they ain't fillin' the gaps in silver!!

 

I kid, I only kid.  Hope you are serving the 4X its ass today, but remember, please buy some physical  ;)

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