Jeremy Grantham

2007 All Over Again... Banking Crisis Imminent

The US is drifting back into yet another banking crisis. Despite the headline numbers (like Friday’s largely-fictitious jobs report) that imply a stable, modest expansion, under the surface the financial system - composed of business loans, bank profits, etc. - is deteriorating fast.

Just Three Things

Historically speaking, it is unlikely that with reported earnings early in the reversion process that we will see a sharp recovery in the second half of the year as currently expected by the majority of mainstream analysts. As long as the Fed remains accommodative, the deviation between fundamentals and fantasy will continue to stretch to extremes. The end result of which has never “been different this time.”

Stanley Druckenmiller: "This Is The Most Unsustainable Situation I Have Seen In My Career"

"when I look at the current picture of expected tax revenues combined with benefits promised to future generations, this is the most unsustainable situation I have seen ever in my career." The disaster that Druckenmiller sees coming for the United States is all about changing demographics and entitlement spending. They don’t add up to a sustainable situation. Fixing this is going to require some real sacrifice by the American people and that doesn’t sound like a very appealing platform upon which to get re-elected.

A "Generational" Peak In Corporate Profit Margins

Falling profit margins and rising valuations (as earnings fall) make for a pretty bearish one-two punch for the stock market. Investors will surely become less eager to pay higher valuations for companies growing more slowly. That equation usually works in reverse. And there’s no reason we can see to expect these challenges to corporate profit margins to let up any time soon. The S&P 500 now trades at its highest price-to-earnings ratio since the bull market began even as the index remains well off its recent price highs. And profit margins still could have a long way to fall before even reaching their average level since 1950.

The Stock Market Is A Monetary Policy Junkie - Quantifying The Fed's Unprecedented Impact On The S&P

The bulls will presumably argue that this Fed impact is now part of the accepted wisdom, and that P/Es should remain higher than history in order to reflect the Greenspan/Bernanke/Yellen Put. The bears will suggest that if ever there were a time for the scales to fall from investors’ eyes over the Wizard-of-Oz-like nature of the Fed, then this is it. We are inclined to the latter view. Betting on the Fed’s ability to generate continued market levitation seems like a dangerous game to us, but as Newton long ago opined, “I can calculate the motion of heavenly bodies, but not the madness of people.”

Weekend Reading: Risk - That Is All

While the world patiently waits for Janet Yellen to raise interest rates this month, the markets have been unable to decide as of yet whether such an event is good or bad thing.

Jeremy Grantham Urges "Easily Manipulated" Americans To "Become More Realistic" About World's Demise

Americans have a broad and heavy bias away from unpleasant data. We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff "that just ain’t so." We are dealing today with important issues, one so important that it may affect the long-term viability of our global society and perhaps our species. It may well be necessary to our survival that we become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news.