Jeremy Grantham: Meltdown – “I’m officially scared!”

By Prieur du Plessis, on July 31st, 2008 posted in: Investment, Markets, Money

After having ventured on the bullish side of things a few days ago with Martin Pring’s upbeat scenario for stock markets (Time to be Optimistic), we revert to a significantly more sceptical outlook today.

The bearer of the bad tidings is well-respected money manager Jeremy Grantham who has just published the July edition of his quarterly newsletter entitled “Meltdown! The Global Competence Crisis”. Grantham co-founded Boston-based GMO, an investment house overseeing $126 billion in assets, in 1977.

Reflecting on his comments of a year ago and how events have played out, he says: “I thought things would be bad enough but they turned out to be a lot worse. I thought a year ago we were looking at the ‘first truly global bubble’ in asset prices. The credit crisis looked to be so predictably powerful and unstoppable then that I likened the experience to ‘watching a slow-motion train wreck’, and I predicted that ‘one major bank (broadly defined) will fail within 5 years’, for which I got considerable grief as a doomsayer, as the less optimistic strategists usually do. Well, a year later one bank failure looks positively quaint as a prediction.

“Ironically for a ‘perma bear’, I underestimated in almost every way how badly economic and financial fundamentals would turn out. Events must now be disturbing to everyone, and I for one am officially scared!”

In terms of strategy, Grantham summarizes his view in what he believes should be investors’ motto: “Don’t be brave, run away. Live to fight another day.”

Click here for the full report on Grantham’s reasoning for his bearish stance.

Source: Jeremy Grantham, GMO, July 30, 2008.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

Scott

July 31, 2008 at 4:21 pm

This was a very interesting report.
Its amazing how accurate their asset class forecast was.

The chart on UK housing was SCARY!

Eber Terastein

July 31, 2008 at 9:58 pm

With all due respect, Jeremy Grantham is suffering from a malaise common to persons in our age bracket: the overwhelming apocalyptic feeling that we believe emanates from the markets, when in reality is nothing but the prefiguration of our own mortality.

In other words: we should not confuse our impending physical dismisal with a crash in the stock market. Pshycology aside, Mr Grantham’s recent disclosed performance comes very short to endorsing any credibility to his increasingly gloomy prediction. But I agree that the performance of his funds is certainly gloomy.

Bryce Wheeler

August 1, 2008 at 2:03 am

Granthams article was a wonderfully comprehensive commentary on our current economic status. He certainly did not exaggrate the rough winds still ahead for at least two to four years as to credit problems and balance sheet fiscal problems.

As indicative of those who have their heads buried in the sand is Greenspan saying that our current fiscal mess is a “one hundred year event”!!! Ya sure. Greedy Wall Street equity and hedge funds will do many new versions of reckless fiscal engineering again plenty soon causing a similar mess within 15 to 20 years as most all penalties of failure seem to be absolved by the government or st least very much minimized. Those black swans are sure getting common.

james whitehead

August 1, 2008 at 2:10 am

both sides of the economy Pring/Grantham

Jim Hancock

August 3, 2008 at 1:31 am

Most of Jeremy’s article I already knew, but found three things interesting:

1) UK housing is over 6 standard deviations away from “normal.” Is this a 1000 year event! 🙁

2) UK has been over 3 SDs away before and significantly overshot to the downside when deflating. The implications for our housing market are scary.

3) I am really surprised he believed the decoupling hype and got emerging markets wrong until now. I guess nobody gets it 100% right all the time. I can surely relate. 🙂

Other than these 3 things the article tended to reinforce what I already thought. It was a nice summary though…