Jeremy Grantham: “I am merely fearful”
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the July edition of his quarterly newsletter entitled “Summer Essays”.
Here are a few excerpts from Grantham’s newsletter.
“I am still committed to my idea of April 2009 that there would be a ‘last hurrah’ of the market, supported psychologically by a substantial economic recovery but then, after a year or so, that this would be followed by a transition into a long, difficult period that I called the ‘seven lean years’. I had, though, supposed that the economic reflex recovery – how could it not bounce with that flood of governmental help to everyone’s top line? – would last longer or at least not slow down as fast as we have seen in the last few weeks. And with unexpectedly strong fiscal conservatism from Europe and perhaps from us, this slowdown looks downright frightening. I recognize that in this I agree with Krugman, but I can live with that once in a while. However, where I am merely fearful, he is talking about another ‘Depression’.
“Despite growing nervousness and despite a slowing economy, I am so impressed by the power of low rates and Greenspanism (for lack of a better or shorter description) that I would still put odds of 45% (down from 50% last quarter) for the market to rise to over 1400 (down from 1500 to 1600 last quarter) by October of next year, accompanied by a speculative spin. On the other hand, I also have to recognize that the 21% I put on a quick and rapid decline to fair value looks even more likely today, perhaps closer to 30%.
“If the market does indeed continue down the current sell-off path, it should result in some unusual movement in the Russell 2000 (small cap index) and possibly even the junky stocks, which might give up their unusual relative strength in a real hurry. I can imagine a situation, for example, where the Russell 2000 gives up a relative 10% in two to three weeks as the aggressive investment world finally has second thoughts on the wisdom of continuing to speculate and changes its mind in its usual rapid way. (Remember, you read it here first.) High quality is perhaps not so promising in this respect, but could still win by several percentage points if the world becomes more circumspect. It would be more typical for quality to outperform over several years.”
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Source: Jeremy Grantham, GMO, July 2010.
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