Grantham's quarterly letter covers the following topics
- Volckerization - Grantham endorses the "Volcker plan" for "Glass-Steagall-lite." His primary reason is that it eliminates the conflict of interest inherent in running a prop desk alongside a commercial bank. The existing structure incents unecessary risk taking in organizaitons. "Let's learn from our near disaster. Viva Volcker!," he says.
- The Supreme Court Decision on Corporate Campaign Financing - Grantham is highly critical of the recent Supreme Court decision removing restrictions on corprorate campaign donations. He says this places too much power in the hands of corporate management, by allowing it to exert political influence.
- The Patagonia Insight - Grantham discusses his reflections upon returnng from a recent vacation in Patagonia. His view of the economy is "boringly unchanged: 'Seven Lean Years'" He forecasts below average GDP growth, profit margins and P/E ratios. Over the short term, though, things will be "odd and unpredictable" due to the massive governmental response. "So all investors should brace for the chance that speculation
will continue for longer than would have seemed remotely
possible six months ago," he says. He puts a fair value of 850 on the S&P 500. He warns, "Equity markets almost always peak when rates are low,
so moving in desperation away from low rates into
substantially overpriced equities always ends badly." He is slightly underweight global equities and "reluctantly" investing the balance in fixed income. He prefers high-quality stocks, which "should hold their own or even outperform."
- A Brief Review of the Decade - Grantham reviews performance across global capital markets and within the GMO funds. As for the next decade, he warns, "Going into this next decade, we start with the U.S.
overpriced, so do not be conned into believing that every
bad decade is followed by a good one." He forecasts 3% real returns for the next decade.
- Lessons Learned in the Decade - Grantham offers 15 lessons from the last decade. Those lessons range from understanding the Fed's power and it's concurrent inablity to recognize bubbles, to criticisms of both government and corporate leadership. He warns that P/E and P/B ratios are now more widely used than they were from 1977-1997, and hence have less value. He also warns of the declining role of the US in the global economy.
- Beware the Financial Industrial Complex - In an Appendix, Grantham recounts his role in a debate on whether financial innovation boosts economic growth. He says that the finance sector has grown disproportionately fast relative to the rest of the US economy. He warns of the dangers of complex financial instruments and the belief in market efficiency, which were (he claims) partly responsible for the near run on the banks in 2008. He is highly critical of academia and, in particular, the efficient market hypothesis.
To read the full letter, click here. (Free site registration required)
(c) GMO
www.gmo.com
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