An open letter to Jeremy Grantham, manager of $112 billion, bubble soothsayer, Wall Street historian, and wordsmith:
Herewith, belated props for a prediction you made 11 years ago. There we were, in the bowels of Manhattan’s 21 Club. Me: a cub business reporter thinking I was a budding J.J. Hunsecker in Sweet Smell of Success. You: a rapier-witted former oil company economist who—thanks anyway, Terence Stamp—would totally play himself in the Jeremy Grantham movie.
Austere. Sober. Dire. No ums or buts, but a menacing look that could kill a goat. The stock market crash and ordeal of 2001 had transpired and shares were marking a bottom. But you were already warning that there would be a huge bill to pay soon enough, now that the Greenspan Federal Reserve had cut interest rates 12 times, most of them in extra-stimulative half-point increments. You exhorted my readers to invest in emerging markets and, if I can recall (I was, alas, in my cups), Carpathian timber, as the world was entering a commodities super cycle. Crude oil was then in the $20s and China had just joined the World Trade Organization.
My takeaway: Pffft. This guy with the great accent and spread collar was such the alarmist. After all, who were we to fight the Fed and a tax-cutting Bush administration that had just won a huge midterm mandate? Plus, the country was bubble-chastened and not about to go there again any time soon.
Then, well, 2008—after a torrid stretch for emerging markets and raw materials, oil went as high as $145. You called it and then some: The U.S. melted down and completed its worst stock market decade since the days of Herbert Hoover. Then, ever so fleetingly at the March 2009 low, in “Reinvesting When Terrified,” you urged investors to hurry up and get back in while the getting was good.
I’ve since read every word of your prophecies. Now, with the Dow, Standard & Poor’s 500, and other indexes regularly setting all-time highs, you proffer good news that is actually bad news: The market is headed potentially much higher … but en route to its third calamity in just over a decade.
“One of the more painful lessons in investing is that the prudent investor (or ‘value investor’ if you prefer) almost invariably must forego plenty of fun at the top end of markets,” you write in Grantham, Mayo, Van Otterloo (GMO) & Co.’s latest quarterly letter (PDF), “Breaking News! U.S. Equity Market Overvalued!”
“This market,” you add, “is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life.”
Your “personal guess” is now that the U.S. market, especially riskier shares, could ascend another 20 percent to 30 percent in the next year or two, with the rest of the world, including emerging-market shares, making up some of the ground they’ve lately lost to the States. Great, right?
But “then,” you predict, “we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.”
“Be prudent,” you say, “and you’ll probably forego gains. Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin. Your call. We of course are making our call.”
Which is that U.S. shares are now significantly overvalued. GMO estimates that the S&P 500 would have to fall almost 40 percent (it lost 37 percent in 2008) to hit fair value. Looking ahead, then, the market’s expected rate of return for the next seven years is a negative 1.3 percent per annum, adjusted for inflation.
Grantham’s asset allocation deputy Ben Inker does note that all this need not necessarily be preordained, especially if the country enters a “golden age” of corporate investment and economic growth. “This would,” he writes, “solve lots of problems, including the federal deficit and unemployment … but there is sadly no evidence whatsoever that it is occurring.”
Square that with what Grantham said earlier this year on Charlie Rose:
“I think Bernanke is whipping this donkey—this economy—that can only grow at 1 percent, because he thinks it’s a racehorse that should be growing at 3 percent. … This donkey can’t run.”
Rose: “Until it either drops dead or turns into a racehorse.”
Grantham: “Yeah, right.”
Rose: “And you are betting on dead.”
Grantham: “And I’m betting on dead …”
Excuse me, then, while I go bet on a fifth of Chivas.