Wednesday, December 22, 2010

"Jeremy Grantham Talks Asset Allocation, the Fed and Where He’s Advising Clients to Invest"

A sweet catch from a reader. Very sweet.
From Portfolioist:
Famous investor and predictor of bubbles, Jeremy Grantham finds a lot to worry about these days. For starters he’s no fan of the Federal Reserve’s ongoing behavior. Also, he’s pretty sure “we’re running out of everything” when it comes to commodities. And Grantham thinks the S&P 500, currently trading at 1178 is more properly valued at 900. His advice to the clients of his firm, Grantham Mayo Van Otterloo (GMO), is predictably circumspect: pile up cash so you can buy when the current, growing US equities bubble bursts, overweight great franchise companies like Coca-Cola (KO) and Johnson & Johnson (JNJ), modestly overweight emerging markets and “underweight everything else.” Oh, and one more thing: “patience.”

If he wasn’t so charming to listen to, Grantham would really be depressing. Though he thinks the economy will “muddle through” that’s about as positive as he got in the course of a very good video interview (video below) with CNBC’s Maria Bartiromo. In it, Grantham outlines some positions that won’t be completely foreign to readers of his GMO missives. (You can get access to some of his writings by registering here, including his October 27 quarterly report “Night of the Living Fed: something unbelievably terrifying” which as you can see from the title is quite a good read, if not so much fun.)

About 11 minutes into the interview, Grantham launches into an interesting defense of the importance of weighting your asset allocation correctly. It comes up while he’s discussing emerging markets and how they have returned 3.3 times the S&P 500 since he first recommended overweighting that asset class in 2000.
…That incredible discrepancy…says the main event in investing should be getting the big picture right. It’s nice to pick stocks, but how many good stocks do you have to pick in a whole portfolio to equal that incredible move between the biggest asset class in the world, US equities, and the third or fourth biggest asset class, emerging markets? It’s these movements between the big asset classes that make you money.
It’s worth taking 30 minutes to hear Grantham make his full argument, but to summarize, here are some of the highlights:
  • The Fed has spent most of the last 15-20 years manipulating the markets because when stocks go up we feel richer and go out and spend, boosting GDP. This time it’s not working so well because of the huge counter force of the housing bust, but things could have been worse. This particular move will be harder to keep pulling since 1. rates are already rock bottom and 2. people are catching on.
  • Because of Fed action (making borrowing so cheap and cash so unappealing that people buy stocks) US equities are now “substantially overpriced” and could be moving toward “dangerously overpriced.”
  • It would be more effective if Congress tried to fix the economy with fiscal policies that create jobs for “lightly skilled” workers. Especially since it’s very expensive (unemployment benefits, etc.) for the government to have a bunch of people sitting around out of work with their skills decaying.
  • Pushing down the dollar is very dangerous. “We’re already in a currency war in a way. It’s a mild one and I hope it stays that way.” That’s because there hasn’t been a real currency war since the 1930s and basically there’s no way to predict what would happen if one breaks out.
  • Even after the big run in emerging markets, they’ve got “at least a few years left” since these markets are growing at about 6% and the developed markets about 2%.
  • Because we’re running out of everything, we’re headed for repeating “chain linked crises in commodities”. Investing in companies with assets in the ground (timber, oil) should pay off, but mere commodities processors should be sold....MORE, including the video
Earlier posts on Mr. Grantham. The 'Seven Lean Years...' requires you to click through, it's worth it.

May 19, 2010 
Kitco's Jon Nadler: "Gold’s Current Highs Not Sustainable In The Long Run" and "Here Is Why Jeremy Grantham Thinks Gold Will Crash" (GLD)
April 19, 2010 
"Jeremy Grantham on Bubbles and the Outlook Ahead"
Feb. 26, 2010 
"Grantham’s ‘Horrifically Early’ Calls Challenge GMO"
Dec. 1, 2009 
Jeremy Grantham: Kiss the rally good-bye
Sept., 2009 
Jeremy Grantham: "GMO’s 7-Year Asset Class Return Forecast"
March, 2009 
Bubbles, Jobs and Investment Tips: Jeremy Grantham visits Wharton
Oct. 2008 
Jeremy Grantham: Third Quarter Letter
Mr. Grantham's firm, GMO, manages $126 Billion.

Bulls of March Look Set to Trade in Their Horns

Jeremy Grantham on ‘Deciphering the Strength of the Chinese Economy’

Jeremy Grantham in Barron's

Grantham says the S&P 500 could lose 40% between late 2008