This is a must-see video that runs 30 minutes. Take the time to watch the whole thing. It is a real coup that CNBC got Grantham on their program.
Overall, Grantham’s view is the same as mine. The Fed should get out of trying to use monetary policy to do fiscal policy. It doesn’t work; it creates bubbles that are destabilising. The Fed should be moving against bubbles instead of creating them. Fiscal policy is the way to go to deal with a large output gap. Bernanke knows this too. Think of how a 21st century unemployment insurance program targeted on infrastructure spending could reduce unemployment in the less skilled segment of the population (more on that here and here). Of course, because of the move to austerity in the US, this is never going to happen. So, Bernanke is going QE – which, by the way, doesn’t endear the US to anyone.
Note that the emerging markets are up over 3 times as much as the S&P 500 since 2000. Do we really need more money pumped into those economies? As an aside, Grantham is a macro-oriented investor. Grantham uses the EM example to point out that asset allocation is more powerful than picking individual stocks. If a whole sector is moving up that much, do you really think you can call individual picks within it to make significantly more?
Grantham believes the U.S. is overpriced already. And the Fed seems to be trying to push the market up even higher via animal spirits. He says he has "already started to sell." So, regarding the QE pump and dump, I have been saying buy the rumour, sell the news. Grantham recommends buying high quality blue chips and holding a decent amount of cash.
On peak commodities, I am in the Grantham boat. I think we are reaching a point where the demand for natural resources is outstripping supply. Debt deflationary moves like the one we have witnessed over the past few years can mask this temporarily. But eventually the supply demand imbalance will re-assert itself as we have seen this year. The move in commodities is two parts fundamental and one part speculative, especially toward the end (see my 2008 post on peak oil here). These price rises are self-destructing due to the demand destruction they induce. But over time, they cause higher lows and higher highs in commodities.
Please also see CNBC’s piece on the interview: Have Cash, Wait for Stocks to Fall: Jeremy Grantham
Agreed. And best of all, it’s free.
Don’t miss this one. It’s well worth the half hour.
JG is a great writer and touches on a lot of solid macro themes but I think people still conflate risk management with market timing. JG’s only theme has been big cap stocks over and over and over again…I think picking individual stocks can work fine if you take on career risk (meaning go against the crowd) and buy deep value.
My takeaway from Grantham was this:
1. As a fundamental value investor, he is skittish about chasing what he sees as a move higher in asset prices that is not fundamentally-based. That means he has started to underweight US equities due to their overvaluation. Others might be able to earn some extra dollars from playing monentum but this is not the GMO way.
2. He is bullish on commodities and hard assets over the longer-term. Short term, we could see a short term bubble in commodities forming due to the momentum trade.
3. On equities he is overweight low beta, large cap because they are priced relatively better.
4. He is overweight emerging markets and will be for a few more years yet.
5. He is keeping plenty of cash ready to buy when the bubble bursts.
Yes and he is expecting the bubbles to burst sooner or later. The Fed really should have their remit changed to stopping bubbles not allowing the government to avoid their fiscal responsibility to stabilise the economy.
JG seems to have a fair sense of impending market conditions and the fed effect. I hope the past few lackluster days and the bullish high water marks don’t perpetuate a faster withdrawal from the market than he anticipates. The current run up in broad stocks is aging and has little traction left with the exception of the high strength, high dividend plays as companies start to prepare us for a less than stellar 4th qtr. Exporters will fare far better in the 4th than companies heavily tied to us consumption. Commodities are a long term play for me as I have 10 plus years to wait and I am bullish on metals. I missed the gold run but caught the Palladium run up in step. Emerging markets has 18 to 20 months at the long end left so I set my sights to draw down in 15 months or less. Thank goodness for the internet imaging trying to keep up with information before it!
Very substantial overlap with my view. Makes me feel good, at least for now, because that’s how I’m invested too.
Grantham’s comments make a lot of sense to me. Very nice interview!
A minor comment: The government gets to hire employees at a discount not only because they save on unemployment benefits and prevent skills from atrophying, but the employee’s income taxes go back to the government. So, there’s a direct tax rebate when the government hires employees, in addition to the nearly 50% saved on unemployment benefits.