Tuesday, August 9, 2011

Jeremy Grantham's 2Q Letter - Part 2: Danger: Children at Play

In the context of today's turbulent markets, Part 2 of Jeremy's Quarterly Letter revisits his early 2009 piece "The Last Hurrah and Seven Lean Years" wherein he asserted that it would be a rocky return to normal for the markets after the excesses of the previous decade. Presenting both positive and negative factors, he evaluates where we are two years into the period.


Stop Press

At the close on August 8, a slightly cheap equity portfolio could be put together comprised of U.S. high quality, emerging markets, Japan, Italy, and European growth stocks. On our data, the imputed 7-year return of the package today would be about 6.5% real!* Quality stocks, especially in the U.S. but almost everywhere, continue to handsomely outperform. Regrettably, this means that they have declined very considerably less than the indices. In its asset allocation accounts, GMO is modestly underweight equities, partly because of the desperately unattractive yields on fixed income. We are now very modest buyers for the first time since mid 2009.

Stop Press Addendum

My worst fears about the potential loss of confidence in our leaders, institutions, “and capitalism itself” are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the “average hour worked” and the fortunes of the average worker. Walking across the Boston Common this morning, I came to realize that the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary as well as the tax changes I discuss here.

To go further, if we mean to prosper long term, I am sure we need to act to make debt less attractive to everybody: it really is a snare and a delusion.