Jeremy Grantham Thinks Stocks Will Soar/Crash

Coverage of Jeremy Grantham’s latest letter to investors at GMO was a stark reminder in the dangers of headline reading.

First I saw this bullish headline from Business Insider:


And then this bearish one from ZeroHedge:


When in doubt, go to the videotape: read the full piece from Grantham himself.

After 5 pages from GMO’s co-head of asset allocation, Ben Inker, demonstrating that he thinks the equity markets are overvalued and poised to offer negative real returns over the next 7 years*, Grantham weighs in.  First:

“My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up.”

But he quickly adds:

“And then 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 later:

“In the meantime investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years – and that most foreign markets having moved up rapidly this summer are also overpriced but less so. In our view, prudent investors should already be reducing their equity bets and their risk level in general.”

At this point, I was about to accuse Grantham of a bit of “cover your ass” syndrome – where he tries to make a prediction that will be right no matter what the outcome – but he explains himself in the next few sentences:

“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. This market is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life. And with a Fed like ours it’s probably what we deserve.”

I think Grantham’s succinct “Investment Conclusions” is well spoken and sage – emphasis mine:

Be prudent 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.”


GMO Quarterly Letter

BI: Grantham: I think Stocks Will Head 20-30% Higher In the Next Year Or Two

ZH: Jeremy Grantham’s GMO: “The S&P Is Approximately 75% Overvalued; Its Fair Value Is 1100”


* Inker: ” On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation. For those interested in the broader U.S. stock market, our forecast for the Wilshire 5000 is a bit worse, at -2.0%, due to the fact that small cap valuations are even more elevated than those for large caps.”

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