The Fed Won't Save Us, But Here's How to Make Money - Barron's Interview with Jeremy Grantham

Jeremy Grantham, "one of the grandest of thinkers and most eloquent of oracles," tells Barron's that today's bear market is like none we've seen -- the difference being unprecedented financial globalization and a first-ever global bubble in virtually all asset prices. Grantham scoffs at the idea government-supplied stimulus can stop the bear; he foresees the S&P 500 (currently 1,334) at 1,100 by 2010.

On monetary and fiscal stimulus: Grantham notes that increased debt has failed to stimulate the economy: Over the past 35 years, during which debt jumped from 1.2x to 3.1x GDP, GDP growth decelerated from 3.5% to 3%. This leads him to conclude that recent Fed actions can be seen as nothing other than an overreaction to the decline in global stock markets. He notes that after 9/11 "the greatest stimulus in American history, an unparalleled series of interest-rate cuts", cumulated "in two, almost three, years of negative real returns".

On private equity: He worries about further decline in the leveraged-buyout arena, noting firms are still assuming they can boost margins by 15%, when in fact it's possible margins could decline by 20-30% as profit margins revert to their historical mean and then get compressed further by a recession. He calls private-equity "the next shoe to drop."

On the housing market: Grantham says housing still has 20-25% to fall before it hits normal levels, which will in turn take a toll on consumer spending.

On valuations: "Everything is expensive. All we are trying to do is extract some relative money, or by going short, actually make some real money." Specifically:

• For a currency trade, he suggests going long the yen, Singapore dollar and Swiss franc against the dollar and the pound. [Editor: note the following ETFs: PowerShares DB US Dollar Bullish Fund (UUP), CurrencyShares British Pound Sterling Trust (FXB), CurrencyShares Japanese Yen Trust (FXY), CurrencyShares Swiss Franc Trust (FXF). Singapore has no currency ETFs, but does have exposure to its equity markets through iShares MSCI Singapore Index Fund (EWS) and Singapore Fund (SGF).]
• For equities, Grantham suggests a combined position of 50% long U.S. quality stocks, 50% long emerging markets hedged with a 100% short position in the Russell 2000. [Editor: Grantham defines "quality stocks" as those with high and stable returns and low debt; the closest ETFs are the Diamonds Trust Series 1 ETF (DIA) or the S&P 500 Index ETF (SPY). For emerging markets, use the iShares MSCI Emerging Markets ETF (EEM), the SPDR S&P Emerging Markets ETF (GMM) or the Vanguard Emerging Markets ETF (VWO). For the Russell 2000, use the iShares Russell 2000 Index ETF (IWM).]

Comments

[Alpha Seeker]

Gratham obviously reads Soros and Faber well. However, they made these statements in late 2007. Since then the market corrected well and while there might be 5% downside left, the rest of the traveling from here would be 70's style. What Grantham obviously likes to see is a perfect buying point for his firm, which is a dreamers point-of-perfection. With the $ so low, there are a lot of money on the sidelines waiting to invest in the unwavering Anglo-Saxon machine. While we did pay the price of having this decade go to waste, I think the perfect buying points are starting appear all around and it may take another another 5-6 months but never that late as 2010. Anyone who attempts to predict that far in the future, is a fool, left alone the "grandest thinker and oracle".
Rob
WallastonInvestments.c...

[Long-ShortGuy]

Jeremy Grantham has been bearish for a while. He was also bearish too early last time around. But the result was that he avoided the bubble and saved his clients a ton of money. So he has a certain authority, black beanie cap or not.

Alpha Seeker: I think Soros and Faber read Grantham, not the other way around. He's that respected. "There might be 5% downside left." Why only 5%? He's saying that the next leg down of the credit crisis has yet to hit.

[Alpha Seeker]

You go to London or Hong Kong and ask about him and you will gather a few blank looks. Ask for Soros and Faber: Now you are talking personalities that move the markets.

[GKM]

Grantham has the right ideas but even he seems to be missing a key point. The housing market will correct obviously, but it won't be just to the mean. The mean wouldn't be the mean unless there are data points above and below the line.

To correct for the unproductive employment of capital into over-priced housing the market will have to correct substantially. Either that or the inflation rate will have to be kinked into a hockey stick shape to catch the falling prices. Long gold and short housing will be a play for months to come.

By the way, that 1100 on the S&P as the forecast for the bottom is what most chartologists would say as the target level. There will be lots of buying support trying to turn the market once it gets there so it will likely be a self-fulfilling prophecy.

[jcrash]

You guys talking about the housing market "correcting to the mean", well that is fine in California where you overbuilt and overbought, but in middle america (not Ohio), home prices are fine...still going up, albeit more slowly and unlikely to drop precipitously given the amount of growth we are seeing.

Living on the coast might be nice, but you must start thinking it is the whole country, and it isn't.

[Frogman]

On Bears:
We have a bunch of bears coming out of the woods...its like telling us that we are in a recession....really!?!... Wow good job! Did the housing market for the last year tip you off? I love the prophets....Now don't get me wrong I am not getting my bull saddle ready and I still think that there is pain but the gloom and doomers are really getting on my nerves...if you keep saying the same thing (that we are collapsing) for 20 years then you know what?? you are probably going to be right (at some point in the cycle)....the market does correct...hell even a broken clock is right twice a day!!..CNBC and the others should start covering (how we get out of this mess) not tell us what we already know...