That is the view of Jeremy Grantham in his quarterly letter to investors as GMO’s Chairman of the Board. He oversees quantitative products and is director of investment strategies. In Grantham’s 1Q 2007 letter to
clients, he discusses how market bubbles form, why it’s
so difficult to pinpoint when a bubble will burst, and looks at potential catalysts for
To give you a sense of GMO, they run $141 billion for mostly insitutional clients (and U.S. VP Dick Cheney). In their Equity portfolio of $125 billion, $93 billion
of it is non-U.S. holdings. Grantham developed sometihng of a reputation as a bear — despite running a mostly long-only portfolio.
Why does anyone care what Grantham thinks? In additon to outperforming most of his peers, his qaurterly letter reveal him to be a smart quantitative investor, who relies on the simple mathematical concept of mean reversion. Based on that thesis, in June 2000, he noted in a Forbes debate with Henry Blodget that markets were still way over-valued:
"We basically believe that, from their highs, the S&P 500 will decline 50%;
the Nasdaq, 70%; and the nonearnings Nasdaq, 80%. The safest thing to say is
sooner or later. The great bear markets do not hurry. They have often had
precipitous decline phases. But basically the 1929 peak didn’t really bottom
until 1945. The 1972 peak didn’t bottom until 1982. And, incidentally, in those
ten years, the S&P was down close to 40% in real terms." (emphasis added)
That call turned to spot on (I have the the full text, but if anyone has a link, it would be appreciated).
For those of you who did not follow up the reference in the linkfest, here’s a quick overview:
1. Global fundamental economic conditions are nearly perfect and have been for some time.
2. Availability of global credit is generous and cheap and has been for some time.
3. Animal spirits and optimism are therefore high and feed on
themselves through reinforcing results and through being universally
4. All global assets reflect this and are overpriced and show, probably for the first time, a negative return to risk taking.
5. The correlation in global economic fundamentals is at a new
high, reflected in the steadily increasing correlation in asset price
6. Global credit is more extended and more complicated than ever
before so that no one is sure where all the increased risk has ended up.
7. Every bubble has always burst.
8. The bursting of the bubble will be across all countries and all
assets, with the probable exception of high grade bonds. Risk premiums
in particular will widen.
9. Naturally the Fed and Fed equivalents overseas will move to
contain the economic damage as the Fed did last time after the 2000
break. But the heart of thelast bubble, the NASDAQ and internet stocks, still declined by almost 80% and 90%, respectively.
10. What is wrong with this logic? Something I hope.
11. Of course the tricky bit, as always, is timing. Most bubbles,
like internet stocks and Japanese land, go through an exponential phase
before breaking, usually short in time but dramatic in extent. My
colleagues suggest that this global bubble has not yet had this phase
and perhaps they are right.
The bottom line remains that U.S. stocks are hardly the bargain they are made out to be; Rather, trading them has become a combination of liquidity driven momentum based investing.