Monday, August 4, 2008

Jeremy Grantham (GMO) Quarterly missive.

Jeremy Grantham’s quarterly missive ("Meltdown! The Global Competence Crisis”) makes for an interesting read. I think Grantham falls in the select group of market/ecnonomy prognosticators who are spot on from a long-term perspective. I had written earlier about his 7 year asset class return predictions. While things always change, the accuracy of his earlier 1998 predictions certainly strengthens his case.

Anyways, so his historical bearishness turned out to be optimistic, given the unraveling of the past few months.

His conclusion?

Due to a combination of spectacular mismanagement by the authorities that resulted in very excessive and dangerous speculation and very bad luck in the timing of commodity problems and over-rapid expansion of China, the fundamental global outlook is substantially worse than expected.

Some other excerpts:

  • The Fed, the ECB and other financial authorities failed and have lost their credibility.
  • We run a serious risk of a meltdown in confidence in leadership totally unlike anything we have seen since World War II.
  • China is exporting inflation (by under pricing currency).
  • The recycling of oil country surpluses could be destabilizing.
  • There’s a transfer of income from consumers to miners and farmers.
  • Underweigt on emerging markets from overweight. Sees a global slowdown, and export-dependent developing countries with massive over investments are ripe for a shakeout.
  • The probability for longer and deeper overruns below fair value and the chance of a “meltdown” has gone up.
  • Poor prospects for commodities and emerging markets for the next couple of years. Attractive from a long term perspective.
  • In the U.K., house prices could easily decline 50% from the peak. If prices go all the way back to trend, then the U.K. financial system will need some serious bailouts and the global ripples will be substantial. (He calls this a near certainty)

Hmm... Certainly food for thought!