I feel somewhat sheepish admitting to what I’m about to say, but I just got around to reading Jeremy Grantham’s (Grantham, Mayo and Van Otterloo) latest quarterly commentary, which came out on February 6th. Typically I stop whatever I’m doing, grab an appropriate beverage (coffee, beer or wine), sit down, relax and enjoy.
February was about as busy as I’ve ever been and here I am in mid-March, sitting at a Starbuck sipping on a mocha…reading Grantham (and Inker).
As always, Grantham delivers. I could summarize 8 pages, but I won’t, instead I’ll leave you with what I assume is his point, Be Careful…here is the last few paragraphs:
Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit! Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.
When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two. That’s the problem. A clue to timing would be when we begin to hear more passionate new era arguments: profit margins will always be higher; growth will snap back to 3% for the developed world; and new ones I can’t think of … maybe “when the discount rate is this low the Dow should sell at, perhaps, 36,000.” In the meantime, prudent managers should be increasingly careful. Same ole, same ole.
For those who think Grantham has lost it, it wasn’t even a month later (remember, there are only 28 days in February) on March 7th that the infamous James Glassman of Dow 36,000 fame penned “How To Get To Dow 36,000” in an opinion piece for Bloomberg.
Perhaps it’s time to invoke Yogi Berra’s “It’s like deja vu all over again.”
Scott Dauenhauer CFP, MSFP, AIF