Guest post: The mega Jeremy Grantham interview

Submitted by Edward Harrison of the site Credit Writedowns.

Hi everyone. I will be cross-posting a lot more this week as Yves is out on holiday. I want to start things off with a video that outlines a bear market rally point of view that is very much consistent with my market view (For more, see “Market manipulation, short-covering rallies and cyclical bulls“). This is an interview in five parts via Morningstar on May 28th with the one-time reputed perma-bear Jeremy Grantham who has been sounding much more bullish of late (in a bear-market rally kind of way). Definitely worth a look. The five parts run just over 20 minutes.


Part 1: On dipping a toe back into the market – and how a lot of people missed the huge surge in equities. He says this about the market: “It’s a very uncertain world. It may not come down again materially Of course it may. But you can’t risk being left behind for years.”

Now, on the surface this sounds like Chuck Prince heresy about dancing when the music is playing, but if you watch the later segments, you will see that he does believe the fundamentals are behind his call to increase equity weighting to at least neutral. Note his little dig at the efficient market hypothesis as “inaccurate’ and “dangerous.”

Part 2: We expose a definition of what high quality is according to Grantham because high quality seems to have underperformed in the recent market melt-up.

Part 3: Grantham touts his seven lean years meme. It sounds a lot like a balance sheet recession as expounded by Richard Koo, the Chief Economist of Nomura. Note how much he stresses the psychological effects of the huge upswing and its aftermath. My takeaway here is that consumer discretionary is not a place to overweight in this environment. See Real Time Economics’ recent post, “Which Industries Are Most Vulnerable to Consumer Shift?

Part 4: Value investing is at the core. He believes that return on capital is MORE important than top line growth i.e. value beats growth. He uses China to illustrate his point, confident that they will have huge growth but not confident this will feed through to exceptional return on capital in Chinese equities. “Overwhelmingly everything comes to starting point value.”

Part 5: Inflation is top of mind for Grantham. He is not in the deflation camp at all because inflation is where GMO is investing its extra time in navigating the investing minefield right now. By the way, this means you don’t want to be long the long-end of the treasury curve.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

One comment

  1. Jamie

    Fund managers fear inflation because of its potential to destroy the assets they manage. Deflation, on the other hand, is an upside risk for fund managers. Consequently, by worrying about inflation, Grantham is just doing his job. I didn't see any insight from him into the likelihood or cause of inflation. I remain a deflationista for as long as it takes this balance sheet recession to work through.

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