This post is a guest contribution (really just a snippet) by Prieur du Plessis, writer of the Investment
Postcards from Cape Town blog.
The bearer of the bad tidings today is money manager Jeremy Grantham, chairman of GMO, who has just published the July edition of his quarterly newsletter entitled “Meltdown! The Global Competence Crisis”.
In terms of strategy, Grantham summarizes his view in what he believes should be investors’ motto: “Don’t be brave, run away. Live to fight another day.”
Specifically, as far as house prices are concerned, Grantham looks at the ratio of US median house prices to family income and states: “In order for house prices to reach normal from here, they must either decline 17% immediately or experience four flat years while income catches up, or some combination.” Even more worrying, however, is the normal tendency for bubbles to overrun on the downside.
Across the pond, the situation looks even more dire as shown by the graph below. According to Grantham: “If UK house prices go all the way back to trend, and history says that is extremely likely, then the UK financial system will definitely need some serious bailouts and the global ripples will be substantial. Of all the negative possibilities out there, and there are plenty, real pain in this area is the most likely; I would say, nearly certain.”
In short, Grantham opines: “Events must now be disturbing to everyone, and I for one am officially scared!”
Click here for the full report on Grantham’s reasoning for his bearish stance.
Source: Jeremy Grantham, GMO, July 30, 2008.