I deduct 1 from my score for GMO’s Jeremy Grantham new Q3 column for gratuitously mixed metaphors in its title — "Reaping the Whirlwind" — but it is still typically incisive and thought-provoking, so let’s give it at an 7.5/10 overall. The gist: Stocks are newly relatively cheap, and he is buying slowly, even if he thinks he is early and we are likely to see lower lows.
His outlier issues to keep in mind:
- China, which Grantham worries, like me, is an economic time-bomb waiting to go off.
- The three most important equity bubbles of the 20th century all overshot price trends by at least 50%. While Grantham doesn’t think that will happen this time, he does think there are believable scenarios where we could see S&P 800, or worse.
My take: Grantham is self-confessedly an atrocious market timer, so keep that in mind. Second, I’ll take gentle issue with his comment that the S&P is cheap, even relatively speaking. Let’s just say it’s not as expensive, but that’s about it — and things could get much worse if earnings really fall out of bed over the few quarters. More broadly, in the absence of solving the consumer balance sheet problem, and with most major economies falling into recession at once, Mr. Market has to do some darn good fortune-telling to see what the other side looks like.
On the other side, I notice that Grantham is being pilloried on some email lists as newly a sell-out now that he’s no longer (seemingly) stumping for the financial apocalypse. That should give you pause for concern that maybe the bears have, at least temporarily, overdone things. And relatedly, I have had umpteen recent emails from people critical of fellow Grantham-ian bear Roubini, who is newly being accused of being too bullish. When people are calling Roubini too bullish, and saying Granthan is a sell-out to long side, something important is going on out there.