Wednesday, August 10, 2011

Jeremy's Grantham Quarterly Newsletter August 2011 Summary (Part 2)

Jerey Granthan from GMO has just released the second part of its Quarterly Newsletters entitled "Danger Children at Play".

He shortly talks about the debt ceiling debacle and how developed economies are can-kicking, but then focuses on his "Seven lean years" prediction of 2009 where he saw weak growth of 2% per year, and analysis the positives and negatives as of today.

  • Economic growth rates in emerging economy
  • US / China Trade Surplus/Deficit has shrunk
  • US Personal savings are up
  • Corporate profits
  • Disillusionment with Institutions, especially congress.
  • Commodities price are higher than expected
  • Balanced budgets now impossible without reducing spending or increasing tax or both
  • Housing bust overhang to remain for years
  • Modest personal income progress and large income disparities between the rich and the middle class in the US. (US Real Average Hourly Earnings Index is down over 40 years)
  • Individuals must pay down existing debt
  • Retirement plans (e.g. 401k) are not as good as defined pension funds
  • Terrible economic policies stuck because Keynesian stimulus and Austrian cut-backs
  • Risk of the US declining like the UK did in the past
He then moves on to focus on corporate profits that are so high that they seem completely disconnected from economic reality. Those profits are likely due to government spending and when it stops you can expect profits to tumble.

In his Q2 newsletter, he predicted a market correction because of Libya, Japan and high commodities price, and still recommend to keep your head down until we reach fair value (S&P to 950) and hold shares of high quality companies.

Finally, he makes some buying recommendations:
  • Managed farmland and forestry
  • Commodities such as hydrocarbons, metals and fertilizer over a 10 year horizon. However, since there have gone up substantially over the last few years, waiting for a pullback maybe safer
  • Quality Stocks
  • Emerging markets
  • Japanese Stocks
To conclude, he warns that historically markets usually become cheap and stay that way for many years and that we should not normally expect any bounce when the markets reach fair value and that GMO is starting to be cautious buyer (the first time since mid 2009) at those levels with a portfolio composed of US high quality, Japan, Italy and European growth stocks

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