Wednesday, November 21, 2012

GMO 7-Year Asset Class Forecasts - October 2012

GMO has released its monthly 7-year Asset Class Forecasts and since many markets have been pretty stable all year, the story remains more or less the same:

  • US Large caps: 0.3% per year
  • US Small caps: -0.2% per year
  • US High Quality: 4.8% per year
  • International Large caps: 4.8% per year
  • International Small caps: 4.2% per year
  • Emerging Markets: 6.3% per year
Avoid US stocks, except high quality, and emerging market stocks should offer the best returns. Obviously, all emerging markets are not created equal. The Chinese stock market which is very depressed is likely to return more than the Thai and Indonesian stock market for example, which seem really resilient at the moment with relatively high valuations.Most bonds, excluding Emerging debt, are still a terrible investment for the next few years according to GMO methology.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at

Jeremy Grantham's Quarterly Newsletter November 2012 Summary

Jeremy Grantham, GMO, has just released GMO Quarterly Newsletter which includes 2 parts:

  • On the Road to Zero Growth by Jeremy Grantham (16 pages)
  • "Help, Help, I’m Being Repressed!" by Ben Inker (3 pages)
The first section Jeremy Grantham explains that GDP growth in excess of 3% a year for the US is a thing of the past, and going forward growth is likely to be within 0.9%  a year. Even this estimate is optimistic as resources price increases are not taken into account, and those could eventually lead us to growth very close to 0%.

Here are the key points brought forward by Jeremy Grantham:
  • The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever.
  • Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.
  • Population growth that peaked in the U.S. at over 1.5% a year in the 1970s will bob along at less than 0.5%.
  • Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the U.S. economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. But growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods.
  • Current accounting cannot accurately handle rising resource costs. Spending $150-$200 a barrel in offshore Brazil in the future to deliver the same barrel of oil that cost the Saudis $10 will result perversely in a huge increase in (Brazilian) GDP. In reality, rising resource costs should be counted as a squeeze on the balance of the economy, as they lower our total utility.
  • Measuring the non-resource balance of the economy produces the correct effect. The share of resource costs rose by an astonishing 4% of total GDP between 2002 and today. It thus reduced the growth of the non-resource part of GDP by fully 0.4% a year.
  • Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
  • The price rise might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, it would take just 11 years before the economic system would be in reverse in the US! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together.
  • Increasing climate damage, reflected mainly in food prices and flood damage, is going to increase. With  any luck this will not be severe before 2030 but it is very likely to accelerate  between 2030 and 2050.
  • U.S. real growth, according to GMO forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.
  • GDP measures must be improved so that they begin to measure output of real usefulness or utility. The  current mish-mash of costs and of “goods” and “bads” produces poor and even damaging incentives. 
  • Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal.  Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a  very long wait! 
In the second part, Ben Inker talks about the Federal Reserve monetary policy, and even though QE managed to increase assets value, it did not really succeed in creating a wealth effect. The only one who benefited are households owning a house and carrying mortgage debt. as they could refinance their debt.  However, the other side is the coin, is that banks (such as Fannie and Freddie) have to pay the bill, and since those are owned by the government (i.e. taxpayers), as a whole there is no wealth effect. Due to low interest rates. this policy actually hurts prudent investors.

Friday, November 16, 2012

5 New "Jim Rogers" Commodities ETNs: RGRC, RGRA, RGRE, RGRP and RGRI

This week, Royal Bank of Scotland (RBS) has added five new ETNs to its offering, giving exposure to commodity indexes created by Jim Rogers:
  • RBS Rogers Enhanced Commodity ETN (RGRC)
  • RBS Rogers Enhanced Agriculture ETN (RGRA)
  • RBS Rogers Enhanced Energy ETN (RGRE)
  • RBS Rogers Enhanced Precious Metals ETN (RGRP)
  • RBS Rogers Enhanced Industrial Metals ETN (RGRI)
RGRA is the ETN equivalent to RJA ETF, RGRC is the equivalent of RJI ETF and RGRE is equivalent to RJN. ETN and ETF are structured differently, but I assume the 3 new products I've just mentionned should provide similar returns to the existing ETF, unless there are important ost differences between managing those 2 different types of financial products.

The real novelty is with RBS Rogers Enhanced Precious Metals ETN and RBS Rogers Enhanced Industrial Metals ETN, which as far as I know do not have equivalent ETF products.

Thursday, November 15, 2012

GEAB 69: Katrina-Sandy : From one Storm to the Other, the End of America as we Knew it

Here are the highlights of GEAB 69 (Novenber 2012) entitled "Katrina-Sandy : From one Storm to the Other, the End of America as we Knew it":
  • Katrina-Sandy : From one Storm to the Other, the End of America as we Knew it - The LEAP team has a controversial view that says Sandy, a small storm that has put New York to its knees, has shown that America has greatly weakened, and that it's the country we once knew anymore. In this section they also address the political division of the US and its dire financial & economic situation.
  • 2013, the king is naked: The great geopolitical dislocation of America. - The US economy is slowly but surely weakening, and 2013 will be the year of the real crisis where the "dollar wall" will collapse.
  • China 2013 : The global riot laboratory - A view of riots in China, and their consequences.
  • A Canadian Tragedy – The Slump of its Real Estate Market - Contrary to the view of Canadian banks who see a market stabilization, LEAP believe the recent slumps in Toronto and Vancouver announced the popping of the Canadian real estate bubble.
  • Strategic and operational recommendations. Currencies may remain irrational for a little longer, it's not to late to escape from the stock market, get physical Gold and do not play short term trades, energy commodities are better for the long term, but may suffer in the short term, and it's really not a good time to invest in Canadian real estate..
  • The GlobalEurometre - Results & Analyses. Only 65% of respondents expect the dollar to go down, which is the lowest figure since the survey started.
The full GEAB 69 report (PDF format) is available to LEAP 2020 subscribers for 200 Euros per year for 10 new issues + the 6 issues published before registration.

Thursday, November 8, 2012

Ron Paul: The US is Broke and Already Over Fiscal Cliff

Ron Paul is interviewed on Bloomberg about the US presidential elections.

He explains that the US is broke, it already passed the fiscal cliff, and we reached a point of no return. I completely agree with this statement, and this has nothing to do with politics, it's just Maths, which most voters in the US and other "developed" economics do not seem very good at. That's actually frightening that only 1% of US voters seem to get it.

He carries on to say the problem is with the people, who just want more bailouts (and that's true both for poor, the middle class and the richest 1% of the US population). He gave the auto industry bailout as an example, and said the people in the Midwest did not vote for Mitt Romney because he had opposed the government bailout of General Motors and Chrysler. In that respect, the US is just the same as Greece as people do not wan  to cut anything, yet Greece is criticized and laughed at in the US.