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 http://www.gmo.com

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.

GMO 7-Year Asset Class Forecasts - July 2012

GMO has released its monthly 7-year Asset Class Forecasts and the expected annualized returns are basically the same as last month for equities:

• US Large caps: 0.2% per year
• US Small caps: -0.4% per year
• US High Quality: 4.5% per year
• International Large caps: 5.0% per year
• International Small caps: 5.2% per year
• Emerging Markets: 6.2% per year

The US market still sucks ( except High quality stocks), and the rest of the world should do OK.

Bonds expected returns are getting worse and worse by the months, as the bond bubble still inflates.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Jeremy Grantham's Quarterly Newsletter July 2012 Summary

Jeremy Grantham, GMO, has just released GMO Quarterly Newsletter. This time there are 2 sections:

• "Welcome to Dystopia! Entering a long-term and politically dangerous food crisis" by Jeremy Grantham (17 pages)
•  When Bad Things Happen to Cheap Assets by Ben Inker (4 pages)

The first part is basically an update of last year April newsletter entitled. "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever" where he discusses constraints on resources and particularly food, water and energy, and the lack of awareness by the media and authorities saving some military establishments.

Here are the key points brought forward by Jeremy Grantham:

1. Last year, GMO reported than we are 10 years into a paradigm shift or phase change from falling resource prices into quite rapidly rising real prices.
2. It now appears that we are also about five years into a chronic global food crisis that is unlikely to fade for many decades, at least until the global population has considerably declined from its likely peak of over nine billion in 2050.
3. The general assumption is that we need to increase food production by 60% to 100% by 2050 to feed at least a modest sufficiency of calories to all 9 billion+ people plus to deliver much more meat to the rapidly increasing middle classes of the developing world.
4. It is also widely assumed that at least the lower end of this target will be achieved. Grantham believes that this is substantially optimistic. At very best, if we reach that level we will not be able to hold it. Much more likely, we will not come close because there are too many factors that will make growth in food output increasingly difficult where it used to be easy:
   
   • Grain productivity has fallen decade by decade since 1970 from 3.5% to 1.5%. Quite probably, the most efficient grain producers are approaching a “glass ceiling” where further increases in productivity per acre approach zero at the grain species’ limit (just as race horses do not run materially faster now than in the 1920s). Remarkably, investment in agricultural research has steadily fallen globally, as a percent of GDP.
   • Water problems will increase to a point where gains from increased irrigation will be offset by the loss of underground water and the salination of the soil.
   • Persistent bad farming practices perpetuate land degradation, which will continue to undermine our long term sustainable productive capacity.
   • Incremental returns from increasing fertilizer use will steadily decline on the margin for fertilizer use has increased five-fold in the last 50 years and the easy pickings are behind us.
   • There will be increased weather instability, notably floods and droughts, but also steadily increasing heat. The last three years of global weather were so bad that to draw three such years randomly would have been a remote possibility. The climate is changing.
   • The costs of fertilizer and fuel will rise rapidly.
    
5. Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce. This is a key point that is often missed.
6. On the positive side, scientists are now very optimistic that they will be able to engineer more efficient photosynthesizing “C4” genes (corn belongs to that family) into relatively inefficient but vital “C3” plants such as rice and wheat, in 20 to 30 years. If successful this would increase output up to 50% and would buy time for a less painful transition to a sustainable population.
7. Many of these increasing difficulties were reflected in the original 2008 food crisis and the 2011 rebound. The last six weeks’ price rise is more threatening because it occurred despite very much larger plantings than were available in 2008. Global demand is now so high and rising so fast and reserves are so low that price sensitivity to weather setbacks has become extreme.
8. It seems likely that several countries dependent on foreign grain imports have in fact never recovered from the 2008 shock. Countries like Egypt saw the percent of their consumer budget for food rise to 40%. At this level, social pressures may be at an extreme and probably have already contributed to the Arab Spring.Any price increases from here may cause social collapse and a wave of immigration on a scale never before experienced in peacetime. Another doubling in grain prices would be catastrophic.
9. Strong countermeasures to prevent a food crisis would be effective in curtailing the current crisis and preventing the development of a much greater crisis, but these measures will likely not be taken. This is because the price signals for the rich countries are too weak – they can afford the higher price – and there is inertia in all parts of the system. Also, the problems of malnutrition in distant countries are not generally felt as high-order priorities in the richer countries.
10. If food pressures recur and are reinforced by fuel price increases, the risks of social collapse and global instability increase to a point where they probably become the major source of international confrontations. China is particularly concerned (even slightly desperate) about resource scarcity, especially food.
11. The general public, the media, the financial markets, and governments badly underestimate these risks. Only the military of some countries, including the U.S. and the U.K., seem to appreciate them appropriately.
12. Natural gas supply increases buy some time, mainly for the U.S., but seem more likely to create complacency and continued dependence on hydrocarbons. The energy situation is less pressing globally in the short term than is the food problem. Supplies are sufficient to cause merely a slow and erratic price increase. The main problem with oil is in its contribution to the food problem through higher farming costs and generally increasing cost pressures on poorer countries.
13. In the longer term, in contrast, energy costs and absolute shortage in the case of oil form a serious problem second only to food shortages and will result in prices so high that they will impact global growth and even the viability of modern, rather fragile, economies.
14. On paper, though, the energy problem can be relatively easily addressed through very large investments in renewable and smart grids. Those countries that do this will, in several decades, eventually emerge with large advantages in lower marginal costs and in energy security. Most countries including the U.S. will not muster the political will to overcome inertia, wishful thinking, and the enormous political power of the energy interests to embark on these expensive programs. They risk being left behind in competiveness.
15. Availability of metals is, in contrast, a minor problem in the next few decades. The prices will steadily rise but the consequences will be less. In the long run though, metals are the most intractable problem. There is no brain-intensive solution as there is for agriculture (i.e., organic farming), nor is there any capital-intensive or technology-intensive solution as there is for energy. We will just slowly run out and prices will rise.
16. The results of these problems will be felt mainly as price pressure in rich countries. The need to obtain adequate resources will squeeze national budgets, profit margins, and economic growth. For poor countries, though, it is literally a matter of survival.
17. We are badly designed to deal with this problem: regrettably we are not the efficient species of investment theory, but ill-informed, manipulated, full of inertia, and corruptible. Only once in a blue moon – like World War II – do we perform anywhere near our theoretical capabilities and this time the enemy is amorphous and delivers its attack very, very slowly. But the stakes globally are very high indeed. We must try harder.
18. The following comments on this topic are Jeremy Grantham's personal comments and reflect his Foundation’s portfolio. These comments are based on a time horizon of 10 years and beyond. The portfolio investment implications are that investors should expect resource stocks – those with resources in the ground – to outperform over the next several decades as real prices of the resources rise. Farming and forestry, though, are at the top of the list. Serious long-term investors should have a very substantial overweighting in a resource package. He suggests for long-term investors a resource position of at least 30%. Another relative beneficiary of resource pressure is the quality group of equities. Resources are a smaller fraction of final sales than average and higher profit margins make them more resilient to margin pressures.
19. Perhaps more importantly, the resource squeeze, coupled with other growth-reducing factors (to be discussed next quarter), is likely to reduce the return from the balance of the portfolio.

The second part, Bne Inker explains that bad things can also happen to cheap assets, and as expensive assets usually return to fair value, it is possible that the new value if indeed a permanent adjustment, as in the case of banks in 2008, and possibly Eurozone equities which are now 15% below fair value according to GMO methodology. GMO has increased Eurozone equities allocation (and become overweight), and Ben discusses the potential capital impairments or gains ahead.

GMO 7-Year Asset Class Forecasts - June 2012

GMO has released its monthly 7-year Asset Class Forecasts and the expected annualized returns have not changed much since last month:

• US Large caps: 0.4% per year
• US Small caps: -0.6% per year
• US High Quality: 4.5% per year
• International Large caps: 5.3% per year
• International Small caps: 5.6% per year
• Emerging Markets: 6.4% per year

And bonds are still a terrible investment for the next very years according to GMO methology,  even worse than US stocks.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

GMO 7-Year Asset Class Forecasts - May 2012

GMO has just released its monthly 7-year Asset Class Forecasts and the expected annualized returns  for international and emerging markets have greatly increased:

• US Large caps: 0.8% per year
• US Small caps: -0.5% per year
• US High Quality: 4.8% per year
• International Large caps: 6.1% per year
• International Small caps: 5.3% per year
• Emerging Markets: 6.7% per year

Emerging markets and internal large caps could even produce pretty decent returns. On the other hands, bonds are still a disaster with expected returns between -2.1% to 0.8% per annum.

One way to act on this forecast is to buy iShares MSCI BRIC Index (BKF).

You can receive GMO's monthly forecasts and the quarterly newsletter by registering at http://www.gmo.com (It's free !).

GMO 7-Year Asset Class Forecasts - March 2012

GMO has just released its quarterly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: -0.3% per year
• US Small caps: -2% per year
• US High Quality: 3.7% per year
• International Large caps: 3.9% per year
• International Small caps: 3.4% per year
• Emerging Markets: 5.4% per year

This last month expected returns have gone down for US stocks and International large caps and up slightly for international small caps and emerging markets, but the returns are still nothing to be excited about.

Different kinds of bonds are expected to return between -2.2% and 1.0% per year.
Managed Timber (stable as ever) is expected to return 6.5% per year. Those are real returns adjusted for inflation of 2.5% per year.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Jeremy Grantham's Quarterly Newsletter April 2012 Summary

Jeremy Grantham, GMO, has just released its Quarterly Newsletter entitled "My Sister’s Pension Assets and Agency Problems (The Tension between Protecting Your Job or Your Clients’ Money)".

In this newsletter, he focus on how career risk for people working in the investment business affects the markets. The first priority for professional investors is to keep their job, and for that reason they usually go with the flow to avoid being wrong on their own and be able to use the all convenient "nobody saw it coming".  Career risk (which I discovered thanks to Jeremy Grantham) is what made me realize that as an individual investor, you could beat the market over the long term, as long as you are disciplined and patient.

Here are the key points brought forward by Jeremy Grantham:

• Career risk is a main cause of volatility: two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend, whereas the market’s actual price is within plus or minus 19% two-thirds of the time.

• Ignoring long term trends may be the correct response on the part of most market players, for ignoring the volatile up-and-down market moves and attempting to focus on the slower
  burning long-term reality is simply too dangerous in career terms.
• The quote “The market can stay irrational longer than the investor can stay solvent.”  can be expressed as “The market can stay irrational longer than the client can stay patient.”  for investment companies. GMO found that clients patience time has been around 3 years on average in normal conditions.
• 3 conditions must be met to bet against market irrationality:
  • Allow a “margin of safety” and wait for a real outlier before you make a big bet
  • Stay reasonably diversified
  • Never use leverage

He admits that his sister portfolio (managed by himself) did better than his clients' portfolio, mainly because he has only had to consider absolute return without the investment constraints some investors impose and felt absolutely no career risk.

GMO tries to find the right balance between short term client expectations and long term prospects, but this is challenging as it appears they lost 40% of their clients when they stayed out of the 1999/2000 stock market bubble. But as they were proven right as time passed by, the company  eventually "attracted a flood of new business" in 2003 to 2006.

Before the 2008 crash, his sister portfolio had virtually 0% allocation in stocks, but GMO clients still had about 45%, again because of business risk. 

GMO now offers a "Benchmark-Free Allocation Strategy" which allowed great return during last decade and reflects little career or business risk. The strategy intended to protect capital first and yet still make good money by taking into account historical trends and valuations.

The second part of the newsletter "Force Fed" written by Ben Inker provides GMO's investment outlook and explains how the Federal reverse market manipulation makes it to invest.

Here are the key points I noted:

• The Fed has engineered a situation in which the really unattractive asset classes are the ones we have always thought of as low risk: government bonds and cash. (etfideas: That's actually the main reason why I hate the fed)
• Stocks are expensive relative to GMO estimate of long-term fair value, but so are bonds and cash.
• Australian and New Zealand government bonds are the only bonds (unenthusiastically) liked by GMO because of decent real yield and government spending policies that are sustainable in the
  long run.

You can read the complete newsletter for free on GMO website.

GMO 7-Year Asset Class Forecasts - February 2012

GMO has just released its quarterly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: 0.4% per year
• US Small caps: -1.8% per year
• US High Quality: 4.4% per year
• International Large caps: 4.0% per year
• International Small caps: 3.3% per year
• Emerging Markets: 5.0% per year

Different kinds of bonds are expected to return between -2.5% and 0.8% per year.
Managed Timber is expected to return 6.5% per year. Those are real returns adjusted for inflation of 2.5% per year.

Those returns look lackluster, and the chart above is as of 29th of February 2012. The different market have generally rallied since then, so the expect returns over 7-year should even be lower today.

Over the next 7 years, the best performing assets are expected to be emerging markets and US high quality stocks and the worst performing assets should be US and international bonds. The US market (except High Quality Stocks) should also be avoided with returns between -1.8% and 0.4% per year.

The ways to act on this forecast is to buy iShares MSCI BRIC Index (BKF) on the long side (I'm not sure how you could get exposure to high quality stocks as defined by GMO), and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX). However, the expected returns on the short side, may not warrant taking this risk just yet, especially with the decay inherent to short and leveraged ETFs.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Jeremy Grantham's Quarterly Newsletter February 2012 Summary

Jeremy Grantham, GMO, has just released its Quarterly Newsletter entitled "The Longest Quarterly Letter Ever" a 15 pages report divided into 3 parts in contrast to his previous Letter "The Shortest Quarterly Letter Ever" with 4 pages only.

Part I: Investment Advice from Your Uncle Polonius
In the first part, which he could also have called "the 10 commandments of the individual investor", he gave 10 recommendations:

1. Believe in history - Be patient and fair for assets to be at or below fair value
2. Neither a lender nor a borrower be - Avoid leverage because it impacts an investor greatest asset: Patience
3. Don't put all your treasure in one boat - If you diversify, your portfolio will be much more resilient
4. Be patient and focus on the long term - Wait until markets are very cheap before making your move. Individual stocks usually recover, and markets always do.
5. Recognize your advantages over the professional - Again, patience is your asset. Professional cannot wait to career and/or business risk (losing one's job or clients due to short term underperformance). You can afford to wait several years, professionals can't.
6. Try to contain natural optimism - This is especially true for Australian and US investors that do not like to hear bad news
7. But on rare occasions, try hard to be brave - You can't take bigger risks than professionals when markets are extremely mispriced even though it may come with pain in the short term.
8. Resist the crowd: cherish numbers only - If you see your neighbors get rich during a bubble, do not jump on the wagon, follow some simple ratios that can help you estimate the markets over/udner valuation.
9. In the end, it's quite simple.  Really - Workout simple ratios and follow them. For example, the meaning reversion of profit margins and price earnings ratios. GMO does that for the 7-year market forecast.
10. This above all: To thine own self be true - Know yourself.  If you are easily influenced by others and cannot resist temptation during a bubble, you should NOT manage your own money.

Part II: Your Grandchildren Have No Value (And Other Deficiencies of Capitalism)

In the second section of the newsletter, Jeremy Grantham talks about the shortcomings of capitalism and how it focuses on short term gains and ignore long term pain. Examples are the current debt and resources depletion. The other problem is that capitalism buys (political) influence as was the case with tobacco companies that also insisted smoking tobacco was harmless, and now with energy companies that try to misinform the public and influence regulations.

The main problem, however, is capitalism inability to process finite resources and maintain rapid economic growth as it is mathematically impossible. Many people would cry foul if you say that a decline in population is necessary so that we can live peacefully. Some scientists also estimated that if Indian and Chinese were to catch the average American lifestyle, we would need 3 planets to live sustainably.

To conclude, he says that capital does thousands things better than other systems, but the 2 or 3 where it fails, could bring it down.

Part III: Investment Observations for the New Year

In the last part of the newsletter, he reflects on the year 2011 where most markets ended basically flat. Most equity markets are currently close to fair value, except the S&P 500 with expected returns of only 1% per year.

Overpricing exists in debt markets however. He sees great opportunities in avoiding duration in fixed income and recommend to underweight the most of the US market as a whole.

• Inflation Hedges

 Although inflation is not an issue right now, it will certainly rear its ugly head soon enough.He recommends stocks, and especially things in the ground such as oild and copper as well as forestry and farmland. He also thins Gold may be a good hedge

• Resources

Farmland has gone up a lot recently, especially in the US, and GMO is looking for opportunities in foreign markets.

On the other end, natural gas is dirt cheap and the natural gas to crude oil ratio (BTU equivalent) is now 14% which is the lowest in 15 year. Anybody with a brain should look into investing in natural gas. Unfortunately,  he did not give any specifics.

He also said that Gold producers look cheaper than Gold itself.

• European Complexity

GMO could not comment on the European issue specifically because they do not consider themselves experts in "sovereign debt-regulation-political-monetary mess". However, one or two other companies  - which have a good track record on those issues - seem to be more worried than the rest of the market.

Finally, he gave GMO recommendations for the year ahead:

• Heavily underweight U.S equities, but not the high quality quartile, which is almost fair price. Non-quality equities, in contrast, have a negative imputed 7-year return after their handsome rally in the last 3 months through to mid-February.
• Slightly overweight other global equities, which are almost fair price, down from a little cheap at year end.
• In total, be about neutral in global equities. Yes, there is more than our normal fair share of potential negatives lurking around, but on our data: a) most of the negatives are reflected in stock prices; and b) all fixed income duration is dangerously overpriced. This last situation is, of course, engineered by the Fed, which hopes to drive us all into taking more risk, notably by buying more equities. I hate to oblige, but at current equity prices it just makes sense to do what they want. As mentioned earlier, equities are also good long-term hedges against inflation.
• Underweight as much as you dare long-term bonds, especially higher-grade sovereign bonds.
• In the long term, resources in the ground, forestry, and agricultural land are attractive, but come with the usual caveats of the risk of short-term over pricing, so average in.

You can read the complete newsletter for free on GMO website.

GMO 7-Year Asset Class Forecasts - 4Q 2011

GMO has just released its quarterly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: 1.4% per year
• US Small caps: -0.5% per year
• US High Quality: 5.3% per year
• International Large caps: 6.12% per year
• International Small caps: 5.0% per year
• Emerging Markets: 6.8% per year

Different kinds of bonds are expected to return between -2.5% and 1.2% per year.
Managed Timber is expected to return 6% per year as always in GMO forecats.
Those are real returns adjusted for inflation of 2.5% per year.

The expected returns have slightly decreased since last quarter, but the best performing assets remain international large caps (Europe & Japan?) and emerging markets and the worst performing assets should be US and international bonds. The US market (except High Quality Stocks) should also be avoided with returns between -0.5% and 1.4% per year.

The ways to act on this forecast remain the same as last time, e.g.  iShares MSCI Japan Index Fund(EWJ), iShares S&P Europe 350 Index Fund (IEV) and iShares MSCI BRIC Index (BKF) on the long side, and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX). However, the expected returns on the short side, may not warrant taking this risk just yet, especially with the decay inherent to short and leveraged ETFs.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Jim Rogers and Jeremy Gratham: Bonds are a Terrible Investment

Jim Rogers recently told Fox Business Network that he plans to short US bonds in the future and to buy them now would be a “terrible mistake”.

"I am not short bonds yet but I plan to be short bonds," he said. "If the world economy gets better, you are going to make money in commodities because that is where the shortages are. If the economy does not get better, they are going to print money and when it does get better, you better own commodities, such as silver and rice."

Rogers warned it would be dangerous to own US T-bills now but admitted he had been burned a few times recently when he attempted to short the asset class.

Yesterday, GMO (Jeremy Grantham) released their 7-year forecast, and all bonds (except Emerging Debt) are expected to provide negative returns every year (on aggregate) over the next 7 year.

Here are GMO forecasts:

• US Bonds: -1% per year
• International Bonds: -2.1% per year
• Emerging Debt: 1.5% per year
  
• Index Linked Bonds: -1% per year
  
• Cash: -0.7% per year

The best 2 investments over this 7 years would be international large caps (6.4%) and emerging markets (6.5%).

Jeremy Grantham Quarterly Newsletter December 2011 Summary

Jeremy Granthan from GMO has just released its Quarterly Newsletters entitled "The Shortest Quarterly Letter Ever".

Yes, it's short, it's just 4 pages long and comprise a list of notes to himself, subject that he plans to write about mainly:

• Caution is advised due to the situation in Europe.
• The U.S., and to some extent the world, will not easily recover from the current level of debt overhang.
• Western world will know a period of slow growth due to population dynamics and lack of savings especially in the US and the UK.
• US income gap inequality.
• Equity markets have been absolutely bombarded by bad news since last spring.
• Profit margins are likely to decrease.
• “No Market for Young Men.”: A market forecast of the market (S&P 500) based on previous bear market and showing it return below 1000 and staying there for about 10 more years.
• Underweight equities until the market becomes cheap again or during the next 3rd year of the presidential cycle (2015) whichever comes first.

Finally he gives some recommendations:

• Avoid lower quality U.S. stocks but otherwise have a near normal weight in global equities.
• Tilt, where possible, to safety.
• Try to avoid duration risk in bonds. For the long term they are desperately unattractive.
• I like (personally) resources in the ground on a 10-year horizon, but I am nibbling in very slowly because, as per my Quarterly Letter on resources in April 2011, I fear a major short-term decline in commodities based on a combination of less bad weather – which has been bad, but indeed less bad – and economic weakness, especially in China. Prices have declined, often quite substantially, since that letter. However, I believe chances for further price declines in resources are still better than 50/50 as China and the world slow down for a while, and the weather becomes a bit more stable.
  

You can read the complete 4-page newsletter available for free on GMO website.

GMO 7 Year Asset Forecast Says Stay Away From Bonds

GMO has just released its monthly 7-year Asset Class Forecasts (November 2011).
Here are the expected annualized return (based on valuation and historical earning growth):

US Large caps: 1.8% per year
US Small caps: -0.4% per year
US High Quality: 5.4% per year
International Large caps: 5.8% per year
International Small caps: 4.6% per year
Emerging Markets: 5.6% per year

Different kinds of bonds are expected to return between -2.3% and 1.3% per year so that is all bonds are expected to return negative interests except emerging market bonds. Managed Timber is expected to return 6% per year.
Those are real returns adjusted for inflation of 2.5% per year.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

GMO 7 Year Asset Class Forecast (Q3 2011)

GMO has just released its monthly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: 3.1% per year
• US Small caps: 1.5% per year
• US High Quality: 6.6% per year
• International Large caps: 7.2% per year
• International Small caps: 6.0% per year
• Emerging Markets: 7.2% per year

Different kinds of bonds are expected to return between -2.7% and 1.9% per year.
Managed Timber is expected to return 6% per year.
Those are real returns adjusted for inflation of 2.5% per year.

So the best performing assets should be international large caps (Europe & Japan?) and emerging markets and the worst performing assets should be US and international bonds.

One way to act on this forecast via ETF would be to buy iShares MSCI Japan Index Fund(EWJ), iShares S&P Europe 350 Index Fund (IEV) and iShares MSCI BRIC Index (BKF) on the long side, and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX).

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

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.

Positives:

• Economic growth rates in emerging economy
• US / China Trade Surplus/Deficit has shrunk
• US Personal savings are up
• Corporate profits

Negatives:

• 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

Jeremy's Grantham Quarterly Newsletter Q1 Part 2

After explaining with he thinks we are in a paradigm shift in the commodities markets earlier last month, Jeremy Grantham published the second part entitled "Time To Be Serious (and probably too early) Once Again".

Here are the key points:

* US Stocks are overvalued by over 40% (Fair value for the S&P 500: 920) based on GMO methodology
* Year 3 is generally good for stocks, but there are many uncertainties including whether QE3 will be enacted
* He doubts the market can reach 1500 by October 1
* Now is not the time to float with the FED, but to fight it.
* GMO increased Japan equities positions are the market seems undervalued
* High Quality Stocks outperformed small caps since March 31: +5% vs -1% as expected
* Long Term recommendations: Forestry and agricultural land

Jeremy's Grantham Quarterly Newsletter April 2011 Summary

Jerey Granthan from GMO has just released its Quarterly Newsletters entitled "Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever".

He explains that the world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value and that we all need to quickly adjust our behavior to this new environment.

Here are some interesting quotes from the newsletter:

• "no compound growth is sustainable "
• "From now on, price pressure and shortages of resources will be a permanent feature of our lives"
• "not just “peak oil,” but “peak everything,”"
  

He then states that after a 100-year downward trends in commodities, we are either in a massive bubble or paradigm shift. He clearly believes the later, surprising for the master of mean reversion.

He have specific paragraph for peak oil (N.B: 70 to 80 USD per barrel for new oil fields, same figure as Marc Faber) metals and agricultural commodities which he all see increase in price.

Finally he also notes the possible downward risks (short term) namely the weather for agriculture commodities and China could experienced a crash as its economy overheats (ce cited Jim Chanos). Out of those events he suggest a 25% chance commodities prices stumble, but if the weather is good (for farming) or China crashes the odds are 80%.

He concludes with "The U.S. and every other country need a longer-term resource plan, especially for energy, and we need it now! "

I strongly recommend you read the complete 19-page newsletter which is available for free on GMO website

I completely agree with Jeremy Grantham, that we would have to live a more simpler live, possibly control the population in order to avoid a catastrophe (massive loss of life) longer term.
Investment wise, I would not buy commodities right now (that's also a risk) and wait for a correction (as we have so many risks) before loading up massively either buying commodities themselves, commodities related stocks (might be risky due to demand destruction and reverses decrease) or ETF. Those are not really safe in case of financial collapse, but the easiest to acquire, some physical gold and silver stored in your home can not hurt, although the best would probably to have production capacity such as a farm or a mine, but it's very difficult to do for most people. In case a major crisis, the rule of law will go out of the window (martial law), and nothing is safe. Let's hope it does not go that far.

Finally, here's an excellent video playlist (8 videos - over one hour) of a lecture (year 2002) explaining the exponential function and showing the problems that will occur when it is applied to population and economic growth.

Jeremy Grantham (GMO): -2.8% annual return forecast for small U.S caps

GMO has just released its monthly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: -0.1% per year
• US Small caps: -2.8% per year
• US High Quality: 4.6% per year
• International Large caps: 3.2% per year
• International Small caps: 0.2% per year
• Emerging Markets: 4.3% per year

Different kinds of bonds are expected to return between -0.7% and 1.7% per year.
Managed Timber (how to invest in this?) is expected to return 6% per year.
Those are real returns adjusted for inflation of 2.5% per year.

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Investments Newsletters and Blogs

There are lots of investment and economic newsletters around, here are the main one I follows either directly (free) or indirectly (paid one) by reading to articles or listening to interviews by the publishers.

Free newsletters and Blogs

• GMO - Jeremy Grantham: Quarterly newsletter. http://www.gmo.com/ where you get a market commentary and expected returns based on the return to the mean. Grantham is the specialist on Bubbles. You'll also get a 7-year market return forecast (for US, emerging and lumber) every month.
• Mish Global Economic Trends Forecast - http://globaleconomicanalysis.blogspot.com/ - with a least three post a day and very informative. Beside economic commentary, you'll also get some more political stances mainly about the handling of US Debt and American unions by politicians.
• Sprott Newsletter - http://www.sprott.com/ - Free Monthly Newsletters (Market at Glance) about precious metals and current market conditions.
  

Paid Newsletters and Commentaries

• Marc Faber - Monthly Market Commentary - http://www.gloomboomdoom.com it costs 300 USD yer year tp get 12 monthly commentary per year. Some older samples are free. for example http://new.gloomboomdoom.com/subscribers/download/051009.pdf
• LEAP 2020 - This is an anticipation newsletter somewhat pro-Europe, but still very interesting - http://www.leap2020.eu - that cost 200 Euros per year and provide an overview of likely trends in the next few months and years. A shorter public (free) version is available every month.
• Trends Journal - Quarterly publications based future trends based on Current Event by Gerald Celente and its team at Trends Research - http://www.trendsresearch.com available for 99 USD per year (Online) and 185 USD per year (Online and Magazine). Discounts are available for the unemployed and financial distressed persons.