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.

Marc Faber: 2013 Will be a Difficult Year for Equities

Marc Faber is interviewed on CNBC Fast money about his market outlook. He explains stocks (and gold) have traded in a narrow range in the last few days, and he expects a breakout, most probably on the downside, but he does not rule out new highs... If the market goes down around 150 points, he expects the Fed to start QE3, 4, and the market could rebound, but he still think we have probably seen the high 

for the year. He concludes by saying 2013 will be a difficult year for stocks. 

Peter Schiff: Buying Treasuries is Like Buying Facebook

Peter Schiff is interviewed on Fox Business News on the 4th of June 2012.

He explains that the next recession (which is coming soon) will be worse than 2008. and the Federal Reserve will have to come up with QE 3 and eventually QE 4.
Interest rates are now too low, and they should be decide by the market instead of the FOMC.
He also compares current US Treasuries massive buys to the frenzy during Facebook IPO, and eventually bond investors will suffer, just as Facebook IPO investors have.

Jim Rogers: Gold Going Much Higher In This Decade

ET Now interviews Jim Rogers on the 23rd of January 2012.

They asked him about commodities following the monetary easing by China, and he replied that natural resources such as silver, rice and natural gas usually benefit during periods of massive money printing. If the world economy gets better, there will be shortages, if it does not, they will print money. He owns more precious metals than base metals however.

If there is a conflict with Iran, everything will go down initially, except maybe crude oil, but this would be positive for Gold in the long term. He sees many people in Washington want to do something about Iran, and it looks like something will happen even though it's sheer madness.

GEAB 61: Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing

Here are the highlights of GEAB 61 (January 2012) entitled "Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing":

• Global Systemic Crisis: 2012 : The Year of the Great Global Geopolitical Swing. 2012 will be a transition year year between the old world and the new world order.
• USA 2012: Towards QE3 Tragedy. QE3 will play an important role in the transition.
• Anticipations 2012 - 20 up and 15 down. 35 Key Trends for 2012. For example, LEAP anticipates that People will become more and more angry, revolt around the world  and contribute to the transition. They also expect that the power of central banks will decrease and that the Euro crisis will disappear in the headlines as the UK and the US debt crises will come back in front pages.
• Strategic and operational recommendations
• The GlobalEurometre - Results & Analyses 

The next month, LEAP/E2020 will unveil its anticipations for Europe 2012-2016 in GEAB 62.
The full GEAB 61 (PDF format) is available to subscribers for 200 Euros per year (10 + 6 issues).

Jim Rogers Mainly Owns Precious Metals and Agricultural Commodities

Jim Rogers interview by the (Indian) Economic Times on the 8th of November 2011.

They first discuss about the current European debt crisis and that they still did not fix the problem as the debt is still going up: there will be more debt in one year and even more in two years.

He said (as in previous interviews) that QE3 has already started, because when Bernanke says he will keep interest rate at zero percent until 2013, he can't just sit he must intervene to keep the interest rate at that level and that shows in the money supply.

Precious metals (Gold and Silver) and agricultural commodities are his main commodity investments, but he also likes on base metals. He still prefers Silver rather than Gold because the former is still way down it's all time high.

Finally, he explains that crude oil will go higher than anyone expects because reserves are going down every year, although if a major event occurs (such as Spain going bankrupt), crude oil would go down with it, but that would then be a buying opportunity.

Jim Rogers: Bernanke Has Already Announced QE

Jim Rogers is interviewed on CNBC's Larry Kudlow on the 10th of October 2011.

He discussed about the current bailout of European banks and called for letting the market work and let bad banks fail.

He's still long commodities and expects the ECB and FED to print more money.

QE is already there as Bernanke said interest rates will be kept low for 2 more years.

Jim Rogers: Invest in Myanmar and North Korea if you can

Jim has been Interviewed on GoldSeek Radio on the 27th of September 2011.

QE3 has already started when Bernanke announced he would keep the interest rate close to zero for 2 years. At that time, M2 measure of the money supply when straight up.

Jim Rogers expects a correction in Gold and Silver. Gold has gone up for 10 years in a row, this is unprecedented even during the 1970s bull market and a correct should be expected. He would buy Silver and Gold on further dips as all commodities will probably end up in a bubble. Of course, if the US dollar becomes confetti, there is no ceiling on the price of Gold.

There has been a recession every 4 to 6 years in the US, so he thinks we'll get another one this year or at least one within 2013. That time will be worse since there are no bullets left. The US had a huge debt problem and they can't triple the debt again, the market won't let them. Same thing for money printing, it would become very difficult now.

Developing countries won't be spared by the next recession occurring in the US and Europe as they are major economies and trade partners of emerging economies. Jim Rogers is actually currently shorting emerging economies.

He'd rather go the Scandinavian way (take the pain now) than the Japanese way (kick the can down the road) in reference to past crises.

Finally, when asked if he saw any investing opportunities right now, he recommended people to try to invest in Myanmar and North Korea if they can, as those 2 countries are starting to opening up like China did 30 years ago. Investing in those countries if illegal for American citizen. (For other individual investors, it's also difficult to get exposure since there are no ETF available yet.)

You can listen to the interview below.

Peter Schiff: State of the Gold Market

Following the recent Gold and Silver sell-offs, Peter has written an update to his subscribers:

Friends,

This past week has been a rout for precious metals. From last Monday to today, gold has dropped 10.9% and silver dropped 30.4% (per the London fix). For gold, from $1794 to $1598, and for silver, from $40.46 to $28.16.

The metals have been on a tear for the past few years. Because of this, investors and speculators that do not understand the fundamentals appear to have joined the bull run, and then quickly departed at the first sign of trouble. Good riddance to them, I say. While sharp declines do test the mettle of some value investors, I believe this leaner market presents a great buying opportunity.

The situation in Europe continues to deteriorate daily. Greece is in default and larger EU members look sure to follow. Meanwhile, gridlock is the password in Washington. QE III is coming, and with it, the dollar is headed for another big decline in purchasing power. The Swiss National Bank just instituted a peg to curb inflows of global investors seeking a safe haven – costing franc holders 25% of their position in the course of a week.

To me, this situation screams, "buy gold!" But, unfortunately, herd-like investors are being corralled into the US dollar. However, as with any move that defies reason and economic law, this will not last.

Marc Faber: The Final Collapse Will Not Happen Right Now

Marc Faber interview on the Daily Ticker on the 9th of September 2011 where he explains he does not take into account government officials speeches and that Western citizen do not take their responsibilities like Asian citizens and always rely on the government to save them.

Finally, he says the US is worse than Europe, as European have savings, but the main advantage of the US is that they have the printing press.

The good news is that he does not believe the "Final collapse" will NOT happen right now :).

Where is Gold headed in the Short Term ?

Gold has broken the trend its started in 2008 on the upside in recent weeks as shown in the chart below (Gold in USD, source: Boursorama.com)
Gold has now started a parabolic move, and is headed towards 2000 USD per ounce. This remind me of the run-up in Silver earlier this year, where Silver reached 50 USD per ounce before severely correcting. It has since then somewhat recovered.

Although I still think that in the long term, Gold is headed much higher until we get positive real interest rates and debt issues are resolved, in the short term, Gold could reach a psychological level such as 2000 USD and then correct somewhat (10% to 20%) before moving up again.

2000 USD (or just above) also corresponds to the top line of the trend started in 2001 (See chart below. Source: Boursorama). Please note that it is a logarithmic chart as such scale is better suited for longer periods of time.



Right now, it's difficult to see what could trigger a sell-off in gold. The recent margin requirement hike did not put much downward pressure on gold. On the 25-26 August 2011 (This week), the federal reserve will meet at Jackson Hole and many people expect them to announce QE3 (explicitly or in disguise) at that time. If it does not happen, and the FED clearly waits and sees, we could see a short term correction in Gold as QE3 (or equivalent) will eventually be implemented.

Marc Faber: The Market is Extremely Oversold.

Marc Faber talks about the recent market sell-off on CNBC on the 5th of August 2011 .
He thinks it is very unlikely that we reach new highs and he would be using rebounds has a selling opportunity whether Q3 is enacted or not.

He says Treasuries has still perceived as a safe heaven. His view is that gold and silver are overbought in the short term, but would buy again on any dips.

He also explains again his prediction of the total collapse of the economic system further down the road where cash and treasuries will be worthless, stocks will go down but still hold some value and precious metals should perform relatively well.