Jeremy Grantham, "Slowdown Looks Downright Frightening"

By on July 21, 2010

Jeremy Grantham has released his latest quarterly letter in which he expresses his belief that there’s no inflationary pressures on the horizon. Despite this view, he doesn’t figure bonds are very attractive at the moment and would continue to concentrate on U. S. high quality and emerging market equities.

Grantham also comments on the bloated financial services industry and the resulting drag on the real economy. He comments on the disparity of information available to the sellers and purchasers of financial products, what he refers to as “the problem of asymmetrical information.” Grantham laments the metamorphasis of client into an exploitable “counterparty,” and feels the industry should have done more to prevent the rise of conflicted, unethical behavior.

Grantham continues his letter with an expression of amazement at the continued relative outperformance of low quality and small cap equities. He also reckons there is a fairly high probability (45%) that the market can approach the old highs by October 2011.

Grantham is somewhat perplexed by the underperformance of quality stocks over the past five years. He offers a possible explanation for which he has no data to support his view. He reckons those nearing retirement (the baby boomers) have been heavily invested in blue chip equities, and as they need money for expenses…well you get the drift. Another possibility is that investors discovered alternative competing investments such as hedge funds and commoditities, and allocated more of their wealth in these areas. Whatever the reason is not that important, but by realizing where the cheapness lies gives patient investors an advantage which could be substantial over time.

Grantham covers one of his pet peeves which is the warming planet. He also does a re-take on a previous theme, “Seven Lean Years.” Grantham concludes with a short essay on “Aging Populations, Pensions, and Health Costs.”

It is, as always, an excellent letter.

Source: GMO Quarterly Letter

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