Read Grantham

Below find Jeremy Grantham’s latest quarterly newsletter. If you value your capital, I suggest you read it. All of it. I agree with every single word.

Houses and Holes
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  1. He’s the only one who called the US RE bubble, equity market bubble and follow up gov’t debt bubble.

  2. I think Grantham calculates the S&P fair value by the average profit margin * the average PE. He says that it is 950. Does anyone have any idea how much the asx200 would be under this calculation? Or any other fair value estimates for Australia?

    • Not sure what average profit margin is (will know after earnings season), but average trailing PE is now reverting to its average in Australia of 11 times, instead of 17.

      The last 30 years have rightly been called the aberration, where P/E ratios ranged between 14 and 20.

      I went over a few of the reasons why the earnings multiple is likely to drop here:

      Once we (Q and I) have absorbed the earnings result, we can calculate a “fair value” of the ASX200 using the proper PE – but I doubt it will have a 5 in front of it, and maybe not even a 4.

  3. +1 H&H. I stayed up and read it last night. SocGen 20% sell off, Markets down all over, gold at USD1803, and the rating agencies saying “don’t panic”.

    Nice start to the day …

  4. Jeremy Grantham is familiar with Steve Keen or this is his own observation?

    He says: ‘when the government debt ratio falls (or even increases) at a DECELERATING rate, it will put offsetting pressure on margins’

  5. this guy is amazing. i want to work for him. i cant think of single billion dollar guy except maybe soros who tells it so straight.

  6. ** putting on his best tea bagger imitation **
    This Grantham guy sounds like a thoroughly indoctrinated commie. Why, he sounds like Castro. (BTW, Soros is Chairman Mao).

  7. I have been thinking about the yield curve. As is well known, an inverted yield curve is well-known leading indicator of impending recession. However, because yields on short-dated debt – being from overnight out to 2 years – are deliberately being held close to zero, it is now impossible for the yield curve to invert. Bearing this in mind, the yield curve can no longer generate a signal about the future of the economy. It is a null signal these days.

    However, it is worth thinking again about what the yield curve actually describes. What yields are is a statement about the time value of money and inflation. Long term rates express a demand by lenders for a real return – say 3% pa – and a premium for future inflation.

    When the yield curve inverts, this is either because short-dated yields rise (say, when central banks raise the cash rate), or because long-dated securities rise in price (and their yields fall).

    In this latter case, markets will bid more for long dated debt because they have lowered their expectations about future inflation and because – with necessarily limited knowledge of the future – they think long-dated securities offer relatively better risk/return relationships than other securities.

    That is, debt markets bid up the price of long-dated securities because – in spite of the possibility of inflation in the future – they seek long term capital security, even if yields are depressed.

    We now have a situation in the US bond market where there is basically no upside in holding short-dated securities and yet there seems to be insatiable demand for the liquidity and security of the Treasury market.

    And the same is true at the long end of the market. We now have the US 10-year rate at about 2% pa and the 30-year rate at just over 3% pa. What the bond market is saying is they will offer a premium for capital security and that they expect very low inflation for the foreseeable future.

    The bull run in the bond market – especially at the long end – represents moves by lenders to take out insurance against recession on a truly massive scale. In taking this position, the markets are also implicitly discounting the probability of a return to high future inflation.

    It is therefore worth looking at this from the viewpoint of commodity prices. Even though these are generally down from their highs earlier this year, commodity prices remain elevated by many standards. The bond market is saying that in spite of all the liquidity in commodity markets at the moment, this will not translate into tangible, sustained consumption and that, if anything, commodity prices are more likely to fall than rise.

    This is a very negative message.

    I certainly do not know any more than anyone else about the future. But the bond markets are seldom wrong. If they are right about this, then we have to expect the worst on commodity prices, and therefore on aggregate demand as well.

      • Yes…. to a person who spends all day long watching charts and data feeds on multiple lcd screens. 🙂
        When we talk in numbers, the human angle is lost, rendering 2 things
        1. It incomprehensible to most of the readers.
        2. The powers-that-be / investors tend to focus on the capital sitting in some bank account rather than the human capital.
        Good to see that Grantham does not fall into this trap.

      • +1…I agree with all that you have wrote David. that was excellent.

        I am thinking more and more about Gold…I just cant see it falling. How does Gold effect the bond markets and the bond buyers desire to preserve capital despite potential inflation destruction…

        Or are you saying the Bond markets are probably pricing in deflation and therefore that is why treasury yields are not spiking on 30 year US treasury debt…which seems like the biggest rip off in the world to me!

        • I personally expect a gold sell-off in the short term…and then I expect it to continue its merry way up as fiat paper continues to fail (but expect it to keep going up in fits and starts, with a net increase until it starts to go parabolic…then bubble and crash).

          My 2c

    • Thats exactly right. This story isn’t new though. The bond markets have been saying more or less since late 2007 that inflation and growth are going to remain low for a very long period. Despite this, effective monetary policy has been thwarted at every opportunity by inflation hysteria.

      To trade bonds, you need to be able to understand monetary policy. When interest rates in core countries are close to zero, the central bank has effectively lost control of price stability and therefore there’s a real deflationary bias. Bond markets have understood this since late 2007, when it became clear that policy rates would fall to zero.

  8. Re; David/average PE
    Grantham uses 2 metrics, the first being 10 year CAPE, or
    cyclically adjusted price earnings ratio, which is a rolling 10
    year average, which smoothes out the earnings over the business cycle. The other metric is Tobin’s Q, named after Yale
    economist James Tobin, which is the present value of replacement of capital assets. This is a less important metric to
    Grantham. He places a great deal of importance on risk adjusted
    returns, which is very different from returns unadjusted for risk.

  9. With gold going up and bonds going up is this consistent with the theme “deflation in things you own, inflation in things you don’t”?

    Seems like there is both inflation and deflation in the economy – i.e goods inflation is catching up and assets are falling meeting to some sort of equilbrium. In the long run these need to be a lot more equal anyway as asset values are supported by the real economy usually. In the short run of course debt and other things can skew this balance. Read something recently that said the same thing – maybe on this site?

  10. A gold trader once said to me the intrinsic value of gold is merely jewellery. I would imagine you’d be better off buying art (or even guns) if the current money system really does come to an end. Personally rare earths seem a better investment than gold, as they’ve got a lot of practical value in future innovations.

    • Gold is the hard-money alternative to fiat money….

      When paper sucks, gold (precious metals) tend to go up; when paper is good, gold (etc) tends to go down.

      It’s just an alternative currency – more than just a commodity.

      And it is increasingly being re-monetised as the hard-money alternative to fiat paper that it is in the minds of many – increasingly many – individuals, who are losing faith in fiat systems of money.

      That’s the main reason that gold is going up.

      • -1

        If I remember it correctly, Mad Max fought for oil, not gold. At the end of the day it’s just an expensive, shiny metal with little utility.

        • -1 to you, +1 to burbwatcher

          If we get to a Mad Max scenario, what use do we have for any money? It’s just barter then, right? You take this argument so far out of context it is only relevant if we get to Mad Max.

          We NEED some type of money to trade. That is what money is for. If our paper/electronic money becomes a problem, then we need another arrangement. You can have your barrels of oil, that come in convenient large and unportable sizes, and everyone else can use something more convenient.