Grantham on the everything bubble

Not sure what the original source for this is given the GMO quarterly newsletter does not appear to be out but the quote is priceless as usual from Jeremy Grantham:

Today's Beta Desert

We have been writing quite a bit about why asset allocation today is in one of the toughest investing environments we’ve ever encountered. And it’s not just because we think equity markets are overvalued. No, we’ve seen that plenty of times before over the past decade or so. Remember the technology bubble of the late ’90s? That was challenging, sure, but what got lost in the shuffle was that while U.S. large-cap stocks were outrageously overpriced, it turned out that real estate investment trusts, emerging equities, and international small caps were deliciously priced. And it was perfectly clear to us what we had to do: avoid technology and own the cheap stuff, even though it might have looked a bit unconventional. Then we entered the 2007–2008 credit bubble, and while, yes, virtually all equity markets were overpriced, it was perfectly clear to us what we had to do: hide and wait. And that was not a bad proposition because there were plenty of safe places to hide—Treasury Inflation-Protected Securities, U.S. Treasuries, and a strategy we had developed called Alpha Only—and earn a decent, if not spectacular, return. Today’s environment, however, is quite distinct, as seen in the chart below, where we lay out the GMO seven-year forecasts in a volatility (an imperfect shorthand for risk) versus return format for the traditional asset classes, or betas. This beta desert is so challenging because not only are there no asset classes that we believe are priced to deliver 5% real return (the red line), there is also no safe place to hide and wait (the green circle).

If you’re struggling to invest comfortably you’re in very good company.


  1. ZIRP is working well. If you have missed this upswing (as I largely have), the name of the game is now preservation of capital, not return on capital.

      • Well, that is true if we are heading towards inflation. Not true if we are heading towards deflation.

    • A lot of us missed this upswing. A young guy who used to work for me picked it perfectly though. I would say “mate that’s way overpriced” he would keep ploughing in and in return say “mate stop trading on fundamentals and just go long and hard…”

      • You sound like my first boss, who’d seen similar to your young-guy back in the 70’s. His view? “Anyone can be right. The time to make a lot of money is when everyone is wrong..”

      • Strange Economics

        This sounds like the property bubble –
        if all have the same delusion that fundamentals don’t matter, then the “sane” lose out big time by not joining the party in the asylum.

        Or as the the RBA says – if the house bubble became “uncontrolled” that would be bad and maybe need macroprudential. (perhaps once the politicians 2 houses each and Joe Hockeys wife’s house have doubled in price).

        So when did they state they were going to create a (controlled) bubble. (what happened to “bubble? what bubble?)
        Where in economics school do they teach how a controlled bubble is good. (or does the RBA believe already in secular stagnation?)

  2. The ‘safe place to hide’ is in yourself. Just keeping and maintaining a real job (one that’s productive), at any wage level, will be the safe investment we all need, as all other asset classes fall in price about us. It’s the sole asset class that in aggregate has been so badly deflated over the last 40 years; it’s in that Green Ring = Developed-Economy, people.

  3. HnH, investing is not easy nor for mugs. If it was easy like real estate, everyman and his dog would be share investors. However the difficulty creates opportunities for those who understand the market to make a lot of money.WW

    • +1 about investment not being for mugs.
      Although property investment is not for everyone either and even though it seems easier than shares, reality is its not and its a lot of hard work too.

      Big difference between your average mom and dad ‘investors’ (What’s called specufators MB) and an actual property investor who knows the ins and outs of his investments(holding costs,yields, when to flip,when and where to buy…)

      • Property investing is easy for the little guys….. if they did it more than 10 years ago.
        It has never been harder for those who are aware of risk.
        The people who know all that detail aren’t small investors, they are traders or professionals or people who don’t understand risk.

  4. I wonder where Grantham would place Australian iron ore exposed equities on that chart?

    I’ve been trying to land in the green circle for years. We could get there with cash in Australia until recently, but no idea how to do it now. You just have to shift to the right, throw some money all over the place, and hope for the best.

    • Once you see the problem, you see the carnage everywhere. The environmental destruction is probably the most sad for mine, you see how this disconnection from the beauty of nature feeds the greed and the growth at any cost. You are right, we are all the little lords of usury now.

      • He is right but refuses to see the solution.

        As I’ve said again and again and again…just some people want to trash it, discredit it..or accuse me of being greedy or selfish (which is exactly what I’m saying…we all are)…It’s the only way..

        To protect anything is to keep the greedy little fuckers (every single one of us) to low numbers.

        stabilize population or we’ve got an uncontrollable disaster of twice as many greedy little fuckers all destroying whatever they have to get their piece of the pie….How this simple maths is lost on anyone astounds me.

        Save the environment, maintain medicare, maintain house prices, food prices, insurance costs, building costs, congestion, WAGES…There’s one way ONLY…Stabilize population….Anything else is just BS usually spouted by the greediest of them all.

      • Thanks aj. Completely agree. Great comment.

        btw, I’m really glad you used that word “little” in your final sentence; I considered editing my own comment to add it. A key insight.

      • “He is right but refuses to see the solution.”

        The problem is usury. The solution is to eliminate it.


        Reducing the number of people who can potentially capitalise on the problem, is not a solution to the problem.

    • Even StevenMEMBER

      There is a large degree of truth to what you’re saying. A lot of share/security trading is unproductive. And if you ‘win’ it is often at the direct expense of others.

      Ultimately, it is a competition. And fortunately all (or at least most) realise that. If they choose to put their wits and intelligence against others – and lose, well, I won’t in most cases, be shedding any tears.

      • “Ultimately, it is a competition.”

        You are spot on mate. And therein lies the heart of the problem with usury.

        It compels us all, from the cradle, into an artificial, contrived paradigm, of unnecessary competition.

        Forced competition inevitably drives an (artificial) outcome, of winners and losers.

        Also inevitably (and speaking sweepingly), those who most strongly embody all the worst traits of humanity — those who are the most immoral, self-serving, cunning, obsessive, manipulative, deceitful, devoid of all conscience and love of fellow man — are those most likely to become the greatest winners under a system compelling competition.

        A usury-based economic system is one designed by such people, for such people.

    • +1 yes, the mistake will be using fiat as a term of reference. Unencumbered assets are their own price, fiat is a short term transacting tool.

      • You have faith in the global fiat system Lorax? Do you really think the current trajectory is sustainable and can be normalised?

      • Things are rarely as bad as gold bugs would have you believe.

        Certainly if the world falls apart I don’t see that owning a stack of shiny metal will save you.

      • @The Lorax: I’ve been running through the same thing in my head. Gold is touted as a hedge against “bad stuff” happening. But depending on how you own the gold, the bad stuff may wipe out your holding.

        You get the gold bugs telling you to only buy physical. But when things go to crap who says it wont be confiscated/stolen from the vault?

        So maybe you keep it in your house. But if society breaks down you will get robbed either carrying your gold to the market or by armed thugs coming to your house. Either that, or no-one wants your gold and it becomes worthless.

        So maybe you want a bunker, hydroponic greenhouse, and lots of guns and fences on your farm. That will probably be overrun by starving hordes too. Where does it end? Life is too damn short, and you are trying to mitigate tiny risks.

      • In the event of a very large scale societal breakdown – e.g. there are major shortages of food, water, energy – who’s to say gold will retain its value?

        As the man says, good compost will be much more valuable, and Aquatabs even more so.

        Could be safer foraging than on a farm – no property to encourage others to rob you.

      • migtronixMEMBER

        You guys are fools, try sneaking away on boat with a few tonnes of compost and see what you get for it on the other side.

        I personally have family who fled Mozambique with stones and gold, crossed over to South Africa or on boat to Kenya…

        Good luck with your compost..

    • It makes sense….Whatever happens you come out with…

      X barrels of Y
      X bushel’s of Y
      X ounces of Y
      X houses in Y location.

      I’ve done that but not entirely…

      • That’s right.

        I own small slices of gold mines and uranium mines (i.e., strategic commodity). They don’t earn anything for now, but they are backed by hard assets. I feel comfortable about them.

        I know Grantham is in the US, but still…… what is wrong with buying as many CCL shares as you can afford?

  5. All that easy debt money bidding up asset prices but little of it getting into the hands of people who can use it for real needs (not just idle wants).

    The ideology says no no no but it is just a matter of time before the penny drops and someone tries something radically simple.

    QE for Struggle Street is on the way.

    But we will probably get a dodgy banker approved version “so yes Virginia there will likely be inflation”.

    • With wages stagnating and mortgage payment increasing where would the demand for feeding the inflation come? I see only one way – lower $AUD, but not trough lower IR.

      • The demand would come from the QE for struggle street.

        QE for struggle street in its purest form is the government operating with a gap between taxes and expenditures that results in the difference being in the hip pockets of real people who then choose what to with it.

        Save it
        Spend it
        Pay down loans

        How is the gap financed?

        The Treasurer gives the RBA a bit of paper called a zero percent non transferrable bond. The RBA then credits the Treasury Exchange Settlement account.

        Job Done!