On Tuesday, Reuters interviewed Jeremy Grantham, chairman of GMO LLC, about his latest economic and investment outlook. Reuters’ Jennifer Ablan and Herbert Lash wrote:

The credit crisis that has ravaged world markets since last summer will fester for years and result in anemic economic growth in Japan, the United States and most of Europe through 2009, according to an influential Wall Street investor.

Grantham said:

We are in a recessionary phase that will last perhaps two and two and a half years. It will be, interestingly, unlike anything else we’ve seen.

Alban and Lash added:

His outlook for the environment now is grim, if not dire… a more prolonged and painful recession than anyone has imagined will occur, an economic downturn that will come closer in global reach to anything the world has seen since the Great Depression, Grantham said.

As for where to invest, Grantham, whose clients have included U.S. Vice President Dick Cheney and former U.S. presidential candidate John Kerry, suggested cash is king. From the Reuters piece:

He recommends investors hold cash, and if they must be invested, he favors large-cap U.S. equities…

Where should investors hide? Grantham said large-cap U.S. stocks provide “an absolute guaranteed no-brainer.”

“Their profit margins are the only profit margins in any group we look at anywhere that aren’t measurably above average at all,” he explained. “Everything else, the profit margins are way over average globally, including emerging markets — very vulnerable, hugely mean-reverting,” he warned.

Grantham said they have lagged other asset classes over the past six years:
“They’ve been left behind, exactly the time you would need them.”

Source:

“GMO’s Grantham sees prolonged credit crisis”
Jennifer Ablan, Herbert Lash
Reuters, August 6, 2008

PIMCO founder and chief investment officer Bill Gross told Bloomberg that he thinks the U.S. government will have no choice but to prop up mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Shannon D. Harrington and Kathleen Hays wrote yesterday:

Bill Gross, who manages the world’s biggest bond fund, said the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.

“By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it,” Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. “We’ll be on our way toward a joint Treasury-agency combination.”

Gross adds to a growing chorus of investors and analysts predicting U.S. Treasury Secretary Henry Paulson will need to use his newly won power to prop up Freddie and Fannie. Freddie posted a second quarter loss that was three times wider than analysts estimated and said credit losses doubled in three months, heightening concerns it may not be able to weather the worst housing slump since the Great Depression.

Source:

“Pimco’s Gross Says U.S. Will Rescue Fannie, Freddie (Update2)”
Shannon D. Harrington, Kathleen Hays
Bloomberg, August 6, 2008

This morning I came across an interesting article about legendary investor Jim Rogers on the Internet news site NewsMax. Rogers, who recently moved to Singapore with his family, is the parent of two daughters and had some advice for other parents. From the NewsMax piece earlier today:

Jim Rogers thinks the smartest and best thing parents can do to ensure their childrens’ future economic well-being is to teach them to speak Chinese.

Later on, the CEO of Rogers Holdings gave out another recommendation. According to NewsMax:

Rogers — who no longer holds any funds in U.S. dollars and advises investors to buy strong non-U.S. currencies — says that the second best thing parents can do for their kids’ future is to keep their money in a Swiss bank account.

“My little girl does not have American bank accounts, she has Swiss bank accounts,” Rogers says.

Why no dollars? The fact that the U.S. is now the largest debtor in history means the U.S. dollar won’t be recovering any time soon, Rogers says.

“We owe the rest of the world $13 trillion, rising at the rate of $1 trillion every 15 months,” he says, to illustrate why the dollar’s value is decreasing.

“And the few people who know what is going on, don’t seem to care.”

The staff at NewsMax also noted that the former partner of George Soros is investing in a new area unbeknownst to Investorazzi.com. They wrote:

Rogers, in fact, is so confident in the future of China’s middle-class that he recently began buying shares in companies that produce a commodity that middle-class Chinese are just beginning to use — wine.

Source:

“Rogers: My Kid Learns Chinese, Banks Swiss”
NewsMax, August 6, 2008

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Offshore Banking Alert
The 10 things you really need to know before opening an offshore bank account. Free Report.

Emerging markets veteran Mark Mobius said in a Bloomberg Television interview yesterday that the Federal Reserve should lower the federal funds rate to jump-start the U.S. economy. Bloomberg’s Matthew Miller and Michael Patterson wrote yesterday:

The Federal Reserve should cut its benchmark interest rate to 1 percent to boost the economy as falling oil prices reduce the threat of inflation, investor Mark Mobius said.

“With oil prices beginning to soften, there may be a chance for them to give a boost to the economy by lowering rates again,” Mobius, 71, who oversees about $40 billion in emerging-market stocks as executive chairman at Templeton Asset Management Ltd. in Singapore, said in an interview on Bloomberg Television. “That’s still in the cards, but no one really knows.”

Cape Town, South Africa

The man who is known as “The Pied Piper of Emerging Markets” also shared his thoughts about where to invest. Miller and Patterson wrote:

Mobius also said valuations for equities in Turkey and South Africa are “very attractive,” and added that he’s “very bullish” on shares of Brazilian banks…

“More and more people are beginning to see that these markets are very cheap,” Mobius said. “The companies are well managed and well run.”

Mobius was especially excited about the prospects for Brazil. He told Bloomberg:

The economy is very vibrant there, and the banks are very well run.

Source:

“Mobius Says Fed Should Cut Rates to 1% to Spur Growth (Update3)”
Matthew Miller, Michael Patterson
Bloomberg, August 5, 2008

Well-known bond-fund manager Bill Gross appeared on CNBC yesterday and talked about the Federal Reserve, the federal funds rate, and where to invest these days. From the CNBC website:

Reacting to the Fed’s move to hold its key interest rate at 2 percent, Gross called talk of rate hikes “comical.”

“We’re in a recession. When has the Fed ever raised rates in a recession?” he said. “Unemployment is headed toward 6 percent, mortgage rates on home buyers are at 7 percent, and these guys want to raise rates?”

PIMCO’s founder and chief investment officer outlined what he thought the Federal Reserve should be doing now. According to CNBC:

Gross said the central bank has a responsibility now to provide liquidity.

“We’re in an asset deflation of near-historic proportions. That calls for the use of the government’s balance sheet and not for the Federal Reserve to raise interest rates,” he said. “To the extent that the central banks now must prevent that deflation, interest rates don’t go up, they go down.”

However, Gross said the Fed cannot lower its key rate, but rather he called on central banks across the world to examine their monetary policy.

“In the US, 2 percent is pretty much the floor. I think the Fed made that clear,” he said. “They’re going to provide liquidity in different forms and fashions.”

Gross, who Warren Buffett calls one of the smartest individuals he knows, told CNBC viewers where, and where not to, invest. From the CNBC piece:

As for investments at this point in the market, Gross advised against junk bonds and toward government-backed securities.

“We want to stay under the umbrella to the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie and Freddie, that’s where you want to be,” he said. “Why mess with junk bonds? Let’s stick to high quality and stay under that umbrella. Let’s stay dry.”

The 4 minute 52 second CNBC segment can be viewed here.

Source:

“Pimco’s Gross: Fed Can’t Raise Rates Due to Economy”
CNBC, August 5, 2008

It’s here. Jeremy Grantham, chairman of GMO LLC of Boston and a well-known money manager whose clients have included U.S. Vice President Dick Cheney and 2004 presidential candidate John Kerry, has finally released his latest quarterly letter, along with a “special topic” letter to boot. The following are some notable excerpts:

U.S. Stock & Housing Markets

Where does this leave me? Believing that asset prices will come down to fair price and below by about 2010, a belief I have held since 1999. This means about a 10% to 15% decline in the S&P by then (to about 1100) and a similar percentage decline for EAFE; about another 10% decline in U.S. housing and perhaps a 40% decline in U.K. housing, which is likely to take quite a while longer than 2010 to bottom out. Critically, overruns on the downside for all asset prices after a bubble breaks are much more the rule than the exception!

Commodities

The prices of commodities are likely to crack short term (see first section of this letter), but this will be just a tease. In the next decades, the prices of all future raw materials will be priced as just what they are: irreplaceable. Oil, for example, will never again be priced on the marginal cost of pumping a marginal barrel from some giant Saudi oil field, as has been the practice for most of the last 100 years of oil production. Real cost is always replacement cost and oil, a precious feedstock for chemicals and fertilizers, simply cannot be replaced. Using marginal cost as a substitute was ignorant and conducive to wasteful consumption of scarce energy resources. It also enabled us to put our collective head in the sand and ignore the growing need for an enlightened long-term energy and climate policy.

Relatively quickly, in 100 years or so, we will run out of oil, underground water, and most non-fully-renewable resources. At current rates, we will do it very, very fast. A major complication now, though, is that we have been brainwashed by repetition to reject this whole idea as irretrievably pessimistic and defeatist, and just well… thoroughly un-American.

Summary & Recommendations

Due to a combination of spectacular mismanagement by the authorities that resulted in very excessive and dangerous speculation and very bad luck in the timing of commodity problems and over-rapid expansion of China, the fundamental global outlook is substantially worse than expected. These problems lower long-term asset values by a little and increase the chances of deeper overruns and perhaps a faster trip to the lows. Our advice until now was very simple: take as little risk as possible except for emerging markets. Now it is even simpler: take as little risk as possible.

The more complex issues, as always, involve timing. Both emerging markets and commodities (especially oil) have a creative tension between the negative and risky short term (1-2 years) and the attractive long-term (5-10 years) prospects. In the short term, slowing world economic growth combines with credit, currency, and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities. Longer term, the reverse is true and they look like the assets to own. But for those who can keep some of their powder dry, there are likely to be much better investment opportunities in a year or two (or three) than we have seen for 20 years. Our motto should be:

Don’t be brave, run away.
Live to fight another day.

You can access both Grantham letters via the GMO site here.

Sources:

“Meltdown! The Global Competence Crisis”
GMO Quarterly Letter, July 2008
Jeremy Grantham
GMO, August, 2008

“Living Beyond Our Means: Entering the Age of Limitations”
Letters to the Investment Committee XV
Special Topic, July 2008
Jeremy Grantham
GMO, August, 2008

Emerging markets veteran Mark Mobius issued a stern warning to Brazil’s stock market investors. Bloomberg’s Michael Tsang and Alexis Xydias wrote earlier today:

The 65 days that plunged Brazil into a bear market are reminding investors that Latin America’s biggest economy is still an emerging nation.

Banco Itau Holding Financeira SA’s Roberto Egydio Setubal says Brazil has been transformed after inflation dropped to 6.1 percent from 6,800 percent in April 1990 and the nation got its first investment-grade rating. Templeton Asset Management Ltd.’s Mark Mobius isn’t convinced as interest rates rise at the fastest pace in the developing world and foreign investors sell equities like never before.

“You cannot say the country has changed,” said Mobius, 71, who oversees about $40 billion in emerging-market equities at Templeton in Singapore. “The experience they’ve had in responsible government spending and balanced budgets is relatively short. Inflation was high. We all have to be very mindful that these things can happen again.”

Rio de Janeiro, Brazil

Tsang and Xydias noted that Mobius’ Templeton Asset Management is among several firms that have become less bullish on Brazil. Last month, Templeton favored India, China, and Russia over Brazil, according to the Bloomberg reporters.

Source:

“Brazil Broken Markets Pit Bulls Against Mobius, Bears (Update2)”
Michael Tsang, Alexis Xydias
Bloomberg, August 4, 2008

Yesterday, a piece appeared on The Economist (UK) website which showed that the American global investment management firm Grantham, Mayo, Van Otterloo & Co., or GMO, made some terrific long-term calls regarding levels of returns from ten separate asset classes. Then again, what else would you expect when the firm is headed by legendary investor Jeremy Grantham? According to the well-known financial publication, Grantham and his cohorts are not so keen on the U.S. stock market and the housing markets of both the United States and United Kingdom. From the piece:

GMO has a very gloomy outlook for the American and British housing markets at the moment. By using the ratio of the median house price to the median family income, GMO reckons that prices in America need to fall by 17% instantly or stay flat for four years to return value. In Britain, prices need to fall by 38% or stay flat for seven years. And of course, there is no guarantee they will stay at fair value; in the mid-1990s, they dropped well below it.

More generally, Jeremy Grantham, GMO’s chairman, thinks that the equity bear market will continue for another couple of years, with the S&P 500 dropping by around 10-15% from here. But he warns that the chance of a meltdown—a drop well below fair value—has increased.

Source:

“The long and short of it”
The Economist (UK), August 3, 2008

So much for Boone Pickens’ foray into technology. Yesterday, Verne Kopytoff of the San Francisco Chronicle reported that the legendary energy investor dumped all his shares of Yahoo. Kopytoff wrote:

Billionaire investor T. Boone Pickens excoriated Yahoo’s management for failing to reach an agreement to sell all or part of the Web portal to Microsoft Corp.

Pickens, who bought 10 million Yahoo shares in May in hopes that an acquisition was imminent, said Monday that he got tired of waiting for a deal and sold his entire holdings at a loss.

“I think that Yahoo management was pathetic,” Pickens told The Chronicle’s editorial board.

Source:

“Pickens rips Yahoo management, says he dumped shares at a loss”
Verne Kopytoff
San Francisco Chronicle, July 29, 2008

Money managers from around the world gathered in Chicago last week for the CFA Institute’s annual investment seminar. Yesterday, the Chicago Tribune’s Gail MarksJarvis talked about two of the speakers- Jeremy Grantham and Marc Faber. The personal finance columnist wrote:

“I am officially scared,” GMO investment manager Jeremy Grantham told professionals from as far away as Abu Dhabi and Malaysia. “In 2000, we had a technology bubble. But this is massive, a massive credit crisis and a bubble in global housing, global equity and global land.”

Grantham, whose clients have included Vice President Dick Cheney and 2004 presidential candidate John Kerry, warned that the world is working its way through the “first truly global bubble.”

The British money manager shared his investment outlook with seminar participants. MarksJarvis wrote:

When asked by a money manager what he would buy now, Grantham said, “long mattresses” — jesting about the stereotypical nervous behavior of hoarding cash. He seriously suggested: “Put money into something incredibly safe, like a high-quality hedge fund.”

Grantham said rather than buying stocks for the long run now, he would only “short” them, or bet that they will decline in price. He sees “nothing interesting in quality corporate bonds,” and he has been shorting oil. “Commodities had a good run, but that’s over,” he said.

Although downtrodden mortgage-related bonds might be a good deal now because some are selling for 59 cents on the dollar, he said he wonders if the price will seem compelling if home prices fall another 20 percent or 25 percent.

He confessed to the group that “I bought my first gold last week, and I hate gold. It doesn’t pay a dividend. I would only do it if I was desperate.”

MarksJarvis noted:

Generally, when bubbles burst, the asset prices stay down for lengthy periods. Grantham isn’t expecting the stock market to hit its low until 2010.

The Tribune columnist also talked about Marc Faber, who publishes the monthly investment newsletter The Gloom Boom & Doom Report. She quoted the Swiss-born investor as saying:

The Fed has created a bubble in everything — stocks in emerging market, real estate everywhere in the world, commodities, art. The only asset class that is down is the U.S. dollar…

It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset bubble will lead to a colossal bust.

MarksJarvis also noted:

And with commodity prices so inflated, he expects an “increase in international tensions” over resources.

Source:

“Even the pros may be stuffing the mattresses”
Gail MarksJarvis
Chicago Tribune, July 29, 2008