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

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