This morning, Barron’s Randall W. Forsyth and Vito Racanelli talked about the onset of a new bear market in U.S. stocks. They wrote:

IT’S OFFICIAL: THE BEAR HAS ARRIVED. The Dow Jones Industrial Average last week qualified for the widely accepted definition of a bear market of a 20% drop from the highs. The good news is that once the decline reaches that arbitrary 20% mark, based on history, the market has suffered most of its losses. The bad news is that the decline typically drags on for some time, and time may be the worst enemy.

Forsyth and Racanelli noted:

The post-1940 average bear market (as defined by the Standard & Poor’s 500 index) produced a decline of 30.4% from a peak that took 386 days to reach its trough, according to data compiled by Bespoke Investment Group. By the time the market was down the requisite 20%, the average bear market was 74% completed. Based on those averages, the bear market would have another 118 days to run and would face losses of another 14% from current levels.

The reporters spoke to Jeremy Grantham, chairman of global investment firm GMO, who indicated that this “new” bear market is really just part of a “super bear” that began in 2000. Forsyth and Racnelli wrote:

But others see the current decline as another phase in a longer-term secular bear market. “We are still in the super bear of 2000,” asserts Jeremy Grantham, chairman of money manager GMO. In a bear market, stocks fall back to, or below, their long-term trend line. But after the great bull market from 1982 to 2000, equities never flushed out their excesses “because of the Greenspan-inspired chain of bubbles, from growth stocks to real estate to commodities,” referring to former Federal Reserve Chairman Alan Greenspan.

Grantham, whose clients have included U.S. Vice President Dick Cheney and 2004 U.S. presidential candidate John Kerry, believes that this bear market has some claws, and is likely to run longer than 118 days. From the Barron’s piece:

“Great bear markets always take their time, and the most likely end is 2010,” Grantham continues. If the S&P 500 were to fall to 1100 in 2010, that would be about a 13% decline from here, about 1263, and would put the index back on its long-term trend line. He adds: “Chances are we will overshoot on the downside. We always do. We will be lucky if it is 1100.”

Source:

“The Bear’s Back”
Randall W. Forsyth, Vito Racanelli
Barron’s, July 7, 2008

This weekend Kathleen Pender of the San Francisco Chronicle talked about how horrible 2008 has been for the economy and markets. So miserable, in fact, she wrote Sunday:

You have to go back many decades - to the early 1970s at least - to find a year that started as miserably for the economy and the markets as 2008.

Pender spoke to Jeremy Grantham, the money manager who oversees $152 billion as chairman of Grantham, Mayo, Van Otterloo & Co. She wrote:

This has been a “wickedly awful year,” says Jeremy Grantham, chairman of investment firm GMO. This is “worse and much broader” than previous downturns…

Grantham says the turmoil is not nearly over. “I’m very confident the global economy, and the U.S. economy, will be weaker than people expect, for longer than people expect,” he says.

The credit crisis is global and “the Fed and Congress have much less power than people think” to fix it. “Now that the system is in retreat, it’s hard to stop,” he adds.

For Grantham, who has advised such clients as U.S. Vice President Dick Cheney and former U.S. presidential candidate John Kerry, China is the key to global economic health. Pender wrote:

Grantham says the biggest risk is China slowing. “If they stumble into the teeth of slowing growth, nervous confidence and a credit crisis, that would be extremely bad news.”

Commodity prices would fall, which would hurt developing countries that export commodities. These countries have been fueling global growth, and if they slow, it will spill over into the developed world.

Source:

“Start of 2008 is the ugliest in decades”
Kathleen Pender
San Francisco Chronicle, June 29, 2008

Brian Milner of The Globe And Mail (Canada) wrote today about his conversation with legendary money manager Jeremy Grantham. The chairman of GMO, who has advised such clients as U.S. Vice President Dick Cheney and former U.S. presidential candidate John Kerry, made a comparison to the Great Depression and discussed other issues, including stock investors, government intervention, U.S. debt, commodities, and his investment strategy.

Great Depression

GM: You draw comparisons between what’s happening today and the start of the Great Depression.
GRANTHAM: We’re in that 1929-30 window, where we’ve had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They’re steadfastly ignored because they’re still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up.
GM: So no short, shallow downturn, then?
GRANTHAM: It’s very hard to torture the economics, to think that you can squeeze liquidity, take a hit to your biggest capital asset, housing, mark it down 15 per cent and then maybe another 15 per cent, in an overleveraged society, without having a sustained negative effect that would last two or three years. Which I’m sure it will.

Stock Investors

GM: Yet the stock market doesn’t seem to agree. Investors are treating this as a short-term problem that will soon be fixed.
GRANTHAM: They [equity players] hate anything negative. And that’s grown along with the moral hazard and the credit crisis. They have almost a pathological aversion to honest, negative opinion, which in itself is a sad state of affairs. But what the market never gets are the long lags.

Government Intervention

GM: You have said that by pulling out all the stops to prevent a recession, governments actually end up slowing the economy more in the long run.
GRANTHAM: I think you can argue logically there has to be some movement of assets into weaker hands, and, therefore, some loss of aggregate efficiency vis-à-vis the rest of the world, and, in all probability, a modest loss of growth rate. That certainly tallies with the data.
GM: If the economy limps along, barely above recession levels, don’t people come to expect this condition to last a long time?
GRANTHAM: Yes. The real divide comes when the recession is sharp enough to wash away the people who were relatively weak at their game or were caught out taking much too much risk and too much leverage. And the next time, there wouldn’t be those weak sisters. It comes back to the health of the financial system. The whole economy becomes a little less vigorous if it’s constantly propped up this way.

U.S. Debt

GM: You have also been extremely critical of America’s love affair with debt.
GRANTHAM: The [U.S.] debt-to-GDP ratio went sideways for 50 years and the economy was growing handsomely. Then the debt level tripled in 25 years [since 1982] and the growth rate slowed. So this beautiful faith we have that increasing debt will cure all problems is a complete hoax. Growth is about the level of capital spending and saving, education, technology, R&D and all those good things. It’s not about what I owe you and you owe me.

Commodities

GM: Let’s move on to a favourite Canadian topic: commodities. Are we looking at a bubble that will go the way of credit or U.S. housing or a real sea change?
GRANTHAM: It’s not a nice simple bubble of the kind that I love and would like to stake a lot on. And the reason is that in the long run, the paradigm has shifted. Raw materials in a world of China and India and so on will never be quite the same tame things that they were from a price point of view for the previous 50 years. Throwing in speculators who like to invest in commodities to get diversification, and two years of almost perfect global economic conditions have set commodity prices on an incredible roll.
GM: It sounds as if a but is coming.
GRANTHAM: They may be quite vulnerable on a tactical, short-term basis. If I’m right in my general thesis that we’re underestimating the pain, then they will probably take a fairly sharp short-term hit. But they’ll be back, as Schwarzenegger would be saying.

Investment Strategy

GM: Are there other opportunities for people who want to stay invested?
GRANTHAM: There isn’t a healthy risk/return ratio around in the equity markets. What I would personally do is look for the greatest vulnerabilities, under anticipated. I’d be looking to make money either by going short or, at the most aggressive, long short. I’d go long emerging [markets] and long high-quality U.S. stocks, and short the U.S. junky [small-cap] stocks. That can do perfectly fine over the next several years.

Source:

“Grantham: the bear growls”
Brian Milner
The Globe And Mail (Canada), June 17, 2008

It’s not often that I encounter a piece written about legendary investor Jeremy Grantham, so when I do, I’m truly ecstatic. Chris Taylor of the Financial Times (UK) wrote about Jeremy Grantham earlier today, and did an exceptional job reminding readers as to why Grantham is considered one of the investing greats. Grantham, now 69, graduated from the University of Sheffield and began his illustrious career as an economist for Royal Dutch Shell in 1961. Over the years, the founder of GMO with Richard Mayo and Eyk van Otterloo and overseer $152 billion (£77 billion) in assets has made some brilliant calls. Taylor wrote:

He was proved right, but it was far from the first time. Some of Mr Grantham’s “greatest hits” are the technology-stock implosion of 2000; the insane Japanese valuations of the late 1980s; the emerging markets run of the last few years; and the plunging housing market of today.

In retrospect, all obvious. But at the time, before these massive booms and busts, he always seemed to be a lonely voice in the wind.

“I remember when Jeremy made a stand against tech stocks in the late ‘90s, and was in the wilderness for what must have seemed like 50 years,” says Jim Grant, founder and editor of Grant’s Interest Rate Observer. “He lost many clients during that time, but he’s a fighter, and just doesn’t back down from a deeply held conviction. I think the British army lost a talented field general when Jeremy migrated to the States and took up finance.”

Source: The Toy Soldier Shoppe

Grantham has proven to be a consistently-reliable forecaster due to his reliance on empirical data, among other things. Taylor noted:

Mr Grantham prefers to pay attention to hard numbers, instead of the misinformed musings of public officials. He is a quant at heart (a believer in quantative analysis), collecting reams of data and discovering what it all has to tell him - with a few crucial modifications.

And these days, what does the legendary investment manager recommend for individual investors?:

“The mattress is good,” Mr Grantham says, only half-joking. After all, boring cash - the “good, old-fashioned” kind of short-term government instruments - is at least a safe harbour, despite negligible returns.

And other places to consider stashing assets, for more aggressive investors? Half in the “bluest blue chips you can find”, and the other half in solid emerging market equities. Even though emerging markets have enjoyed a multi-year run of outperformance, Mr Grantham still likes them, given the stunning global growth story.

And Grantham’s economic outlook? Not rosy. Taylor wrote:

As for the current market nightmares, do not think they are over quite yet. Indeed last summer Mr Grantham said “In 5 years I expect that at least one major bank [broadly defined] will have failed and that up to half the hedge funds in existence today will simply have ceased to exist.”

Source:

“A general who relishes the heat of the battle”
Chris Taylor
Financial Times (UK), March 24, 2008

Welcome to Investorazzi.com, a new financial weblog that tracks the investment activities of the world’s greatest investors. At the present time, the list of legendary investors includes:

• Tom Barrack, “The World’s Greatest Real Estate Investor”
• Warren Buffett, “The Oracle of Omaha”
• Jeremy Grantham
• Bill Gross, “The King of Bonds”
• Eddie Lampert, “The Next Warren Buffett”
• T. Boone Pickens, Jr., “The Oracle of Oil”
• Jim Rogers
• George Soros, “The Man Who Broke the Bank of England”

See “The Investors” page for more information about these investment legends.

My name is Christopher E. Hill, and I am the creator and editor of this blog. As an independent financial research analyst based out of Chicago, Illinois, I came up with the idea for Investorazzi.com during the 2007 holiday season. Using the Internet and other resources, I will attempt to shadow these legendary investors, much like the dreaded paparazzi and their celebrity targets. Which is, by the way, how the weblog got its name.

The word “paparazzi” is derived from a character in the Fellini film La Dolce Vita. The character, a photographer named Paparazzo, reminded Fellini of “a buzzing insect, hovering, darting, stinging.”

-Source: Howstuffworks

As the creator and editor of Boom2Bust.com, “The Most Hated Blog On Wall Street,” I’ve had prior blogging experience. Boom2Bust is an independent financial blog that seeks to warn and educate readers about a coming U.S. financial crash. Making its debut over the 2007 Memorial Day Weekend, material from Boom2Bust appears regularly on Reuters.com (over 100 posts) and has featured in the online editions of the Wall Street Journal, Fox Business, Chicago Sun-Times, West Orlando News, and Palm Beach Post.

I hope you enjoy reading Investorazzi.com. Please do not hesitate to contact me with any suggestions for improving this blog.

Sincerely,

Christopher E. Hill
Editor
editor(AT)investorazzi(DOT)com