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

Marc Faber spoke to Bloomberg Television by phone earlier today and had the following to say:

Obviously, the economy is already in recession. Corporate profits will disappoint. In particular, the consensus earnings for 2009 are still far too high. And after jobs creep downward, obviously valuations look less compelling.

Well, I would say, what we are in, is kind of a water-torture bear market. A lot of stocks peaked out already in 2005, like to homebuilders. And in 2006, the subprime lenders. Then in 2007, all financial stocks… And I think the cyclicals, and the energy, and the materials stocks, like steel and iron ore companies, they will now all come under pressure… but I think other sectors of the market that have held up well are now vulnerable.

On what investors should be buying, Dr. Faber, who is known for advising clients to get out of the U.S. stock market one week before the October 1987 crash, said:

I think the question should be, what sector should you sell… I don’t see any compelling value in equities. I also don’t see any compelling value, in say, real estate, or in the commodity market. I think asset markets are still inflated. And we are in an environment, contrary to the last 25 years, during which leverage increased. We are in a period of deleveraging.

Responding to the question of whether or not investors should park their money in cash, the editor of the Gloom Boom & Doom Report said:

Well, cash is not desirable in the sense that it loses its purchasing power because you have a money printer at the Fed, Mr. Bernanke… His monetary policy inevitably is inflationary, and as a result, leads to a lower dollar.

When Bloomberg asked if high oil prices were unjustified, the Swiss-born investment adviser said:

My view would be that commodities will rather ease, as some have already done…

(On oil) The big upside is now gone. And so I would be a little bit careful about blindly buying commodities. I think they’re on the high side, the way real estate was on the high side, the way stocks were on the high side. I would not short commodities, but I would be careful about buying them here.The dollar has some upside potential here. But of course, if Mr. Bernanke continues to print money and push down the Fed funds rate to zero, then the dollar won’t go anywhere. As of today, I believe the dollar is relatively undervalued with the euro. I still like gold (transmission garbled)…

Finally, Dr. Faber had this to say when asked to pick one investment for next 6 to 12 months:

Well, I would take a holiday and forget about the speeches of Fed governors, because their economic knowledge, is in my opinion, is extremely limited. And each time they speak, they actually confuse the issues. And so, there is very little sincerity, at the present time.

You can listen to the 8 minute 21 second Bloomberg interview here.

Source:

Marc Faber Interview
Bloomberg, June 9, 2008

Both Bloomberg and MarketWatch are reporting that Warren Buffett is sitting on a $40 billion war chest, and there is increasing speculation that the “Oracle of Omaha” may increase acquisitions through Berkshire Hathaway in light of the recent market conditions. Buffett has already taken advantage of the current climate through investments in:

• Auction-rate securities- Berkshire Hathaway built up a $4 billion position in auction-rate securities in February and March. Auction-rate debt carries yields similar to long-term debt but acts like short-term investments because investors can sell at weekly or monthly auctions, when rates reset.
• High-yield (junk) bonds- Berkshire bought junk bonds in 2002 during the depths of the dot-com bust, and made billions on the positions, according to MarketWatch.
• Derivatives- Berkshire Hathaway owns derivatives contracts that require it to pay up if certain junk bonds default. They expire from 2009 to 2013. According to the company’s latest annual report, the company collected $3.2 billion in premiums on these contracts last year and paid $472 million in losses.
• Bond insurance arm- Berkshire has started its own bond insurer, Berkshire Hathaway Assurance Corp., to participate in the lucrative municipal bond guaranty business.

Other notable investments as of late include $4.5 billion last month for a 60% stake in the Pritzker family’s Marmon Holdings Inc. Just this week, Buffett committed $6.5 billion to help finance chocolate giant Mars Inc.’s takeover of Wm. Wrigley Jr., the world’s biggest maker of chewing gum. Also included in the deal is $2.1 billion for a minority holding in Wrigley that Berkshire will get at an unspecified discount, according to Bloomberg.

Still, Buffett has been noticeably absent from the bailouts of struggling financial institutions in recent months, according to MarketWatch’s Alistair Barr yesterday. He added that the Omaha-based investor has also avoided the purchase of complex mortgage-related securities such as collateralized debt obligations (CDOs), which have been among the hardest hit investments during the credit crunch. Barr wrote:

For some Berkshire shareholders, that suggests Buffett may be waiting for markets to deteriorate further before making major acquisitions or investments.

“It’s very, very telling that he has not made any investments,” said Whitney Tilson, head of hedge fund firm T2 Partners LLC and a Berkshire investor. “Every major pool of capital in the world has made big investments in distressed financial institutions. He’s seeing every deal, so why hasn’t he done one? Maybe because he thinks things will get a lot worse.”

Barr added:

Indeed, Buffett told Fortune magazine in early April that the markets and the U.S. economy may be a long way from turning a corner.

“It seems everybody says it’ll be short and shallow, but it looks like it’s just the opposite,” he said.

In the meantime, Buffet will continue to look for bargain outfits, most notably in Europe, where he will be conducting a four-city tour starting May 19. Bloomberg’s Josh Hamilton wrote this morning:

Buffett has said in recent years that investments meeting his criteria and big enough to make a difference to Berkshire have become scarce, prompting him to look abroad. He said at last year’s annual meeting that he would welcome a $40 billion to $60 billion deal. Buffett also has said he expects the dollar to depreciate, making earnings in other currencies more important.

Photo by Ove Tøpfer, stock.xchng

Sources:

“Buffett gets a crisis to put Berkshire’s cash to work”
Alistair Barr
MartketWatch, May 1, 2008

“Buffett Plots Buying Spree as Crunch Diverts Bidders (Update1)”
Josh Hamilton
Bloomberg, May 2, 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