GMO Call Notes

I listened in on a conference call with Jeremy Grantham, see here for more info on Jeremy.  Here are some highlights from the call:

  • The US stock market is 10% cheap, EAFE and EM are 20% cheap.
  • He believes that there is a 2-to-1 chance that markets go back down to new lows before any sort of sustainable rally occurs later this year or next.
  • Nevertheless, it is OK to buy into the markets now if you don’t want to try to time it. Over the next 7 years he believes that US markets will have “normal” average annual returns of 8%, 9% in EAFE, and 10% in EM.  (In other words, the total return of the S&P 500 over the next 7 years divided by 7 will be around 8%.  But, the returns in any particular year will most likely be above or below that.)
  • In this 7-year planning period things will go back to “normal”: normal P/Es, normal profits, and normal growth.
  • With that being said, their Asset Allocation fund is only 30% net long stocks right now as he is waiting for the new low. He is attracted to high grade corporate debt, although he is concerned about inflation 2-3 years out. And he has been buying gold for the first time ever. (Net long implies the combination of long, short, and other hedged positions.)
  • Long term, he believes that EM is the most attractive place to be. His reasoning is simple. GDP growth in the G7 over the next 20 years will be closer to 2% than the traditional 3% due to aging populations. EM GDP growth looks closer to 4%. In addition, their asset prices are currently lower. (Comment: I don’t think there is much controversy over the forecast of lower GDP rates in all of the G7 with the exception of the US where there remains debate due to our high immigration rate.)

My take on this is that it is foolish to bet against Jeremy.  His timing is frequently off, but his thematic conclusions have been amazingly accurate for years.  So, if you have 7+ years before you need to touch any of your money, this is good news.  A lot can happen between now and then, however.


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