Grantham Advises Nibbling at High-Quality Stocks in Soft Market
Jeremy Grantham, one of the few investment advisors who deserves guru status, told MoneyWatch recently that the decline in stocks in the last month or so has taken them closer to fair value but not close enough for him to counsel betting big on a rally. Only with a further drop of about 20 percent would stocks be worth what they cost, in his view.
Believe it or not, such a decline might be good news because the otherwise bad news might make even worse news less likely. The cascade since late April seems to be lessening the possibility - for now - that stocks will enter bubble territory.
A continued slump into October to fair value or below - somewhere between 800 and 875 on the Standard & Poor's 500-stock index - "means we could probably muddle through without a major crisis," Grantham said.
Why October? Grantham, chief investment strategist for the fund manager GMO, reckons that the market could hit bottom around then because the start of the third year of the presidential election cycle will be just around the corner. Since 1932, he said, U.S. stocks have had a perfect winning record during that period because the Federal Reserve "helps the current administration, regardless of party," by seldom raising interest rates.
Grantham is no big fan of the people who run the Fed or the help they provide. He is merciless in his criticism of Ben Bernanke and Alan Greenspan, the previous chairman, for what Grantham sees as serial mismanagement.
He blames the two Fed chiefs for keeping credit too easy, allowing bubbles to form in such assets as technology stocks and homes and setting up crashes when the easy money runs out and valuations return to normal levels or less. The Fed then bails investors out, in Grantham's view, by keeping interest rates artificially low and the process begins anew.
"What I worry about is that Bernanke is an unreconstructed Greenspanite who races in and cushions the pain," Grantham said. "It looks like he's bound and determined to play this game to the end, and I think it's a dangerous game." Investors have come to think that "when the market frightens them to death, it always bounces," he added.
If the bounce from the lows last year resumes and the Fed conducts business as usual, Grantham warned, "we could have another bubble breaking 18 months or so from now with nothing in the piggy bank, having shot all our ammunition" reviving the economy and financial system the last time around.
No Lasting Solution
Grantham worries about something different in the European Union, which is engineering a bailout of its own by borrowing money to transfer to the countries that have run out of their own supply.
"All the E.U. is doing is announcing that in a liquidity crisis in two or three lame states, they stand ready to help out," he said. "Obviously that doesn't solve any of the serious problems." He offered an example: "In Greece they're paying themselves 25 percent more than they can afford."
Grantham finds the Greeks to be rank amateurs compared to some. While giving credit to U.S. authorities for using their stimulus packages in part to get the financial system up and running again, he also expresses disdain that so much of the money was used "to pay bankers more than they're worth."
Grantham has ready solutions for what ails the world - more fiscal prudence, tighter credit policies by central banks and much tighter regulation of the financial industry - but he discusses them with that'll-be-the-day skepticism. For all of his concerns, however, his faith in the presidential election cycle and his knowledge that bubbles are splendid things to behold and participate in - up to a point - allow him to maintain a somewhat benign investment outlook.
He concedes that investors will be well off hiding in cash if some of the worst potential outcomes occur, but he finds some high-quality stocks in the United States and in developed and emerging markets abroad to be cheap enough already to take modest positions.
