Legendary investor Jeremy Grantham, chief investment strategist at GMO, has been bearish far more often than bullish on U.S. equities for almost two decades, so his latest downbeat quarterly letter to investors should come as little surprise.
The Boston-based money manager still sees at least a half-a-decade of lean years to come, as the global financial system works off all the excesses of the epic credit bubble that touched off the Great Recession.
"The U.S., and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values and the gross financial incompetence on a scale hitherto undreamed of," Grantham writes.
And although the economic picture looks better than it did during the depths of the financial crisis three years ago, the future is still quite bleak, Grantham says.
"The probabilities of bad outcomes are not as high for us today as they were in early 2008 when, I'm pleased to say, as predictors, they looked nearly certain to us," writes Grantham. "But the possibility of extremely bad and long-lasting problems looks as bad to me now as it ever has."
Against this backdrop, Grantham offers four recommendations for the current investing landscape:
1.) Avoid lower-quality U.S. stocks, but otherwise have a near-normal weight in global equities.
2.) Tilt, where possible, to safety.
3.) Try to avoid duration risk in bonds. For the long term, they are desperately unattractive. Don't be too proud (or short-term greedy) to have substantial cash reserves. "Admittedly, this is the point where we at GMO try to be clever and do a little better than the minus 1 percent real from real cash -- and, so far, with decent success," Grantham says.
4.) Grantham personally likes resources in the ground [commodities as well as timber] on a 10-year horizon, but he's "nibbling in very slowly because...[he fears] a major short-term decline in commodities based on a combination of less bad weather -- which has been bad, but indeed less bad -- and economic weakness, especially in China."
Grantham maintains extremely long horizons, which perhaps explains his somewhat droll take on the scariest uncertainty investors face right now: the sovereign debt crisis in the eurozone.
"I have no particular insight into the problems plaguing the eurozone, but I can recognize a terrifying situation when I see one," Grantham says. "The appropriate response is surely to be more cautious than usual."