'Black hole' awaits in 2005, analyst says (Grantham i'view)
By Chet Currier, Bloomberg News
January 16, 2004
Dizzied by the pace of the rally that has swept the world's stock markets since early last year? A visit with Jeremy Grantham will cool your giddiness down.
The recovery may be "the greatest sucker rally in history," he says, with a "black hole" awaiting the markets in 2005.
Mind you, this isn't some guy selling fallout shelters.
Grantham is chairman of the powerhouse money-management firm Grantham, Mayo, Van Otterloo & Co. in Boston, whose assets under management stood at $54 billion when I had lunch with him the other day.
"By the end of this year, we will have battened down the hatches as tightly as we can," Grantham says. "With any luck, 2005 and 2006 will be such a bloodbath we'll get it all out of the way quickly."
If it's any consolation, Grantham sees the moment of reckoning as still at least several months away. In the meantime, he says, the action may stay lively - especially in the recently torrid emerging markets from China to Brazil.
"We've been a roaring bull on emerging," he says. "It has wonderful fundamentals. Up until about three months ago it was the only cheap asset class."
Sooner or later, Grantham says, unrelenting forces of overvaluation, excessive debt, pressure on the dollar, and even the U.S. political cycle will catch up with the stock market.
By his method of figuring, the price-earnings ratio of the Standard & Poor's 500 index, lately at about 25-to-1, needs to come down to around 16 for stocks to be "reasonably priced." He says P-E ratios can't escape the pull of reversion to the mean.
"The market loves comfort - stable growth, stable low inflation, strong profit margins," he says. "All these things mean revert. Things are pretty good now. There is plenty of room for all these variables to move against you. If you want to make money, you buy when things are bad."
The U.S. political cycle has worked in stocks' favor last year and this, Grantham says.
In pre-election years such as 2003, incumbent administrations "attempt to stimulate the economy for year four to create a favorable re-election environment. This president, perhaps learning from his father's error, succeeded in having truly record stimulus."
After the November 2004 election the political cycle hits the bad side in '05 and '06, Grantham says. "In the first two presidential-cycle years all the housecleaning - like moving against excessive debt - gets to be done, and debt levels are the highest ever and still growing."
Every big rise in stock prices comes with a persuasive story, he remarked. Glad you mentioned that, I replied, because some find the current narrative quite compelling -powerful advances in productivity stemming from historic innovation, notably the Internet.
In effect, don't these new things turbocharge the whole economic machine? "I'm a huge fan of the Internet," he said. "But the thing that goes on in the Internet, above all, is price disclosure." Great as that may be for consumers, he says, it's not so good for businesses' profits, and it gives them big obsolescence headaches.
"Technology is often threatening to profit margins," he says.
Though Grantham is quick to point out he is no "perma-bear," some commentators have been twitting him lately for his negative comments as, and before, stocks rallied 35 percent to 50 percent or more.
In July 2002, Barron's magazine quoted him as saying that the S&P 500, then at around 850, needed to drop to 700 to be fairly priced. The index bottomed around 777 in October of that year and has since jumped back above 1,100.
"I have a huge degree of confidence that eventually the market will be reasonably priced," he said. "We do not know the timing. If it's not 2005, then it might be 2007."
Grantham wrote in a recent investor letter that he sees "the worst global investment returns of my 35-year career. The asset classes collectively are simply the most overpriced they have been. There are no large categories that are good hiding places." How's that for a splash of cold water? |
