Grantham on a Low-Growth, Overpriced Environment

Equities and other assets have become overpriced (to varying degrees) just about everywhere you look, GMO’s Jeremy Grantham says in his latest quarterly letter.

“Courtesy of the … Fed[‘s] policy, all global assets are once again becoming overpriced,” writes Grantham. “But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced.” Grantham says that U.S. stocks (ex “quality”) “now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return.” Fixed income investments, meanwhile, mostly have negative estimated returns, he says.

Grantham says Ben Bernanke and the Federal Reserve are creating the overpricing with their loose monetary policies, which is becoming a pattern. “This strategy will be seen in future years as archetypical of the Greenspan-Bernanke era: badger and bully investors into taking more risk and eventually pushing assets — houses or stocks or both — far over replacement value, followed eventually, at long and hard-to-predict intervals, by exciting crashes,” he says. “No way to run a ship, but it does produce an environment that contrarians like us, who can take a few licks, can thrive in.” He also says the Fed is overestimating how much the U.S. will grow, which could have very bad repercussions.

But, Grantham says, markets could continue to rise for a while longer. “When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two,” he says. “That’s the problem.”

Grantham also spends a good portion of his letter talking about GMO’s meager long-term growth projections for the U.S. He offers a good deal of evidence showing that stock returns and GDP growth are not, as many assume, related, but that doesn’t mean he’s optimistic on stocks. His advice: “Prudent managers should be increasingly careful.”