GMO: the Greater Fool Theory?

Jeremy Grantham's GMO has issued its latest quarterly newsletter, which is always an interesting read. For instance, a list of the six largest global bubbles:

 

 

The bubble in the Japanese property and stock bubble were correlated, I would have liked to see the Asian crisis being included. Anyhow, I for one (having lived and invested through that crisis) would love to read a good investigative book about that, especially about Malaysia: what exactly happened?

 

Even now, we still don't even know the events surrounding the infamous UEM/Renong case (new material from time to time trickling it, even after 17 years), which played such an important role in the crisis.

 

Back to GMO, they analysed the current situation of the US market, and find it overvalued, by roughly 65% or somewhat more, which is in line with Hussman's evaluation.

 

Grantham's forecast for the coming years:

 

 

The interesting question is: is GMO investing according to this advice, especially regarding the second and third point? Because that looks a lot like the Greater Fool Theory.

 

Loosely defined as: "I know I am a fool paying this price, but I am sure there will be a greater fool who is prepared to pay an even higher price.

 



On a side note to the reader, recently quite a few stocks (both Malaysian and internationally) with rather "dubious" fundamentals (I prefer to call them "garbage stocks") have come down sharply after a large rise, which is something that can often be seen at market tops. Buyer beware.

5 Great Presentations

Five presentations from the "Wine Country Conference":

• John Hussman: "An Unstable Equilibrium", QE (quantitive easing) simply doesn't work;

• John Mauldin: "2013, Unsustainability and Transition", avoid what is negatively affected by the Unsustainable and choose what is Sustainable;

• Chris Martenson: "A Grand Experiment" about exponential growth;

• James Chanos: "China, The Edifice Complex", many (well documented) warnings regarding China's growth from the famous short seller;

• Mike "Mish" Shedlock: "Brief lessons in History", "history suggests waiting for better opportunities is the prudent thing to do.

John Hussman: "The Right Kind of Hope"

http://www.hussmanfunds.com/wmc/wmc120103.htm

Some snippets from his latest weekly newsletter:

With 10-year Treasury yields below 2%, 30-year yields below 3%, corporate bond yields below 4%, and S&P 500 projected 10-year total returns below 5%, we presently have one of the worst menus of prospective return that long-term investors have ever faced. The outcome of this situation will not be surprisingly pleasant for any sustained period of time, but promises to be difficult, volatile, and unrewarding. The proper response is to accept risk in proportion to the compensation available for taking that risk. Presently, that compensation is very thin. This will change, and much better opportunities to accept risk will emerge. The key is for investors to avoid the allure of excessive short-term speculation in a market that promises - bends to its knees, stares straight into investors' eyes, and promises - to treat them terribly over the long-term.

Again, we enter the year with great hope. But our hope is not for continued speculation and the maintenance of rich valuations (that only look reasonable because long-term cyclical profit margins are at a short-term peak about 50% above their historical norms). At present, we have a situation where saving is discouraged by desperately low interest rates, where unproductive uses of capital are not discouraged because the bar is so low, and where central banks recklessly facilitate economic stagnation by bridging the gap between a puddle of unrewarding savings and a mountain of unproductive speculations. So our hope this year is for a return to a proper investment opportunity set - where saving is encouraged and rewarded by sufficiently high prospective returns, and the cost of capital is high enough to discourage high-risk, low-return investments and unsustainable fiscal deficits. The longer policy makers wait to begin the orderly restructuring of bad debt and overleveraged financial institutions, the greater the risk of a disorderly restructuring.

Meanwhile, the European Central Bank is more tapped out than we suspect investors recognize. The balance sheet of the ECB now stands at about $3.55 trillion (2.73 trillion euros), compared with EU GDP of about $16 trillion. This puts the European monetary base at about 22% of EU GDP, which is even greater relative to the economy than the Fed's balance sheet ($2.97 trillion on $15 trillion of GDP as of December 28, which works out to 21 cents for every dollar of GDP). Forget the "zero bound" - given the bloated size of the ECB balance sheet, combined with the lack of credible safe-havens in Europe, distrust of the banking system, and an apparent aversion to cash-stuffed mattresses, German 3-month debt is now sporting a yield of -0.17%, which means that investors pay the German government for holding their money.