Grantham: Well, from GMO's point of view, our first choice is a melt-up, jump out, and have it meltdown rapidly, and jump back in. Our second choice is the bump-along because we are out of the U.S. equities, we're overweighted emerging and EAFE. There's nothing in my five-year forecast that says S&P down 20 to prevent emerging being up 20. It's easily cheap enough to have that sort of divergence with room to spare and maybe ether up 5. That is a dismal market for a pension fund, but it's not a dismal market for GMO's relative performance.
Jeremy Grantham: I made it clear, by the way, in January that I was not suggesting that an individual undertake this. It's too hairy. I recommended that an individual just be more cautious. It takes a lot of confidence to move money around. You have to have pretty good data to make it worthwhile. I think we do. That's why I tend to use probabilities. We're never dealing with certainties. Once you start thinking in certainties, you have real trouble. When the facts move against me, I moved down from 50% probable to 35, which is my official forecast. If we keep on fighting trade wars with Canada and the EU, and so on, it will go to 30, and then eventually 25 and fade away.
Ptak: Suppose I'm an advisor or I'm an individual investor. Let's say I have a seven-year time horizon, we'll just pick a number arbitrarily, and I'm trying to think about how to purchase a portfolio.
Grantham: I fall back on a different paper I wrote, which is there are times when you simply have to be brave, and do things that don't come easily. All asset classes pretty much are overpriced badly except emerging, which is priced not too badly, and particularly at the value end of emerging. It's priced fine, so take as big a position as you dare in emerging. Avoid the U.S. as much as you dare. Don't have much duration in the bond market, and you at least might muddle through quite well. This is not a period that you're likely to make a lot of money, but let's face it, the market has just tripled. You can't follow markets, the triple with markets, the triple. It doesn't happen, but at least by avoiding the U.S. that's tripled, and emphasizing the emerging markets which has lagged far behind, you might be able to muddle through OK.
That's still a dismal return for the S&P, it's about 2 1/2% real for 20 years, which is nothing to wish for. Even in a world that is different, that stays higher priced, that has higher profit margins, and mean reverts more slowly, you still get some pretty ugly returns.
Bob Dylan once sang, “Something is happening here, but you don’t know what it is, do you, Mr. Jones?” That’s what it kind of feels like today. There’s something going on behind the scenes in Russia –something we’re not privy to. On the heels of new U.S. sanctions and a chemical weapon attack in Syria, the Russian market fell 10% on April 9th, a much larger reaction than expected.
Given the fact that Mr.Oleg Deripaska (who is closely associated with Mr. Paul Manafort) and the companies he controlswere the primary targets, one might draw a conclusion that there’s a political dimension to this.
If the intent was to hurt Russia economically, sanctioning companies such as Gazprom and Sberbank would have had a much more profound impact.
Our sources in Moscow suggest a similar view. The new risk is that the White House is now actively involved with day-to-day Russian policy and everyone is uncertain as to what Mr. Trump might tweet tomorrow. In short, we don’t think the U.S. is exercising the “nuclear option” of trying to tank the Russian economy. While it will cause pain in certain areas, we do not think this action will have a profound impact on the Russian economy.
Within the Russian market, Gazprom fell 8% while Sberbank fell almost 22%. As the supplier of 30% of Europe’s natural gas, Gazprom is unlikely to be sanctioned or suffer significant negative effects. On the other hand, we believe Sberbank’s dramatic fall reflects the fact that it is the most foreignowned and most liquid Russian stock (the GDR trades an average of $100 million daily in London alone) and was hard hit for liquidity, rather than for fundamental reasons. Only 3% of Sberbank’s assets were exposed to sanctioned companies. Furthermore, it is Russia’s largest bank, with 20,000 branches and 65% of the country’s deposits.
Gundlach, who oversees $120 billion at DoubleLine, said he believes the U.S. dollar will weaken again because of the “ridiculous” expansion of federal debt against the backdrop of rising interest rates. He characterized the explosion of the federal debt and the Federal Reserve’s interest-rate increase cycle as a “suicide mission.”
Gundlach said he expects oil to rise toward $80-$90 a barrel, and said he would be a buyer of gold and continues to be bullish on commodities. Overall, Gundlach said, there is “no U.S. recession in the offing,” but he does see slower global growth.
The Bank Credit Analyst recently opined: "The two key elements affecting the performance of EM financial markets are the U.S. dollar and commodities prices. The combination of a weak U.S. dollar and higher commodities prices is typically bullish for EM. The opposite also holds true: A strong dollar and lower commodities prices are bearish for EM."
My more reserved comments about emerging markets may surprise some of my readers. After all, I have argued vocally over the last two years or so to overweight emerging stock markets based on more favorable valuations and better long term growth prospects than in the US. This view was correct over the last two years and is probably still valid in future, but only in the long term. For now, as I shall explain, dollar strength is negative for emerging markets and for European equities. Dollar strength is a symptom of tightening global liquidity and likely slower global growth ahead.