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.