GMO has now made its famous 7-year asset return forecasts visible on its website; previously they would email them freely to registered recipients. They, primarily Jeremy Grantham, the co-founder, actually have quite a good record, though past performance may not correlate with future performance. LINK.
While there is no way for yours truly to have any idea how they came up with these forecasts, they are decided completely on fundamentals, not technicals. They do make sense to me, though the one uncertain listing involves “U.S. High Quality”. What does that mean? Perhaps more importantly, such a high return from that category turns the efficient market hypothesis totally on its head. How is it possible that the most picked-over stock market in the history of the world could have such undervaluation in the best-known companies versus all the rest of the stocks out there?
Leaving that topic aside, if one takes my point of view and says that these projections look reasonable, then they support my repeated statement that most American savers and investors are well-off intheir taxable accounts simply owning municipal bonds of quality and duration acceptable to them, as well as sitting in cash and waiting for better investment opportunities. The other thing they may be well-off doing is purchasing ETFs that focus on high-dividend emerging and international stocks. A number of them have current dividend yields about 3%, and many yield less than 3% but still yield more than the S&P 500 and Russell 2000 ETFs, namely SPY and IWM. And while nothing is guaranteed, these markets have tended to have faster dividend growth than the mature economies’ stock markets have demonstrated.
In other news, both the Bloomberg Consumer Comfort Index (LINK) and the “Michigan” sentiment survey (LINK) show deterioration. Of course, the latter survey’s downbeat results were “unexpected”, and of course, the BBG report of it made sure the final quote accentuated the positive:
Automobile sales, meantime, have been a bright spot as consumers take advantage of cheaper borrowing costs. Motor vehicle purchases are expected to grow in 2013 by 3 percent, Jim Lentz, U.S. sales chief for Tokyo-based Toyota Motor Corp. (7203), said at an industry conference this week.
“The U.S. economy is expected to continue to improve,” Lentz said. “Consumers appear to be more upbeat about the business and labor conditions.”
As Jim Cramer might say if he were a macroeconomist, there’s always good news somewhere! (Or, at least some optimism.)
Meanwhile, one area where consumers might be unduly pessimistic is actually in the same survey, namely re price inflation:
Consumers expect an inflation rate of 3.4 percent over the next 12 months, compared with 3.2 percent in the prior survey, today’s report showed. Over the next five years, Americans expect a 2.9 percent rate of inflation, the same as in the previous report.
Recent data actually do not support this. The CPI is down or flat the past two months. That data are supported by the data through Nov. 29 provided by MIT’s Billion Prices Project (LINK), which shows “deflation” in November.
The pace at which prices reflect money-printing is unpredictable. There are clearly price-reducing forces present in the U.S. These include, in no special order, the fracking revolution; a ZPG fertility rate (LINK) and no net immigration from Mexico; productivity advances; advancing age of the population; better automobile fuel mileage; and, continued though diminishing excess supply of homes.
Perhaps an unappreciated possible price-deflationary force is the ability of the central authorities to simply run smaller deficits and/or for the central bank to print up less money. Not that either institution will actually do so, but one never knows for certain.
In any case, there are other reasons to wonder if interest rates might take another great leap downward. The obvious one would come from a stock market decline, some anxieties over something or other, a drop in the price oil, and/or recession fears. Years ago, perhaps in Y2K, Louise Yamada at Smith Barney put out a long-term chart of interest rates in the U.S. As I recall, she identified the longest period of declining interest rates as 36 years. This secular interest rate bull has lasted about 32 years. Might it exceed 36 years? After all, it began with the highest rates since the U.S. became a modern nation, and for over four years has had the lowest short-term rates ever. Perhaps the historical relationship between the 2-year and 10-year bonds (notes), as well as between the 2-year and the 30-year, might re-establish themselves at the current 2 year yield around 0.25%, which would result in materially lower 10- and 30-year yields?
Given that not long ago, many of the largest and systemically important financial institutions went bankrupt or were saved from bankruptcy by emergency actions by the central authorities, thus representing a worse situation than in the 1929-33 period in the United States, who can be sure what is coming next?