Jeremy Grantham Finds U.S. Stocks and Bonds Equally Unattractive, Likes International; One More Move Down Left for Rates?

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?





7 comments to Jeremy Grantham Finds U.S. Stocks and Bonds Equally Unattractive, Likes International; One More Move Down Left for Rates?

  • Intel $INTC at a 4%+ dividend is effectively an Intl stock and looks like a “High Quality” to me.

  • Andrew: If you have an “in” with GMO, perhaps you could find out if it’s on that elite list.

    It’s lagging badly in mobility to such competitors as ARMH and Apple’s own A6 etc. chips. PC sales stink. Earnings and out-year earnings estimates are on the decline. Might it, in the fullness of time, turn out to be like an auto or steel company of decades ago– well past its prime, with shrinking margins awaiting it?

  • Journaljim

    So, Doctor X, I was hoping to find directional advice, at least for the near term and I got… very little to none. What the heck should somebody do to preserve what little he has???

  • Jim: I’m comfy with Grantham’s views. I have said many times that the “average” saver/investor who can afford to invest for the longer term, based in the US and dealing with taxable money, is just as well off prospectively in muni bonds (depending on tax bracket etc.) as in anything else. While my views change unpredictably, right now the assets I “like” the most such as DGS and BLK have “momentum” behind them, and thus are subject to whipsaws even if I am correct on the major trend. I also am invested in Russia with ETFs such as ERUS and RSX because of dirt-cheap valuations, numerous negatives being well known, and Jim Rogers having gone long Russia last year.

    No guarantees; no specific investment advice; simply my views and my current investment posture.

    I also like US single-family housing that is on the rebound, price-wise, as opposed to renting.

  • Andy

    Hi DoctorRx,

    I am a huge fan and love reading everything you write. While it is fun to read zerohedge and get yourself so worked up you crap a peach pit, when it is time to find out what is *really* coming down the pipe, there is no better source than yourself and Jeff. Thank You.

    With regard to Intel, being a software monkey myself, and being intimately familiar with Intel in the mainstream server industry, I would say that while they did miss the boat and let ARM claim a big share of the mobile market place, Intel still has the atom processor right now and it is very powerful for how little energy it sips and it is also 64 bit right now.

    Further, Intel is committed to getting into the mobile game. Those guys are wicked crazy smart and they have ridiculously deep pockets and knack for making the best processors on the planet.

    If TMobile forges ahead with Google and succeeds in dumbing down the data pipe, you could see a wealth of new handsets spring up almost overnight and a healthy share of those may just run atoms instead of arms.

    In any case it will be fun seeing what comes.

    Thanks again for helping us wind our way through this crazy economic time.

  • Thanks for the kind words, guys.
    Re Intel, thanks especially for your input, Andy. Yes, they have immense resources of many sorts and will be willing to engage in a price war if necessary to gain share in mobility. It continues to surprise me, though, how slowly they have upped they game in that space.

  • dd

    the CPI is not really a valid discussion point, is it?