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Jeremy Grantham: When Bears Turn Bullish

Written By Brian Hicks

Posted October 27, 2008




Bubbles. Bubbles. And more bubbles.

That’s what famed investor Jeremy Grantham saw in the markets during the opening months of 2007.

“From Indian antiquities to modern Chinese art,” he wrote in a letter to his clients “from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it’s bubble time.”

No asset class, according to Grantham, was safe.

Speaking to The Spectator in February 2007, Grantham said, “For the moment I say don’t be too proud to own cash. You always feel there must be something you can own that will do better [than cash] and usually there is. In 15 years of asset allocation for clients, we have never once owned cash. We could always find something better—but now we can’t.”

“The bursting of this bubble,” Grantham warned, “will be across all countries and all assets.”

That was nearly 21 months ago. And while all of the bubbles he warned about back then went much higher from there, in today’s broken markets Grantham earlier warnings have been right on the money.

So how does Grantham feel about the markets today you ask?

Well these days he is anything but a “perma-bear” In fact, he’s becoming more and more bullish as the markets have pulled back.

Here’s the story in Business Week by Amy Feldman entitled: The Buying Opportunity of a Century?

“Years of harboring a gloom-and-doom outlook gave Jeremy Grantham, chairman of Boston-based asset manager GMO, the reputation of being a perma-bear. Talk to him now, though, and the 70-year-old is almost gleeful. Stocks, he says, are cheaper than they’ve been since 1987. Like another value investor, Warren Buffett, Grantham is buying, with a focus on high-quality U.S. blue chips and emerging markets. “This is what serious investors should look for,” he says. “We make money by buying cheap assets.”

Across many asset classes, prices appear cheap, and in some cases dysfunctional markets have created long-term bargains. Many money managers see good value in beaten-down blue chip stocks. High-quality corporate and municipal bonds are yielding unprecedented premiums over Treasuries as investors flock to safety. Even in real estate, or specialty areas such as master limited partnerships and closed-end funds, there are opportunities for savvy investors.

Grantham is buying blue chips with strong franchises and little debt. Darell L. Krasnoff, managing director of Los Angeles-based Bel Air Investment Advisors, recommends his clients do the same. “We like large-cap businesses with cash flow that can sustain their growth through a few tough years,” Krasnoff says.”

The story is similar in municipals. “Munis have been beaten up to an unprecedented degree because of forced selling,” says John Miller, chief investment officer at Chicago-based Nuveen Asset Management and overseer of its muni portfolios. He’s finding bargains in high-rated securities, such as AAA-rated bonds issued by financially strong states such as Maryland and North Carolina, and universities including Harvard and Yale. For those willing to take more risk, he says, BBB-rated bonds, such as those for hospitals and sewer systems, yielded around 5% last year and now yield 8% or greater. In the 35% tax bracket, that’s equivalent to at least a 12% taxable yield.

Sure, the markets are challenging. But the best investments are often found at the darkest moments. Says Gaffney: “Unless you think the world is going to end, it’s the market of the century.”


 The world really isn’t going to end, you know.