GMO’s Jeremy Grantham has just released his latest view about the stock market and it isn’t pretty. In his latest piece, he flatly says stocks are trading 40% above fair value and that fixed income markets are badly overpriced because of the Federal Reserve’s monetary manipulation.
Other ‘Sacrilege’ Fed Opinions
Beyond his opinions on valuation, which many on Wall Street no doubt disagree with, Grantham advocates another sacrilege opinion — “fighting the Federal Reseve.”
Here’s what he says:
“The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to float along with the Fed, but to fight it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table.”
Today’s Fed
Over the past 2 to 3 years alone, our generation has seen a lifetime’s share of invasive behavior by the Federal Reserve and financial regulators. Along the way, Ben Bernanke’s Fed has invented its very own vernacular. Imaginary concepts like quantitative easing (QE) and permanent open market operations (POMO) have become our reality. And so has a depressed U.S. dollar, whose buying power and worldwide appeal has been greatly diminished.
- Related Article: 5 Myths & 5 Ugly Truths About the Fed
Indeed, over the past 2 years, fighting the Federal Reserve with bearish bets on stocks has not been a profitable trade. Many, (ETFguide included) underestimated the Fed’s power and its ability to flood the market with liquidity. But is the Federal Reserve an infallible institution? This is a particularly relevant question when it comes to taming financial markets, which have shown an occasional propensity for disorder. (See May 6, 2010 ‘Flash Crash’, the 2008 Credit Crisis, Black Monday in 1987, etc.) Is the Fed, even in all its power and glory, bigger than underlying market forces?
For sure, the Federal Reserve has frustrated a good many bears – especially impatient ones.
Prominent bears like David Rosenberg at Gluskin Sheff have recently turned bullish on stocks. Contrarians take note! “This is not about throwing in the towel,” wrote Rosenberg in a letter to clients. Really?
If there’s anything we can say about the conventional wisdom to not “fight the fed” it’s that conventional wisdom is often wrong. Maybe Jeremy Grantham has a point.
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