Thoughts From a Superbear: Jeremy Grantham

Brian Milner of The Globe & Mail conducted an interview with Jeremy Grantham, a superbear, who sees some terrible things unfolding in the stock market and the economy. Jeremy Grantham oversees investments at GMO, a big institutional money manager. Here are some excerpts:

(source: Grantham: the bear growls, by Brian Milner, June 17, 2008. The Globe and Mail.)

Milner: You draw comparisons between what's happening today and the start of the Great Depression.

Grantham: We're in that 1929-30 window, where we've had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They're steadfastly ignored because they're still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up.

I'm not that familiar with Grantham so don't really know what type of investor he is or what his track record is. He is certainly in the superbear camp.

Milner: Can you give us an example of how profits are being misread?

Grantham: If the dollar goes down 18 per cent against the euro, then all your profits in Germany are marked up by 18 per cent. Bang, simple as that. Let's say you have 6-per-cent natural growth and an 18-per-cent markup. You have a 24-per-cent earnings increase from your German subsidiary. The next year, the 6 [per cent] may only have gone down to 4, but the dollar has rallied ... and your growth has gone to zero.

That's something Marc Faber has warned about as well. Even if nothing teribly bad happens in the economy--Grantham is expecting something bad though--stocks could come under pressure due to declining profit expectations. People banking on currency translation for profit growth (such as those overloading on export-oriented US businesses or those generating majority of profits overseas) could face difficulties if the US$ starts strengthening (I don't necessarily have a strong view on this but just pointing out the risk.)

Grantham he is bullish on commodities:

Milner: Let's move on to a favourite Canadian topic: commodities. Are we looking at a bubble that will go the way of credit or U.S. housing or a real sea change?

Grantham: It's not a nice simple bubble of the kind that I love and would like to stake a lot on. And the reason is that in the long run, the paradigm has shifted. Raw materials in a world of China and India and so on will never be quite the same tame things that they were from a price point of view for the previous 50 years. Throwing in speculators who like to invest in commodities to get diversification, and two years of almost perfect global economic conditions have set commodity prices on an incredible roll.

Milner: It sounds as if a but is coming.

Grantham: They may be quite vulnerable on a tactical, short-term basis. If I'm right in my general thesis that we're underestimating the pain, then they will probably take a fairly sharp short-term hit. But they'll be back, as Schwarzenegger would be saying.

The thing I find interesting is that a lot of the bears ar bullish on commodities. I can see someone like Jim Rogers or Marc Faber being bullish on commodities since they have made that case for almost a decade now. But I really wonder about all these other strategists.

It's also kind of interesting that a lot of people who are bearish on commodities (this includes me) are not that bearish on the broad markets. We may be in a bear market but I don't think it will be that serious in the US (the same doesn't apply to Asia, or even the commodity-levered Canada).