Jeremy Grantham: Prepare for Low Growth, Higher Energy Prices

Monday, July 27th, 2009

Jeremy Grantham has released his latest newsletter, “Boring, Fair Price.” Grantham’s newsletter is a must read, given that he has made some of the most noteworthy and canny calls of the last decade. Grantham called the tech bust, accurately predicted 10 years out, the S&P 500 would revert to a fair value of 950 last fall, give or take a few days, and exited emerging markets last summer. In early March, his letter, presciently titled “Reinvesting when Terrified,” was released the day the market turned around.

Here, Grantham writes how he has bitten hard on the energy transition apple, a theme we have covered a great deal throughout the year, and goes to some, but not too much length to explain that higher energy prices loom, and what their impact will be on agriculture and transportation, and how oil will eventually flow (only) to its first and best uses. This one will be near and dear to Canadian investors.

Click the button in the top right corner to full screen the viewer, and use the menu on the left hand topside to print. Or, you may download it here.

Grantham of GMO’s Q2 letter

Tags: 10 Years, Agriculture, Amp, Apple, Bust, Canada, Canadian Investors, Click The Button, Emerging Markets, Energy Prices, Energy Transition, Few Days, Gmo, Higher Energy, Jeremy Grantham, Last Decade, Left Hand, Low Energy, Newsletter, oil, Q2, Top Right Corner
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David Swensen Interview (May 22, 2009)

Wednesday, May 27th, 2009

David Swensen, legendary CIO of the Yale Endowment appeared in a full length interview on Consuelo Mack’s Wealthtrack on May 22. 2009. In it, he discusses among other things, his updated recommendations for individual investors. Swensen reminds us of Jeremy Grantham, a dedicated practitioner who could care less about the investment spotlight, and would most likely prefer to be left alone to do what he loves best. Investing.

Click play to watch. For a transcript of Part 1, click here.

This is an enlightening interview, as Swensen shares his candid views on investing, and what is required for investment success.

Here are Swensen’s recommendations for individual investors. Canadian investors may want to substitute for the Canada equity bias on the US stocks allocation. Substitute for Canada Bonds and Canada Real Return Bonds to reduce the currency risk.

30% US stocks
15% treasury bonds
15% TIPS
now 15% REITs
15% foreign developed equities
now 10% emerging markets

Swensen has reduced the REITs allocation by 5% and raised the Emerging Markets allocation from 5% to 10%. By the way, Swensen made these long view asset allocation adjustments at the beginning of the year, and not last week, so given that emerging markets are outperforming G7 country equity markets, his call early in the year, to individual investors, to overweight them was reliable.

Swensen remarked that diversification fails during crises - it did in 1987, 1998 and last year. He also discusses the idea that while he is religiously a bottom-up investor, crises force you to look at top-down considerations.

This is a must see interview and Swensen provides much food for thought in this meaty interview.

Tags: Active Management, Asset Allocation, Asset Classes, Canada, Canada Bonds, Canada Equity, Canadian Investors, Candid Views, capitalism, Consuelo Mack, Currency Risk, David Swensen, Diversification, Emerging Markets, Endowments, Etps, Financial Crisis, Food For Thought, Hedge Funds, Individual Investors, Investment Horizon, Investment Success, Jeremy Grantham, Length Interview, Long Periods Of Time, Real Return Bonds, Reits, Roger Nusbaum, Some Critical Remarks, Stocks Bonds, Treasuries, Treasury Bonds, Wealthtrack, Yale Endowment
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10-Yr+ US Treasury and Canada Yields Falling

Monday, December 1st, 2008

During the December 1st liquidation of stocks, the yield on 10-Yr. US treasury securities fell to 2.81%, a level not seen since 1954. Incidentally, during the 1935-1955 period, the yield on these was at levels far below current levels, this being the period following the collapse of the US financial market post circa 1929.

With the bond market rallying in the longer durations, its hard to NOT see how this plays right into the hands of the US government’s needs for long-term funds to pay for a trillion-dollar war and a trillion-dollar plus bailout, not to mention just staying in business.

Bloomberg says: Yields on two-, 10- and 30-year debt dropped to levels not seen since the U.S. began regular sales of the securities after Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.

Which once again begs the question:

What incentive does the US Government have for reviving the equity market, except to levels which keep some hope alive? Not much, right now.

With investors being crowded out of equity markets by continuing volatility and losses surmounting from deleveraging, it should eventually be a snap for Washington to amortize very sizable short term obligations by selling bonds to fleeing investors. Bernanke is merely pointing out the obvious in a roundabout way.

Debt is the new equity. Why would you bet against the Fed? This is the direction they have been moving us in, deliberately.

Canada Long Bond Yields Falling

By the way, the 30-year Canada rates fell from 3.97% last week, to 3.76% today, in the face of the 9% drop in the TSX. Until 5 months ago, the Canadian economy was bolstered nicely by rich commodities prices. Now that commodities prices have fallen sharply and fairly quickly, Canadian investors haven’t yet adjusted to the reality that Canada is in recession too, and given that, it is likely the long-term Canada yields will fall. Our three key industries are now dealing with a slump; autos, financials, and commodities.

Which is the likely scenario over the next one to two years: Long-term Canada Yields go up, sideways, or down, given that Canada is entering a full-blown recession?

Bloomberg says: The yield on the two-year bond declined 12 basis points, or 0.12 percentage point, to 1.59 percent at 4 p.m. in Toronto, the lowest since Bloomberg records began in 1989. The price of the 2.75 percent security due in December 2010 rose 23 cents to C$102.29.

The 10-year note’s yield fell 19 basis points to 3.13 percent, also the lowest since at least 1989. The price of the 4.25 percent security maturing in June 2018 climbed C$1.66 to C$109.18.

“Long-term rates are playing catch-up in terms of the decline in yields we have seen in short-term bonds,” said Mark Chandler, RBC Dominion Securities Inc. “There is limited downside in short-term yields,” he said.

“The relatively greater drop in yields on long-term bonds compared with short-term bonds is a theme that could continue into the first half of 2009,” Mr. Chandler said. “This is known as a yield curve flattener,” as the spread between the short-term and long-term rates narrows.

Currently, Canada’s yield curve is steep, defined by short term rates near zero percent, and 30 year rates, which closed today (12/01) at 3.761%, down 21 bps from last Thursday (11/27) morning.

As Hugh Hendry recently put it:

“I withdrew my hard-earned money from a bank this summer. But it may surprise you to learn that I bought government bonds of long duration. Surely I should have bought gold? Except that I believe the way to make money is to seek opportunities through paradox.

And therein lies our brinkmanship: everyone has skipped our story and read the conclusion. They fear financial anarchy. Gold coins are sold out. Everyone is in. And yet the price of gold has fallen this year. So, for now, I would stick with the bonds. The 18-year British gilt yields 4.8pc but, with the Bank of England likely to follow the Fed and slash rates to 1pc, I believe we could see gilt yields below 3pc.

And I promise you that if bond yields broke 3pc there would be a stampede to buy. At this stage gold might trade close to $500, and those who missed its rally from 2002 would have the solace of schadenfreude when in reality they should be buying the stuff and selling their bonds. What delicious irony: deflationists and inflationists could both claim to be right. But how many will have profited?”

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