Jeremy Grantham predicted the peak in stocks in 2000 and the bottom in March 2009.
Nobody on the planet called it better.
Today, Jeremy Grantham’s prediction is for DEFLATION. He’s “throwing in the towel” on inflation. And he recently explained what will make you the most money over the next seven years.
Grantham comes across as grumpy. And his writing is cumbersome to trudge through. But he’s an original thinker…
Original thinkers are hard to come by (particularly on Wall Street!). And the guy was RIGHT… He called the biggest top and the biggest bottom in stocks in recent memory.
In the latest letter to customers of his Boston-based investment management business, Grantham described the deflation situation and how you should invest:
I, like many, was mesmerized by the potential [for inflation,] for money supply to increase dramatically, given the floods of government debt used in the bailout…
But now, better late than never, I am willing to take sides… inflation seems a distant prospect. Suddenly (for me), it is fairly clear that a weak economy and declining or flat prices [deflation] are the prospect for the immediate future.
As is typical for Grantham, he is in the minority with his deflation prediction. But he was in the minority in 1999 – nearly alone – in predicting an extreme stock market bust. And he was nearly alone in March 2009, when he predicted a big rally.
So how do you invest for the next seven years? Surprisingly, more than any other asset class, Grantham likes what he calls “high-quality” stocks – classic big names like Coca-Cola.
Despite growing nervousness and despite a slowing economy, I am so impressed by the power of low rates… that I would still put odds of 45%… for the market to rise to over 1400… by October of next year…
In plain English, Grantham’s predicting a 24% rise in the overall stock market. And he’s predicting seven lean years for the U.S. economy. But he believes high-quality U.S. stocks will outperform every other asset class over the next seven years.
High-quality stocks were left very much behind in the great rally last year, which was the biggest and most speculative since 1932. Much more surprisingly, they have underperformed this year…
Grantham offers up several explanations why high-quality stocks have underperformed, including this one:
In the last 10 years, institutions and even ultra-rich individuals have, in general, been increasing the share of their portfolios that is invested in private equity and hedge funds, commodities, and real estate. And even within their equities, they have been increasing their share of foreign equities, including emerging markets and small caps…
So what is being liquidated to buy all of this new stuff? Old-fashioned blue-chip U.S. stocks.
Quality stocks might possibly spend much of the next several years underpriced, but from time to time will bounce back to fair value. This is all that patient investors need.
For the first time in the history of my True Wealth newsletter, I’ve started recommending high-quality U.S. stocks. I launched True Wealth in 2001. I’ve avoided U.S. blue chips for nearly a decade. They were overpriced. Avoiding them was the right call.
But times have changed. High-quality stocks are cheap. Grantham and I both believe the time is finally here for U.S. blue chips.
Remember, nobody has been more right about these things in the last dozen years than Grantham. And right now, he’s predicting deflation, seven lean years in the economy, and great performance from high-quality stocks.
As you formulate your strategy, keep his ideas in mind. I know I am.
P.S. For more on Jeremy Grantham, and to read his quarterly letters, visit his company’s website at www.gmo.com (it’s free to register).