“It may be the most accurate 10-year call in stock market history,” I said.
I was talking about Jeremy Grantham’s 10-year forecast from December 31, 2001. It was ridiculously accurate…
Grantham sized up 11 asset classes. He correctly predicted that U.S. stocks would be the worst-performing asset class for 10 years. And he got the order of the performance of the 11 asset classes nearly exactly right.
Grantham’s latest long-range forecast is out…[ad#Google Adsense 336×280-IA]Now, Grantham predicts you will lose money in bonds over the next seven years. (He’s changed his forecast horizon to seven years).
Specifically, he says the total return on bonds won’t keep up with inflation. He says U.S. bonds will lose 1.4% a year over the next seven years, after inflation.
U.S. stocks in general won’t do much better. He predicts absolutely no returns at all after inflation in large U.S. stocks… and a negative 0.5% a year return after inflation in small stocks.
So what does Grantham like?
Grantham likes timberland. And he likes non-U.S. stocks. He believes international stocks can return between 4.4% and 4.9% a year after inflation.
He thinks stocks from emerging markets will be the best-performing stocks – at a return of 6.1% a year after inflation. But he believes the returns in emerging markets will be the most volatile.
How does he come up with these “crazy” predictions… predictions like “U.S. stocks will lose money for 10 years” back in 2001… or “both U.S. bonds and U.S. stocks in general will have trouble beating inflation over the next seven years” today?
His method is simple. His basic assumption is that the markets will revert back to their fair value in time. And “in time” – in his case – is seven years. That’s the base case for his forecasts.
Grantham may turn out to be right. It is difficult to argue with his forecasting record… or the idea that things will eventually revert to their long-run average valuations.
Me? I’m actually more than willing to own stocks for the next couple years.
I think most investors are missing the big story – that over the next year or two, the Bernanke Asset Bubble has the potential to push asset prices (like stocks and real estate) to unimaginable heights.
U.S. stocks might revert to their long-run average value in seven years, as Grantham assumes. But seven years is a long way away.
In the meantime, I think there’s a lot of money to be made in the next year or two, courtesy of the Bernanke Asset Bubble.
My recommendation is to stay invested now, while times are good. You could do extremely well. But make sure you have an exit strategy – like using trailing stops to lock in your profits – in case Grantham is right…
Source: Daily Wealth