Another Permabear Who Doesn't Know What He Is Talking About?

Many regularly-quoted "experts" (basically, securities salesmen with an extra helping of B.S.-ability) and TV pundits like to dismiss negative views on the economy and the stock market by characterizing those who say such things as "permabears." The term is a kind of derogatory code word, meant to convey the sense that individuals who are so labeled are either stupid, naive or losers.

However, I wonder if those who throw the term around so loosely really believe that such a simple-minded and often baseless epithet is appropriate when it is applied to someone like Jeremy Grantham, the seasoned founder of a 30-year old, $157-billion money management firm with an enviable, market-beating track record, who has been through more than a few cycles in his lifetime?

You can decide for yourself by reading the following Bloomberg report, "Grantham Says Shun Stocks, Shift to Cash Amid Crisis."

Jeremy Grantham, the money manager who oversees $157 billion as chairman of Grantham, Mayo, Van Otterloo & Co. LLC, said investors should shun stocks and hold cash during the worst financial crisis in more than 60 years.

"Don't be a hero," Grantham, 69, said today in an interview from his office in Boston. "Move to cash and let the other guys fish around for the bargains in the wreckage."

Dubbed a "perma-bear" for his dour view on U.S. equities for more than a decade, Grantham correctly predicted a crash in technology stocks two months before the bubble burst in March 2000. Grantham told his firm's investors that if they want to take the risk of investing in stocks, they should stick with the "highest-quality" large U.S. and emerging-market shares.

Grantham said investors should hedge stock positions by selling short the Russell 2000 Index, which tracks the smallest U.S. companies. The Russell 2000 has declined 13 percent this year. In successful short sales, investors sell shares they have borrowed and buy them back at a lower price, pocketing the difference.

"This is the most important U.S. financial crisis since World War II," he said.

A surge in defaults of loans made to the riskiest borrowers has sparked a worldwide credit crisis, leading to $133 billion in writedowns by banks and investors balking at all but the safest debt securities.

Recession Probable

Grantham said the financial crisis is likely to push the U.S. economy into a recession. Conditions are worse than the savings-and-loan crisis of the 1980s, when the failure of thrifts cost U.S. taxpayers more than $160 billion, he said.

"The S&L crisis was parochial in comparison," Grantham said. "This is the first one that is global; it has tentacles everywhere."

U.S. stocks rallied the most in two months today on speculation lower borrowing costs and a plan to bail out bond insurers will restore confidence in the financial system. The Standard & Poor's 500 Index added 28.08, or 2.1 percent, to 1,338.58, its first advance in six days. The Dow average rose 298.98, or 2.5 percent, to 12,270.17.

Billionaire investor George Soros said today a U.S. recession is all but certain, and the global economy will probably avoid a contraction.

2010 Bottom

The Standard & Poor's 500 Index has declined 8.8 percent this year and is headed for its worst monthly drop since August 1998, when Russia defaulted on domestic debt. The Morgan Stanley Capital International Emerging Markets Index has fallen 15 percent.

Grantham said he expects stocks to reach a bottom in 2010.

"There are plenty of bad things left in this cycle," he said.

The fund manager has been predicting a weak U.S. equity market since 2006. The Standard & Poor's 500 Index returned 16 percent in 2006 and 5.5 percent in 2007.

Stock and bond funds managed by Grantham's firm returned 19 percent on an asset-weighted basis in the three years ending Nov. 30, double that of the S&P 500, according to data tracked by Morningstar Inc. in Chicago. The funds advanced 15 percent in the first 11 months of 2007, compared with the 6.2 percent gain in the S&P 500 during that period.

Grantham, who helped start Grantham, Mayo, Van Otterloo in 1977, said credit problems are likely to spread beyond subprime mortgages to commercial real-estate loans and debt used to finance private-equity transactions.

"Private-equity deals will be in trouble," Grantham said. "They were under-researched and over-leveraged, and we had reached a level where the junkiest possible companies were selling at high prices."

'Most Underappreciated Risk'

Grantham, who yesterday published a quarterly letter to investors, wrote in his letter that private equity "is the most underappreciated risk of all and is likely to be the center of another phase in the crisis."

The cost of bonds and loans used to pay for buyouts has doubled since June, according to Merrill Lynch & Co. data. That will limit the fees and profits that leveraged-buyout firms generate from buying and selling companies.

Cerberus Capital Management Chairman John Snow and Carlyle Group co-founder David Rubenstein are among the executives at the World Economic Forum at Davos, Switzerland, saying that lack of credit is hobbling the pace of leveraged buyouts.

Snow said banks need to "purge" about $200 billion in loans that haven't found buyers before LBOs can resume. Rubenstein said the pace of takeovers of large companies will slow in 2008 because of a lack of debt

Comments

[Tim]

The Times of London Online is reporting the bond insurers need a cash infusion of 200,000,000,000$. Impressive to say the least.

[Independent Accountant]

I have a lot of respect for Grantham. That said, I am not a bear on the stock market. I am a bear on cash. I think over the long run you are better off with stocks than cash which is guaranteed to lose value due to inflation.