Jeremy Grantham: Hardly a Bull
I just finished reading Jeremy Grantham's Quarterly Letter for GMO. There have been lots of headlines about Grantham's thesis, which lays out the case for a continued rally in the near term, brought to you by the U.S. government. After reading through the entire report, it now seems laughable that there were headlines like "Grantham now bullish!"
Yes, Grantham notes that stocks can continue higher, but before you break out the champagne, he also notes that the rally would only set the stage "for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world."
Grantham presents a cogent argument for both the stimulus-infused rally and the scary future "lean years," but the really fun stuff can be found in the appendix. For those of us who dig statistics (much to the dismay of my college statistics professor), Grantham's team has compiled some fascinating probabilities.
The GMO strategists consider two basic scenarios: (1) "The economies of the U.S. and other leading countries kick up by late this year or early next year," an 80 percent probability and (2) "The global economies prove to be so weak that they do not start to recover until late next year after a series of disappointments," a 20 percent probability.
The mathletes drill through a bunch of numbers, but here's the end result:
- Chances that this is the start of a lasting bull market destined to take us to new highs within three or four years (after inflation): 15 percent
- Chances that we face a long, drawn-out period to reach a new high (up to 20 years): 85 percent
