Night of the Living Fed, Jeremy Grantham's October Letter (Bonds or Equities?)

Night of the Living Fed by Jeremy Grantham
GMO's co-founder and chief equity strategist Jeremy Grantham released his 3Q 2010 letter titled "Night of the Living Fed". Check out the cover page to your left (click for full view). GMO runs $94 billion in client assets. After listing the "ruinous costs" of Fed asset price manipulation, Grantham questioned bonds versus equities since both are overpriced and bonds are manipulated. Read the full report here in PDF form.

"5) Should we buy overpriced stocks when bonds are even worse?

We plan to write more substantively on this topic in the near future, but for now the short answer is that bond prices are currently manipulated, and are yielding less than any market clearing price would suggest. They absolutely do not reflect the substantial fears in many quarters about inflation in the long term. Even in less manipulated times, bond prices can be quite silly for the usual behavioral reasons, as demonstrated most clearly by the 15% yield on the 30-year Treasury in 1982! Bonds are thus emphatically not a reasonable yardstick for measuring value in stocks. We use the long-term returns for stocks to decide what their fair value is. They are currently overpriced. Bonds are even less attractive. Yet, remember that in a strongly mean-reverting world, you need to be careful about enthusiastically buying the less ugly of two overpriced investments. Cash has an option value: on the chance that stocks or bonds or, better yet, both, decline, the investor will need resources from which to buy." [full report]

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