Jeremy Grantham, co-founder of GMO LLC which has $104 billion under management, was on CNBC talking with Maria Bartiromo about the economy, S&P fair value, QE2, commodities, emerging markets and currencies. It was a warning call. Watch the must see interview after the jump. Notable quotes:
"The Fed has spent most of the last 15 to 20 years manipulating the stock market whenever they feel the economy needs a bit of a kick. I think they know very well that what they do has no direct effect on the economy. The only weapon they have is the so called wealth effect"
"What are they going to use as ammunition if they (the Fed) cause another bubble and it breaks, let's say, in a couple of years? Then we might have some real Japanese type experiences"
"We don't like to play games with overpriced assets and that's the world that we're in now. The Fed is driving the S&P, which is overpriced— the Standard & Poor's 500— a broad measure of the U.S. market, is driving it from already substantially overpriced into what I would call dangerously overpriced. This is about the boundary line. We expect on a seven-year horizon one percent only plus inflation from the U.S. market. And now, as you push it up another 20 percent perhaps in the next year, it becomes dangerously overpriced."
"And you must remember bonds are even worse than stocks on a seven-year forecast. So, you get caught in this paradox. It's very tempting— and this is what the Fed wants by the way. It wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive."
"[Cash] buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."
"we believe that the old-fashioned, super blue-chip franchise companies like Coca-Cola are also much cheaper than the rest of the market."
Grantham is more bullish on the emerging markets than developed markets and believes "we're in a period that I call a chain-linked crisis in commodities". "If you're afraid of inflation - if you can bring yourself to have a long horizon (10-20 years), then locking up resources in the ground is a terrific idea. Or locking up— timber, agricultural land will do just fine...."
Another must read 10/28/2010: Night of the Living Fed, Jeremy Grantham's October Letter (Bonds or Equities? Or None of the Above)