GMO May 2011 Quarterly Letter: "Time To Be Serious (and probably too early) Once Again"
"With these headwinds, I do not feel the same degree of conﬁdence that I did, which was considerable, that the Fed could carry all before it until October 1 of this year. A third round of quantitative easing would very probably keep the speculative game going. But without a QE3, there seem to be too many unexpected (indeed unexpectable) special factors weighing against risk-taking in these overpriced times. I had recommended taking a little more risk than was justiﬁed by value alone in honor of Year 3, QE2, and the Fed in general. Risk now should be more reﬂective of an investment world that has stocks selling at 40% over fair value (about 920 on the S&P 500) and ﬁxed income, manipulated by the Fed, also badly overpriced."
"The market may still get to, say, 1500 before October, but I doubt it, especially without a QE3, although the chance of going up a little more by October 1 is probably still better than even. And whether it will reach 1500 or not, the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky. So now is not the time to ﬂoat along with the Fed, but to ﬁght it. Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high quality blue chips and emerging market equities, both of which have semi-respectable real imputed returns of over 4% real on our 7-year forecast. The GMO position has also taken a few more percentage points of equity risk off the table."