In July 2007, Grantham warned of a financial bubble as hedge funds, private equity, and homeowners gorged on debt.
Today Grantham says we're in for slowing global economic growth. In particular, he believes China will slow down more than expected as most economists have taken in their forecasts for Chinese growth only a touch. He argues that China is very dependent upon exports and that the countries on the other end of the trade are too weak.
Grantham expects that slowing growth will also keep commodity prices falling. "I would keep out of commodities for the near term," he said.
In addition, he sees the deleveraging--an unpleasant unwinding of debt-- leading to a reverse wealth effect for companies and consumers alike. Both had been living beyond their means and now will have to adjust to below-average earnings and income, and that means they'll be tight with spending.
Nonetheless he's now more constructive about equities because he believes they are trading at severely depressed prices. He said that at the end of Friday, global equities were trading as cheaply as they had been since the 1980s. In fact, the U.S. had traded below GMO's fair value estimate--though as we spoke Monday morning a rally had brought it back to around fair value. Specifically, he prefers blue chips to small caps or highly leveraged companies.
"We're buying carefully and slowly," Grantham notes. Why slowly? "When bubbles correct, they usually overcorrect so that the market is selling well below fair value."
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