And his latest quarterly letter is awesome. I can even overlook the part where he slanders libertarians by lumping them in with leveraged Wall Street bailout-junkies. Perhaps he hasn't spoken to enough libertarians to understand that Too Big To Fail is not part of the program. And click on over and see what he has to say about bonds... it's exactly what we've been saying here for some time.
The interesting overpricing that exists in global markets is in debt markets – those that are seen to be lower risk than the rest (e.g., most developed market government bonds ex the usual suspects: Greece, Portugal, Spain, and Italy). In some markets like the U.S. and the U.K., the long bonds can be so murdered by inflation that holders should end up concerned about return of capital and forget about being paid for the risk. On the plus side, if economies collapse, the bonds with some duration may protect your money in the short term. This is a trade-off between possible short-term safety against probable long-term risk and negative return.
So in asset allocation there is one great opportunity – avoiding duration in fixed income – and one pretty good opportunity – down weighting most of the U.S. market. Not such a bad opportunity set, really.
But this act of data malpractice cannot stand.
Grantham uses data since 1919 to show that stocks are a better hedge against inflation than gold is. The problem with that? The dollar was pegged to gold during most of that time. Using the history of a gold-pegged dollar to forecast what will happen in a pure fiat regime is absurd!
Here's Grantham's chart:
And here's what gold and stocks have done in the fiat currency era.
Sources: St. Louis Fed, Bloomberg, W.C. Varones.
A few caveats: that's price return for the S&P, so you can add a few percent for dividends, but it doesn't change the picture much. And of course the CPI has been through a number of contortions which have tended to further understate inflation over time. But the story remains the same: gold rocks in inflationary environments.
And when does gold suffer? Those big negatives were during the reign of Fed chairman Paul Volcker, when he jacked the Fed Funds rate up to double digits. How likely is that to happen again? Answer: because we've allowed the national debt to balloon to $15 trillion, 100% of GDP, double-digit interest rates would instantly bankrupt the United States. We couldn't service the interest on the debt. So don't expect another Volcker to come riding to gold bears' rescue.