GMO’s Grantham: enough of the groundhog day economics

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Veteran investor Jeremy Grantham is lost for new things to tell clients during meetings due to the perpetual, tiring nature of the macroeconomic picture, the fund manager has revealed.

In his second quarter update, which mainly focuses on resource scarcity, the founder of GMO said he has grown weary of global economies constantly being on the cusp of collapse and begged for a change.

He said: ‘The economic environment seems to be stuck in a rather unpleasant perpetual loop. Greece is always about to default; the latest bailout is always about to save the day and yet never seems to.’

‘China is always about to collapse but instead teases us by inching down; and I swear the Financial Times is beginning to recycle its reports!’

‘It is getting difficult to find anything new to say at client meetings. I, for one, wish that the world would get on with whatever is coming next,’ he added.

Grantham said he had only witnessed one real change in the market and this was profit margins and earning gains weakening after a period of sustained increases and growth.

‘Profit margins and earning gains, together with Bernanke’s super low rates, have been the twin pillars of the market and not bad ones at all: here we are up 8% for the year in a thoroughly unsettling financial and economic world.’

‘With margins weakening, one of the twin pillars is looking shaky and price declines look more likely than before.’

The value investor thinks this could have knock-on effects for investor confidence, although he did not suggest whether this changing scenario would impact his investment strategy.

Resource scarcity

The bulk of Grantham’s letter was given over to discussing his concerns about potential food shortages and how he is investing on a long-term horizon in order to protect against this.

Echoing the majority of points he made at the ReSource 2012 Conference last month, Grantham said he is very bearish on the problems facing the world in terms of material shortages but was exceptionally bullish on resources-related stocks.

‘We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse.’

‘Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.’

In order to combat this, Grantham said he had adopted an ‘investment battle plan’ which will see him invest up to 30% of his foundation fund in resources, such as farm land, forestry names and resource efficiency.

This is while avoiding oil and mining stocks, as he expects their short term gains to be outweighed by longer term difficulties.

‘Not only am I more convinced than a year ago that sensible long-term investors’ 7-to-10 year horizons should overweight resources but I am also convinced rising resources prices will worsen the prospects for the balance of the portfolio by squeezing both the profit margins and reducing overall growth,’ he said.

To read the entirety of Jeremy Grantham's latest market commentary, entitled 'Welcome to Dystopia', please click here.