Sell Everything

[EJ]

Sell Everything

Move to Bonds and Cash

That is essentially the message in Jeremy Grantham's letter to portfolio managers today. The only assets that make sense to hold now are cash and sovereign debt. However, if you are a portfolio manager, career risk prevents you from following this advice to a tee.

All the World's a Bubble
Friday April 27, 2007 (TheStreet.com)

While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.

One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

Everything is in bubble territory, he says.

Everything.

The bursting of this bubble will be across all countries and all assets.' -- Jeremy Grantham

AntiSpin: We got hold of the full letter and it's distinctly iTulipy. He talks about bubbles, such as in private equity, how hedge funds overcharge for managing mundane asset classes (see Most Hedge Funds Suck), and so on, and what will happen when they inevitably turn turtle. The letter is discussed in the iTulip Select forums in the context of Too Many Dollar Bears?

We also received an update from our intrepid Real DOW analyst who gives us his take on US home prices. And it ain't pretty.

S&P/C-S 10 is the S&P Case-Shiller (C-S) home price index for 10 largest cities, released monthly, plotted on a real (inflation-adjusted) basis. The last datum was released 4/24 for the February 2007 number–actually a 3 month moving average, thus representing a Dec 2006 to Feb 2007 average. To get the real number, the C-S index is divided by the average CPI-U for the same three month period. The data are then scaled to a max. of 100.

S&P/C-S 20 is the same analysis applied to the 20 largest cities, and S&P/C-S US to home prices nationally and based on quarterly data.

IrrExubRJS US is based on Shiller’s real annual data, except for 2006 which is an estimation and explained here.

Meanwhile...

US posts weakest growth in four years
April 27, 2007

US economic growth during the first quarter was the weakest in four years, hurt by a slumping housing market and deteriorating international trade, the Commerce Department reported.

At the same time, one price gauge in the GDP report posted its biggest jump in 16 years, sending a jolt of fear through financial markets that official interest rates will stay high.

So far, our now five year old prediction of the bubble cycle economy ending in an inflationary recession appears to be playing out, except more rapidly than expected. The housing bubble decline driven recession, scheduled for Q4 2007, is arriving ahead of schedule, as is the inflation, which is supposed to wait until the dollar depreciates further. If our Real DOW friend's analysis is correct, we are in very early innings of the process. Given where we're starting from, maybe we're in for the Wile E. Cayote scenario: after you strap on the skies with the rocket pack on your back and you fly off the cliff past the Road Runner, you fall 1,000 feet to the ground, then the anvil falls on you, then the rocket hits the cliff and the cliff falls on you.

Grantham letter is analyzed for iTulip Select subscribers here.

[jk]

Re: Sell Everything

"In my previous commentary I concluded that Ka-Poom is not tradable. It may be too short. In fact, the disinflation may have even already come and gone. I only know how to confirm the begining of the Poom, not the end of the Ka." ej 9/19/06

[Sapiens]

Re: Sell Everything

Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.

[raja]

Re: Sell Everything

The only assets that make sense to hold now are cash and sovereign debt.

Did Grantham say what kind of cash and sovereign debt?

What about gold?

If Poom is is a period of high inflation, I would think cash would be exactly the wrong place to be . . . . or maybe Grantham's thinking deflation?

[jk]

Re: Sell Everything

grantham is saying all asset classes - equities, commodities, real esate - are, globally, in a bubble. thus they will, at some point, sell-off. i.e. they will go down relative to cash. [have i finally got it, finster?]

[Finster]

Re: Sell Everything

That is essentially the message in Jeremy Grantham's letter to portfolio managers today. The only assets that make sense to hold now are cash and sovereign debt. However, if you are a portfolio manager, career risk prevents you from following this advice to a tee...

Problem is ... there is no such thing as being invested in nothing. Give your assets to the brotherhood ... take a vow of poverty ...

... doesn't matter; if you think holding cash is tantamount to investing in nothing, you have a rude awakening awaiting you ...

[EJ]

Re: Sell Everything

Problem is ... there is no such thing as being invested in nothing. Give your assets to the brotherhood ... take a vow of poverty ...

... doesn't matter; if you think holding cash is tantamount to investing in nothing, you have a rude awakening awaiting you ...

That's fine for you and I. But Grantham is writing to portfolio managers. They can't hold much cash for long, and I don't know of any that is ever 100% cash. They need to be invested.

[grapejelly]

Re: Sell Everything

Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

this is pretty much what I am doing except I also have some gold and silver mining stocks.

[Jim Nickerson]

Re: Sell Everything

Hold -Printed currency, not "cash" in a bank account.

Hold Physical Gold and Silver

Hold T-bills, not bonds, not CDs.

Wait for those in panic to seek safety, pick them off when you think is right.

Sapiens,

It strikes me as nuts for anyone to suggest to iTulip readers they should hold "printed currency" vs. "cash" in an interest bearing account.

It would be interesting to see you expound on the wisdom of your recommendation. I expect it has a lot of deep serious thought behind the notion, and I'd appreciate knowing your perspective.

[Ed]

"Robert Rubin on relativity"

Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.
Everything is in bubble territory, he says.
Everything.
The bursting of this bubble will be across all countries and all assets.' -- Jeremy Grantham

Seriously concerning talk coming from that big a reputation! Makes one think of conserving!
I remembered this “Robert Rubin on relativity” and found it (WSJ 9/24/98, Asian contaigion):

Mr. Rubin, whose world view was shaped by decades at the investment bank of Goldman, Sachs & Co., counters the Vietnam analogy with one of his own: the 1973-74 stock-market decline that devastated Wall Street.
"The difference between the people who were smart and shrewd, and the people who weren't really smart and shrewd?" he says. "Those people who were really smart and shrewd lost a lot of money. The people who weren't really smart and shrewd got wiped out."
Success, he says, "meant that you managed extremely difficult forces effectively enough to ... come out the other end."

TIPS is the one sure USA ride to ‘come out the other end’

[DemonD]

Re: Sell Everything

Ed, great point. Let me be my stock-market blue-chip loving bull here for just one second:

My favorite cigarette selling stock appreciated 600% in the 1970's - and that was without any dividends or dividends reinvested, which they not only paid quarterly throughout the 70's but also increased their dividend every year. Other blue chip stocks also fared well assuming you chose wisely, for example your local favorite mega-international large-cap integrated oil company, or your toothpaste and soap selling company, or your blood pressure medication selling company, or your band-aid and diaper and shampoo selling company.

In other words if you were just the regular coffee-can LTBH DRiP investor you would have done pretty well in the 1970's if you had chosen relatively wisely and not scared yourself or tried to chase up the market with your money.

Also the point about T-bills. Correct me if I'm wrong but T-bills are technically backed by the US government where cash is technically a "federal reserve note" meaning that T-bills would have stronger weight than cash right?

[tree]

Re: Sell Everything

Should I feel better? A few mornings ago I awoke feeling foolish for having cashed out my small pension, which was professionally managed, and rolling it into cash in my IRA, managed by scaredy-bear moi. I was concerned about the stability of my former employer, and the possibility the pension would go to the federal PBGC, where I couldn't get at my money until I turned 65. (If the cancer returns before then, I want to travel the world 'til the money and I am gone!) Of course, once I cashed out the pension, I worried that I wasn't taking advantage of traditional investments (stocks, bonds, etc.), not to mention a pro doing the work. A dear friend, a financial planner, stands ready to advise on investing, but every time I get close to doing it, I freeze and decide to stay in cash. Being a baby iTuliper ain't easy! :confused:

[Sapiens]

Re: Sell Everything

Sapiens,

It strikes me as nuts for anyone to suggest to iTulip readers they should hold "printed currency" vs. "cash" in an interest bearing account.

It would be interesting to see you expound on the wisdom of your recommendation. I expect it has a lot of deep serious thought behind the notion, and I'd appreciate knowing your perspective.

http://www.ces.org.za/docs/NofM.pdf

[Finster]

Re: Sell Everything

That's fine for you and I. But Grantham is writing to portfolio managers. They can't hold much cash for long, and I don't know of any that is ever 100% cash. They need to be invested.

My point is more conceptual than substantive. Simply that when you own cash, you are invested in a security. A debt obligation of the Federal Reserve. As you noted in another thread, you can view it "... as a common share in USA, Inc.". Of course cash happens to be the most liquid asset, and it happens to be the unit we use to measure the value of other assets, but that latter property leads us to mistakenly believe that when we are in cash, we are not invested in anything. That somehow we have removed all risk from our portfolio. But since cash itself is an asset, you can't actually sell everything, you can only trade other assets for cash.

So without taking issue with the merits of Grantham's views (he's a pretty smart guy, and I wouldn't do so lightly ;)), he seems to be saying that cash will outperform all other asset classes. At least in the Finsterish lexicon, he is calling for deflation.

The implication for the investor is not so esoteric, however. He has to ask himself what his position on the value of the currency is. Many here are quite bearish, for example, on the value of the US dollar, and not without reason. It has been depreciating in value for most of its existence, and seems unlimited in supply. A large short position has been built up by the US government and homeowners across the country, which puts upward pressure on its value. But the helicopters are loaded and ready, and an ace pilot is in charge at the Federal Reserve.

[Sapiens]

Re: Sell Everything

At least in the Finsterish lexicon, he is calling for deflation.

Thumbs up!