Grantham's Warning

“We recommend taking some risk units off the table,” Jeremy Grantham begins today. Largely written off as just another alarmist “perma bear,” Grantham has developed this strange habit of being right quarter after quarter after quarter. In 1998, he said the S&P 500 would return a negative 1.1% annualized over the next 10 years… which was exactly correct. In May 2007, he called for the pop of a “truly global bubble”… right again. Then at the end of the first quarter this year, he told his GMO investors to buy… yet again, nailed it.

This week, he’s telling you to get out.

“A year ago, equities globally — and everything else, for that matter — were very overpriced, particularly if they were risky,” reads his quarterly letter to investors. “A quarter ago, in mid-March, prices everywhere were cheap. Now they have all — or almost all — converged for a few unusual moments at fair value… It’s difficult to be inspired at fair value.

“Given our view that we are in for seven lean years in which the market will be looking for an excuse to be cheap, we recommend taking some risk units off the table, including becoming underweight in equities — between 1,000-1,100 on the S&P, if it gets there this year. Around 880, you should continue to move slowly to fair value, twiddle your thumbs and wait to see what happens. Boring!”