Grantham called the stock market's performance in 2003 a "brutal rally" because it gave investors hope during a bear market that he thinks is by no means over. He called his expectation of an investment "black hole" in 2005 "optimistic." Rodriguez had only a four-letter word for investors: cash.
Deane, whose
gloomy view seemed relatively rosy by contrast, said that bonds were extremely overpriced but that the first economic rally in decades to include not only the United States, Europe, and Japan, but also potentially India and China was a possibility. He estimates the likelihood of such an event to be no better than 50%.
Hoarding cash
Grantham and Rodriguez agreed that given valuations across the stock and bond markets, the most prudent thing to do now was nothing. Both advised hoarding cash. Deane noted that rising interest rates (which he said would continue through the end of 2005) were not necessarily harmful to equity markets, so long as those rates accompanied inflation and job growth.
All agreed that the current massive leverage across markets--in which big investors, such as hedge funds, have borrowed at short-term rates to invest over the long term--was potentially disastrous. Grantham blamed the Indian market’s two-day 25% drop on such leverage, while Deane wondered whether an unwinding would come early and intelligently, or only with great pain. He surmised the latter.
All three were asked to name their current favorite investments. Rodriguez expressed a preference for cash, noting he’d bought only one stock in nine months--and refused to name it. Deane thought shorting the 30-year bond the one obvious choice. Grantham professed his long-standing love of timber, because "if the sun shines, and the rain rains, those suckers grow." When possible, he said, one should purchase an entire forest.
This article originally appeared on www.morningstar.com on June 25th.
