Life In A Time Of Bubbles
No matter where Jeremy Grantham travels, it's the same investment landscape: overpriced assets. The chairman of Boston money management firm GMO (formerly Grantham, Mayo, Van Otterloo) (GMO ) thinks we're in the first-ever global bubble, one affecting everything from stocks to real estate and antiquities. Grantham, whose firm manages $145 billion in assets, argues that when this bubble bursts, the fallout will be painful and severe. The longtime bear recently spoke with BusinessWeek contributor Tyler Hill.
What's driving this bubble?
Private equity is a major component—but only one component—of what I call the let's-all-look-like-Yale effect. It's a move into sexy new areas, such as private equity, hedge funds, forestry, emerging equity, emerging debt, and so on. This phenomenon is happening everywhere: in the Singaporean government, the Norwegian government, and just about every pension fund in America.
Are there any pockets that haven't been touched by the bubble?
One of my colleagues said: "Not everything is expensive. We can find some plays on Malaysian land that are attractive." There might be one or two nooks or crannies around the world like that.
It's been a while since anything has been cheap. Right now I would say that 10-year government bonds and TIPS [Treasury Inflation-Protected Securities] are good.
What's the most overvalued asset?
Land. People say "real estate," but you can build a house today for very much the same price, adjusted for inflation, as 20 years ago. The land, though, has tripled or quadrupled in real terms. I put that as classic, old hat bubble territory.
Could the problems in the credit market burst this bubble?
I don't know if the subprime debacle started it, but it was the first manifestation of it. When things get that good they tend to roll over and it happens that subprime was the first thing to bite. But it does obviously have an important carry-over effect. In the end the curtailment of housing borrowing will be a bigger deal than subprime itself.
Will the economy be affected by the fallout?
The economy is like the Golden Gate Bridge. You've got a series of bolts that are very sensitive and rather flaky and one or two look like they're failing. It doesn't mean the bridge is going to come down. You hope that two or three of them are not lined up together. I think in the end it's going to be several of these pieces that fail. That said, I wouldn't bet against the U.S. economy. It is tough, durable, and resilient. Over two or three years, the bubble bursting might knock a point or two off economic growth.
If the bubble is deflating, which assets are safe?
Cashlike T-bills and money-market fundsis good. Ten-year bonds look pretty good now, government bonds look good, junky bonds look terrible. Junky stocks look even worse. Equities in general look a little dangerous, but the high-quality ones look less dangerous than the low-quality ones. So if you have to own equities, make sure they're blue chips. And don't be too proud to own cash and 10-year government bonds these days.
How are you preparing your portfolio?
We are taking as little risk as we have ever taken in our 30-year history and clutching more cash and bonds than we normally hold. We do asset allocation across a wide variety of strategies. But for example, in an account for which I have total discretion and no constraints, I have 17% in emerging-markets stocks and a 17% short position in the Russell 2000 index (U.S. small cap stocks). That nets out to zero equity exposure. The rest of the money is in cash and a bit of timber.
So you're avoiding all overpriced assets?
I feel very, very guilty. When I got back [from a recent trip around the world], I had two packages waiting for me, one of which was Indian art, so I am definitely not taking my own advice on this one.
Views expressed in Outside Shot are solely those of contributors.