Salient to Investors:

Jeremy Grantham at GMO said:

  • The slow recovery is due to the Fed’s actions. In the 1980s the US had an aggregate debt level of 1.3 times GDP versus 3.3 times debt now and yet GDP has been slowed – showing that more debt or QE does not create growth.
  • After WW I the economy came roaring back without intervention or bailouts. After the S&L crisis, we liquidated the bad banks and their bad real estate bets and the economy came roaring back. We did not liquidate the people who made the bad bets this time.
  • The Bernanke put – the belief that if anything goes bad the Fed will come to the rescue – has had a profound impact on people and how they act.
  • Without Fed intervention the crash may have been worse and the downturn sharper but by now the depths of that recession would have been forgotten and the US would have regained its growth.
  • Savers have become collateral damage of Bernanke’s policies. Lower interest rates have not spurred capital spending and there is no evidence that QE has boosted capital spending. Historically we have always come roaring back from recessions, even the Depression but we have never had such a limited recovery as this.
  • The Fed can manipulate stock prices, perhaps the only thing they can do, but why would we want to get an advantage from the wealth effect when we are going to have to give it all back when the Fed reverses course.
  • The Fed encourages steady increasing leverage and more asset bubbles with very cheap leverage on the upside, and bailouts on the downside. Only hedge fund managers have benefited from QE.
  • The market will go higher because the Fed won’t stop playing until we are in bubble territory and it bursts – usually at 2 standard deviations from the market’s mean, or 2,350 on the S&P 500.
  • Not investing in stocks because his 7-year prediction calls for negative market returns and won’t invest on the basis of speculation driven by the Fed’s misguided policies.
  • The next bust will be unparalleled because all the central banks have leveraged, which has never happened before. Assets are overpriced generally and will become cheap again. 

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