GMO: "on the road to zero growth"

Jeremy Grantham & Cia, es decir el fabuloso equipo de GMO, acaban de publicar su Quaterly Letter. Como todas las anteriores, una lectura obligatoria. El informe completo, aquí.

Algunos extractos:

1. The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.”
2. GDP measures must be improved so that they begin to measure output of real usefulness or utility. The current mish-mash of costs and of “goods” and “bads” produces poor and even damaging incentives.
   
3. Accurate measurements of growth must eventually include the full costs of running down our natural assets. True income (said Hicks) is meant to allow for sustained productive capacity, which our current measures clearly do not. If they had done so the developed countries might well have been in reverse for the last 20 years.
   
4. Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal. Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!
   
5. Some of the investment implications of this low growth outlook and the Bernanke optimism will be addressed next time (with luck!). 
   

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So where does that leave us with our asset allocation portfolios at GMO? Pretty much where we were before. We own significant amounts of short duration assets in accounts where such assets are an option, with the recognition that the longer rates are repressed, the greater the opportunity cost of those holdings. 

We are doing this because the risks around jumping into long duration assets under the assumption that low interest rates make them more valuable leaves us more vulnerable to taking losses if that policy winds up not lasting as long as investors assume it will. The strong move in equities and other long duration assets in the months up to the announcement of QE infinity may be “justified” on the basis of a promise from the Fed of low rates for longer, but buying assets whose prices are only justified by low discount rates is an inherently dangerous way to invest, and we responded by taking down our equity weights modestly in asset allocation portfolios where permitted. 

If the Fed is true to its word, inflation does not flare up, and the various nasty events out there (China hard landing, euro blow-up, fiscal cliff, etc.) either don’t happen or cause less trouble than we fear they might, our “prudent” holding of short duration assets in the face of uninspiring asset valuations will wind up costing us and our clients money.

So, our fingers are crossed that, despite our reservations, Fed policy actually works, because we can then go back to a world where we aren’t faced with the ugly idea that stocks priced to deliver 2% real might be “fairly priced” after all. If investors see through the game the Fed is playing, however, we could be in for a long wait.