Doug Kass Predicts 2013

Have a look at the following article by Doug Kass to learn what 2013 has in store for us:

Doug Kass: 15 Surprises For 2013

The Economy: Will It End Well or Ill?

Nomura Strategist: S&P 500 To Fall 45%, Lab Rats To Scurry

By Colin Lokey

www.seekingalpha.com

2012 September 21

Jim Grant showed up on CNBC Thursday and dubbed all of us 'lab rats' referring to our unwitting participation in perhaps the most spectacular monetary policy experiment of all time. There is a growing sense among market participants that, having run out of options to stimulate growth, the Fed has simply decided to conduct a kind of clinical trial (a "science experiment" to quote Maria Bartiromo) where the drug is perpetual asset purchases and the subjects are the economy and the financial markets.

Indeed the appropriateness of the analogy becomes ever more apparent each time some formally useful piece of data is stripped of its ability to signal investors and thereby rendered useless by the Fed's heavy hand. Interest rates and spreads are now simply independent variables the Fed toys with and tweaks periodically to determine the impact on economic outcomes and financial markets.

Take the mortgage spread for instance. The spread between 30-year mortgages and 10-year Treasury bonds fell Thursday to just 19 basis points, a record low. Perhaps more important is the absurdity of what that supposedly says about the risk profile of MBS and Treasury bonds: would one really want to assert that mortgages are only 19 basis points riskier than risk-free Treasury bonds?

All of this speaks to a contention that I made last month which is that September will forever be remembered as a turning point; the beginning of the era of limitless money printing. This idea -- that a new regime is in place -- was echoed in a note dated September 18 from Nomura'sBob Janjuah entitled "When Money Dies". Janjuah says in the introductory paragraph that September marks a "significant pivot point":

"...I think historically important events may be unfolding. I think that by their actions both Fed Chairman Bernanke and ECB President Draghi may have belied how deeply worried they are about our economies and the financial system. In short, I see fear in their actions."

Janjuah goes on to say that Bernanke and Draghi have essentially become politicians (albeit Bernanke less so) and that this could jeopardize both the realization of a fiscal union in Europe and an expedient solution the problem of the fiscal cliff in the U.S. Moreover, Janjuah notes that

"Lest we forget, neither QE, nor the LTRO, nor the OMT either have, or will, do anything sustainably positive for growth. The evidence of the last four years is clear." (emphasis mine)

The fact is he says, the notion that because of central bank asset purchases individuals and corporations will begin to spend and consume as though there is no tomorrow is nothing other than wishful thinking. This is similar to the point I made in an article published Thursday:

"...the market expects consumers, tapped-out by years of ultra low or negative real returns on their income generating investments, to carry stocks -- and indeed the entire economy -- forward via a sudden propensity to spend in the midst of the uncertainty occasioned by the fiscal cliff debate."

This is pure 'hopium' to use a term popular with Fed detractors these days.

Ultimately, Janjuah concludes that the new policies could cost central banks their credibility as the current course of monetary policy seems to suggest that central bankers feel they have lost control of the situation and as such must continue to print money just to keep the wheels from falling off so to speak:

"...they [have] abandoned the search for "real‟ solutions. Instead...[they extend] the same failed policies that got us into our financial and economic despair in the first place. Namely MORE debt, MORE bubbles and MORE monetary debasement."

In the end, Janjuah says that thanks to QE3, a period of risk aversion has been averted and the market has likely skipped straight to the last leg of a cyclical bull market (2009-2013). 

While he feels the post QE rally could mean another 10% upside for stocks (maybe he's been reading Credit Suisse notes), his longer-term target for the S&P 500 (SPY) remains 800, representing a 45% decline from Thursday's 1460 close. 

While that's a bit too bearish even for me, you can't say you weren't warned.

2011 Looks A Bit GRIM!

Wake-Up Call: Top 11 Trends of 2011

After the tumultuous years of the Great Recession, a battered people may wish that 2011 will bring a return to kinder, gentler times.  But that is not what we are predicting.  Instead, the fruits of government and institutional action – and inaction – on many fronts will ripen in unplanned-for fashions.  Trends we have previously identified, and that have been brewing for some time, will reach maturity in 2011, impacting just about everyone in the world.

1.  Wake-Up Call  The reputation of Gerald Celente and The Trends Research Institute is based on its willingness to “tell it like it is.”  Neither optimists nor pessimists, no matter whose interests it challenges, no matter whose feathers get ruffled, we are beholden to nothing but the facts … and follow them where they take us.  Though unafraid to call a spade a spade, we do so with as much respect as is appropriate to the matter.

Thus, prevailing conditions and future trends require us to call it the way we see it, and with all due respect, this is what we see: the proverbial “s#%t has hit the fan.”  The chickens have come home to roost, the genie is out of the bottle, and yes, the jig is up.

In 2011, the people of all nations will fully recognize how grave economic conditions have become, how ineffectual and self-serving the so-called solutions have been, and how dire the consequences will be.  Only little kids, ideologues, the uniformed, and the out-of-their-minds will still believe what they are being told by politicians, pundits and experts who have higher-ups to answer to, agendas to fill, and something to sell.

Having become convinced of the inability of leaders and know-it-all arbiters of everything to fulfill their promises, the people will do more than just question authority – they will defy authority.  The seeds of revolution will be sown in the streets of failing nations, on the Internet, and at the polling places.

2.  Crack-Up 2011  Among our Top Trends for last year was the “Crash of 2010.”  What happened?  The stock market didn’t crash.  We know.  We made it clear in our Autumn Trends Journal that we were not forecasting a stock market crash – the equity markets were no longer a legitimate indicator of recovery or the real state of the economy.  We pointed out that the action in the Dow was “merely a reflection of the cheaply borrowed dollars that were being used to gamble.”
 
What we did regard as reliable indicators included the employment numbers, the real estate market, currency pressures, and sovereign debt problems – all of which have bordered between crisis and disaster.  We informed readers, “The Trends Research Institute cannot predict what undreamed-of-schemes Central Banks will dream up this time….”  And dream and scheme they did.  TARP and the Obama stimulus were only the financial props that the government made public.  Just recently has it been revealed that secret backdoor bailouts amounting to over $20 trillion were funneled from the Federal Reserve, by way of “emergency lending programs,” to banks both foreign and domestic, hedge funds, select financial institutions, and favored corporations.

It was no different on the other side of the pond.  The basic treaties agreed upon to establish the European Monetary Union were breached in order to bail out bankrupt banks and float nations sinking in sovereign debt.
In 2011, with the arsenal of schemes depleted, we predict that teetering economies will collapse, currency wars will ensue, trade barriers will be erected, economic unions will splinter, and the onset of the “Greatest Depression” will be recognized by everyone … even if they refuse to acknowledge it.

3.  Screw the People  As times get even tougher and people get even poorer, the “authorities” will intensify their efforts to extract the funds needed to meet fiscal obligations.  The first round of “austerity measures” imposed by European governments provides the first taste of what to expect from recession-plagued nations.  As the Great Recession extends its global reach, those high-flying emerging markets, which “experts” claim are immune, will also be submerged beneath loads of crushing debt and will also resort to austerity measures of their own.
 
While there will be variations on the theme, the governments’ song will be the same: cut what you give, raise what you take.  Social safety nets will be torn and public services will be cut to the bone.  Getting a lot less will cost taxpayers a lot more.  While corporate tax rates are held sacrosanct and tax breaks and loopholes for the wealthy are maintained or widened, the arm of the revenuers and the arm of the law will reach ever deeper into the pockets of prols.  The dulled minds of bureaucrats, whose own jobs depend on a steady stream of public funds, will shine with creativity as they look for any angle to wring the last penny from working men and women.

Sales taxes, sin taxes, highway tolls, meter fees, park permits, license fees, water rates, and the fines for every minor violation – from nuisance laws to speeding tickets and jaywalking to litterbugging – will go as high as the traffic can bear … before it goes even higher.
 
4.  Crime Waves  No job + no money + compounding debt = high stress, strained relations, short fuses.  In 2011, with the fuse lit, it will be prime time for Crime Time.  With little hope, few options, closed doors, and deep despair, Americans who had never thought of themselves as criminals will be driven to do what they have to in order to survive.

As Gerald Celente says, “When people lose everything and they have nothing left to lose, they lose it.”  Besides, from top to bottom, crime has become institutionalized.  In governments worldwide and from Broad Street to Wall Street, throughout corporate culture, and even at the bottom of the pile – among the welfare cheats and disability frauds – taking a stab at crime was already “as American as apple pie.”

Aside from the “filthy rich,” hardship-driven crimes will be committed across the socioeconomic spectrum by legions of the on-the-edge desperate who will do whatever they must to keep a roof over their heads and put food on the table.
 
5.  Crackdown on Liberty  As crime rates rise, so will the voices demanding a crackdown.  Not only will fighting crime be a major plank in campaign platforms, it will provide yet another weapon in the crackdown on liberty.  Under the rubric of Homeland Security and with the avowed purpose of fighting a “War on Terror,” Americans have already been stripped of critical Constitutional Rights.  Now, with a new front opening up, a national crusade to “Get Tough on Crime” will be waged against the citizenry.  And just as in the “War on Terror,” where “suspected terrorists” are killed before proven guilty or jailed without trial, in the “War on Crime” everyone is a suspect until proven innocent.

Beyond the warrantless wire taps, computer intrusions, GPS monitoring, stop-and-frisk searches, full-body scanning, TSA groping, and CCTVs or Google Street View watching every move – even the skies will know no limit to surveillance.  Added to the satellite images taken from space, military-style aerial vehicles (UAVs) will soon bring the Afghanistan experience to American neighborhoods, starting with the Miami PD’s purchase of unmanned drones to hover over homes, follow suspects, and track enemies of the state.

6.  Alternative Energy  As gasoline prices speed past $3 a gallon and endless arguments about global warming wear on, the world is expecting the “usual suspects” of solar panels, wind and water turbines, geothermal, and biomass to provide tomorrow’s green, renewable power.  But our real energy future lies on the far side of these interim technologies.

In laboratories and workshops unnoticed by mainstream analysts, scientific visionaries and entrepreneurs are forging a new physics incorporating principles once thought impossible, working to create devices that liberate more energy than they consume.  Inventions that manipulate the hydrogen atom, spark low-temperature, radiation-free nuclear reactions, and capture useful power from the energy fields that surround us, are poised for commercialization.

What are they, and how long will it be before they can be brought to market?  Shrewd investors will ignore the “can’t be done” skepticism, and examine the new trend opportunities to determine the winners and reap the rewards.

And rewards there will be.  For those who are ahead of the times and on top of the trends of 2011 – developing, preparing, and planning for what lies ahead – there will be ample opportunities to be seized.  Fortunes, names, and careers will be made by tapping into the newly emerging energy trends that will come of age in 2011.
  
7.  Journalism 2.0  Though the trend has been in the making since the dawn of the Internet Revolution, 2011 will mark the year that new methods of news and information distribution will render the 20^th century model obsolete.  With universal access to publishing and broadcast technology, web news is able to escape the stultifying and elitist agendas of the mainstream media.  With its unparalleled reach across borders and language barriers, “Journalism 2.0” has the potential to influence and educate citizens in a way that governments and corporate media moguls would never permit.  Of the hundreds of trends we have forecast over three decades, few have the possibility of such far-reaching effects.
  
8.  Cyberwars  Just a decade ago, when the digital age was blooming and hackers were looked upon as annoying geeks, we forecast that the intrinsic fragility of the Internet and the vulnerability of the data it carried made it ripe for cyber-crime and cyber-warfare to flourish.  In 2000, even while downplaying the severity of the risk, governments and e-commerce titans boasted that they could provide ample defenses.

In 2010, every major government acknowledged that Cyberwar was a clear and present danger and, in fact, had already begun.  Stuxnet, WikiLeaks and a host of “Anonymous” battles have disrupted infrastructures, compromised government secrets, planted malware (secret digital agents) deep in the most crucial government, military and control centers, and closed down e-commerce at will.
  
The demonstrable effects of Cyberwar and its companion, Cybercrime, are already significant.  Equally disruptive will be the harsh measures taken by global governments –  in the name of Internet Security and fighting the “War on Terror” – to control free access to the web, identify its users, and literally shut down computers that it considers a threat to national security … however they define it.

9.  Youth of the World Unite  University degrees in hand yet out of work, in debt and with no prospects on the horizon, feeling betrayed and angry, forced to live back at home, with time on their hands and testosterone surging through their bodies –  young adults and 20-somethings are mad as hell, and they’re not going to take it anymore.
  
Educated enough to understand that they will ultimately have to shoulder the debt burden acquired by their governments, as well as suffer from austerity measures, they are also savvy enough to know that if they don’t fight “against the machine” now, they will be run over by it for the rest of their lives.  Filled with vigor, rife with passion, but not mature enough to control their impulses, the confrontations they engage in will often escalate disproportionately.
  
Anyone wondering about what happened to the protest spirit of earlier decades, will discover that all it takes to get youth back into the streets is a developed sense of the personal price that is being exacted from them.  
Government efforts to exert control and return the youth to quiet complacency will be ham-fisted and ineffectual.  Each small success and perceived incidence of government “caving” will lead to intensified protest.  The Revolution will be televised … and blogged, YouTubed and Twittered.

10.  End of The World!  Get ready for Armageddon. The closer we get to 2012, the louder the calls will be that the “End is Near!”
 
Of course there have always been sects, at any time in history, that saw signs and portents proving the end of the world was imminent.  But 2012 seems to hold a special meaning across a wide segment of “End-time” believers.
  
Among the Armageddonites, the actual end of the world and annihilation of the planet in 2012 is a matter of certainty.  Some point to scripture, be it Revelations or Luke, as the source for their prophesies.  Others say it was written in stone over a thousand years ago, in the detailed and sophisticated Mayan/Hopi calendar.  These believers pinpoint the coming of the “end” to occur on 21 December 2012.

Even the rational and informed who carefully follow the news of never-ending global crises, may sometimes feel the world is in a perilous state.  Both streams of thought are leading many to reevaluate their chances for personal survival, be it in heaven or on earth.

For the non-religious/non-prophesy prone, who fear economic, social and military chaos, “Survivalism” – and all that it entails – is a trend that will dominate in the year to come.
 
For the others, repenting, converting, doing penance and praying will take up much of the energy that could otherwise be directed toward securing their safety in the here and now.

11.  The Mystery Trend ... will be revealed the second week of January. 

Rest assured if there are any major developments or events that transpire between now and when the Trends Journal comes out, you will be notified via a Trend Alert.

Best wishes for a joyous holiday season and a healthy and prosperous new year.

Gerald Celente


CC: MMX The Trends Research Institute

Jeremy Grantham on the Federal Reserve Board

Full Transcript: Jeremy Grantham Interview

JEREMY GRANTHAM BARTIROMO, LULU CHIANG, INVESTOR AGENDA, DAVOS, BLOG, CNBC, CNBC.COM, MARKETS, STOCKS, STOCK MARKET, STOCK MARKET NEWS, CNBC STOCK NEWS, CNBC MARKET NEWS,

Posted By: Lulu Chiang | CNBC Senior Producer

cnbc.com

| 11 Nov 2010 | 11:46 AM ET

Legendary investor Jeremy Grantham, Chief Investment Strategist of Grantham, Mayo, Van Otterloo sat down with Maria Bartiromo in an extremely rare interview.

Grantham recommended institutional clients to sell into this rally. He is convinced that stocks are overpriced and cash is now the avenue for investors.

As an investment strategist for the past 30-years, Grantham has long been known for his timely calls.

In 1982, he said U.S. market was ripe for a "major rally."

And in 1989, he correctly called the top of the Japanese economy. In January 2000, he warned of an impending crash in tech stocks which took place two months later. And in April 2007, Grantham said we are now seeing the first worldwide bubble in history covering all asset classes.

When we sat down with Mr. Grantham earlier this week, he expressed worries about various pockets of the global markets, including emerging markets and U.S. stocks. Grantham is betting on a strong cash position and being patient about when to get back into the market.

Check out the complete transcript of Maria Bartiromo’s interview with Jeremy Grantham, or watch the complete interview here.

MARIA BARTIROMO: Great to have you on the program. Thanks so much for joining us.

JEREMY GRANTHAM: Very nice to be here.

BARTIROMO: Time and time again, your writings and your predictions have been right on in terms of investing and where we are in this market. From the tech bubble to beyond. Can you talk to us about where we are today in the stock market and what trends you see developing?

GRANTHAM: What I worry about most is the Fed's activity and — QE2 is just the latest demonstration of this. The Fed has spent most of the last 15, 20 years— manipulating the stock market whenever they feel the economy needs a bit of a kick. I think they know very well that what they do has no direct effect on the economy.

The only weapon they have is the so-called wealth effect. If you can drive the market up 50 percent, people feel richer. They feel a little more confident, and the academics reckon they spent about three percent of that. So, the market went up 80 percent last year. They should be spending 2.4 percent extra of— of the entire value of the stock market, which is about two percent of GDP. And that's a real kicker.

You don't see it because of the enormous counterdrag from the housing market— and— and its complete bust. But, it would have been worse with— without this. The problem is, they know very well how to stimulate the market. But, for whatever reason, they step away as the market gathers steam, and— and resign any responsibility for moderating— a bull market that may get out of control as we saw in '98 and '99 with Alan Greenspan, as we saw in the housing market.

And— I fear that the market will continue to rise. It will be continuously speculative. After all, when you can borrow at a rate that is negative after adjustment for inflation, it's not surprising that you would borrow a lot.

BARTIROMO: So, what are the implications of— of this constant easing and stimulation? You know, it— it seems the numbers are so mind boggling: $600 billion here.

GRANTHAM: They— they (CHUCKLE) are mind-boggling.

BARTIROMO: You know? (CHUCKLE) But, give us the—

GRANTHAM: The consequences are you get boom and bust. You— stimulate in '91. You let it get out of control. You have this colossal tech bubble in '99. Sixty-five times earnings for the— for the growth stocks. Then you have an epic bust. Then, of course, they're panic struck. They race back into battle with immense stimulus with negative real rates for three years.

And you get another— rise of risk taking and everything risky— prospered in '03, '04, '05, '06, '07 until we had what I called the first truly global bubble. It was pretty well everywhere in everything. It was in real estate. Almost everywhere. It was in stocks absolutely everywhere. And— and it was in the bond market to some considerable degree.

And that, of course, broke. They all break. That's the one thing they can't control. You can drive a market higher and eventually — of its sheer overpricing, it will eventually pop. And, typically, it seems to pop at the most inconvenient time. So, we're going to drive this one up, and this time there isn't much ammunition. In 2000, the Fed had a good balance sheet. The government had a good balance sheet.

In '08, it was still semi respectable, and— and now it's not. It's not very respectable at all. So, what are they going to use as ammunition if they cause another bubble and it breaks, let's say, in a couple of years? Then we might have some real Japanese-type experiences.

BARTIROMO: Where are the solutions then, if not this? What do you think ought to be done?

GRANTHAM: I think the Fed is not designed— to have effective tools to deal with the economy. It should settle for just controlling the money supply. And— if it insists, it can worry about inflation. The way you address a weak economy, particularly very substantial excess unemployment is through fiscal policy. You must either bribe man— manufacturers, corporations to hire people who have been unemployed, which they did in Germany. A lot of economists think that's perfectly effective.

Or you must go in there and hire people yourself as a government. Now, I— I believe in crowding out. So, I— I would never do it unless there was clearly quite a few million extra unemployed. I wouldn't go after too many skilled labor because there's never— enough of them to go around. And that does cause crowding out. I would go after the— what I called lightly-skilled workers.

The kind of people who were building the extra million-dollar— sorry— extra million houses in— in '05, '06 and '07. And find— and find jobs for them. We have an infrastructure that is decades behind schedule.

We could insulate every house in the Northeast. These are high-return projects, great— for society in general. And to— to allow people to sit there unemployed. Their skills are deteriorating. Their family morale goes to hell. And— it's a deadweight on society. And you have to remember when— when the government hires someone, he doesn't pay the full price like a corporation does.

He pays about half price because he pays a lot. He, the government— it, the government, pays a lot for someone sitting down unemployed. All the— all the many ways— that unemployed get— get helped plus— the government carries the atrophying of the skills. Society loses that, the longer they're unemployed.

BARTIROMO: So, what should the federal government be doing then? I mean, the housing industry, for example, missing in action. What is it going to take to get housing moving again? What is it gonna take to get businesses hiring again? If it's not the job of the Federal Reserve, what policy should we be seeing coming out of the government?

GRANTHAM: I think the Federal Reserve has— is in a very strong position to move against bubbles. Bubbles are the most dangerous thing— asset-class bubbles that come along. They're the most dangerous to investors. They're also the most dangerous to the economies of— as we have seen in Japan and in 1929 and now here. You've got to stop them.

The Fed has enormous power to move markets. And it— not necessarily immediately, but give them a year and they could bury a bull market. They could have headed off the great tech bubble. They could have headed off the housing bubble. They have other responsibilities— powers. They— they could have interfered with the quantity and quality of the sub-prime event. They chose not to.

In fact, Greenspan led the charge to deregulate this, deregulate that, deregulate everything, which was most— ill advised, and for which we have paid an enormous price. So, they can— they can stop bubbles, and— and they should. It's easy. It's a huge service. What you do now is— is— I like to say it's a bit like the Irish problem.

I wouldn't start the journey from here if I were you when you ask— the way. You— you really shouldn't allow the— situation to get into this shape. You should not have allowed the bubbles to form and to break. Digging out from a great bubble that has broken is so much harder than preventing it in the first place.

Japan has paid 20 years for the price of the greatest land— bubble and the greatest stock bubble in history. Far worse, in my opinion, than the South Sea bubble or the tulip bubble in many ways. The land under the Emperor's Palace really was worth the whole state of California, which is quite remarkable. But, we spent quite a few hours checking it, and it seemed to be true. And the price they paid— to dig out of that has, of course, been legendary.

And we better hope that we don't pay anything like that price. But, that is a risk. It's not— it's not certain that we will escape— without several years of— sub-average growth and— and stress to the system.

BARTIROMO: So, are there policies that the administration could be implementing?

GRANTHAM: It's really Congress. If Congress is bound and determined to— interfere with any proposed stimulus, then— we’re going to have a nice experiment and that is to see how the natural, recuperative powers of the economy stand up to this stress. I think it will probably muddle through. But, it won't be pretty. I— I don't think it will necessarily go backwards. But, it will go forward at a very sub-average rate. And I think that's the course that— would have to be recommended now is— it would be much better if Congress would shape up and— and do some sensible— stimulus program from here.

And it would be sensible if the Fed recognized it doesn't have that— that power, and— and get out of the way. Cranking out the printing press irritates all the foreign countries. Why wouldn't it? It's manipulating the dollar downwards. It's causing inflationary fears.

It's causing— commodities to go through the roof. Not led by gold by the way. Gold has gone up almost exactly the same in the last year as all the other metals. Everything is up. The commodity index in a year is up 35 percent. A weighted average of everything. And that isn't oil because oil is slightly less than that.

But, it is— a very dangerous situation. And it risks currency wars. If we're seen to be pushing down the dollar, when on technical terms— and fundamental terms, I should say, the dollar looks already pretty cheap, and we're clearly driving it down by aiming to increase inflation and— and swamping the system with money, why wouldn't— emerging countries take defensive action? And all of them are.

So, we're already in— in a— in a currency war in a way. It's a mild one, and I hope it stays that way. But, a currency manipulation is exactly the same as tariffs. It's a bit easier to change, a bit easier to back off. But, it has the same effect on global economy if we get into a currency war as if we got into a tariff war, which characterized the period after 1930 when the Smoot-Hawley Tariff Bill was passed. And— and— and they're talking about that even as we speak in— in— in Congress.

BARTIROMO: So, while so many people are talking about the Chinese as far as manipulating their currency, you say the Fed is manipulating these markets?

GRANTHAM: They are. And— and— and China is, of course, manipulating its currency. And it would make life easier for everybody if they would allow the currency to rise a— a little faster. But, it— it certainly weakens our hand enormously to go there and— and shout at them angrily when we're clearly doing the same thing. And this is what the— the German Finance Minister— the point he made two days ago.

BARTIROMO: Yeah. Let me ask you about emerging markets. You recommended an overweight position in emerging markets back in 2000 when not many people were talking about it. And, obviously, it was dead on, the right call as we've seen a huge move in the emerging markets. Do you think there's still room to run in the emerging markets? Or is that becoming a bubble?

GRANTHAM: Incidentally, the emerging market since— 2000 is 3.3 times the S&P. So, every $100 you have in the S&P, you would have had $330 starting from the same point in emerging. And after that incredible discrepancy, which by the way says the main event in investing should be getting the big picture right. It's nice to pick stocks. But, how many good stocks do you have to pick in a whole portfolio to equal that incredible move between the biggest asset class in the world, U.S. equities, and the third or fourth biggest asset class emerging markets?

It— it's these movements between the great asset classes that make you money. And I'm happy to say that that's the group that, GMO, I work with— asset allocation where we are students of bubbles. And— and— and, basically, financial history. It's a very entertaining job, I might say, which has made me forget the question.

BARTIROMO: The question is do you think that is now becoming overvalued? Is there still room to make money in emerging markets?

GRANTHAM: I'm pleased to say two and a half years ago, I did a quarterly letter called the Emerging Emerging Bubble, and I argued that in the following five years, the case for emerging would be seen as so crystal clear— that it could not possibly help but outperform and go to a premium PE. Now, up until then, they had always sold at a discount. Sometimes a substantial discount.

But, I — the case is this, they are growing at about six percent real. Six percent plus inflation. We are growing in the developed world at about two. Before '95, there was no difference. Before 1995. And now it's three to one. My argument two and a half years ago is what a simple bull case? You want to grow? Buy emerging.

You want to be conservative? Buy utility companies or the blue chips of— of— of the developed world. If you're going to grow at six, you're— you're— it is very appealing that you would outperform a world growing at two percent. And the developed world is slowing down. I— I say it has an incurable case of middle-aged spread.

It's just been there, done that. It's a little old. It's a little pastured. Doesn't have the population profile. Emerging does. And they have the attitude, and they have good finances. And— and they're really showing— a— a clean pair of heels to the developed world.

Now, it turns out that you— it's a bit more complicated. You don't actually find a strong correlation between— top-line GDP growth and making money in the market. It— it seems like you should. The fastest-growing countries should give you the highest return. They simply don't. But, there's only four of us— that— that believe that story. Everyone else in the world believes that if you grow fast like China, you'll outperform in the stock market.

And so, I'm reasoning two and a half years ago, everybody will think this way pretty soon. And surely— emerging countries will go to a big premium on— every dollar of earnings that they make. And they're beginning to. But, I think they've got at least a few years left. The bad news for us, because we're fairly purest value managers for mainly institutional clients, is we don't like to play games with overpriced assets.

And that's the world that we're in now. The Fed is driving the S&P, which is overpriced— the Standard & Poor's 500— a broad measure of the U.S. market, is driving it from already substantially overpriced into what I would call dangerously overpriced.

This is about the boundary line. We expect on a seven-year horizon one percent only plus inflation from the U.S. market. And now, as you push it up another 20 percent perhaps in the next year, it becomes dangerously overpriced. A bubble territory and ready to inflate to considerable pain. That's what we have to worry about.

So, you're caught between, if you want to become conservative, you've got to start taking— counteraction now. If— if you want to go with the flow, don't fight the Fed as they say— you should be prepared to speculate on very nimble feet. It's not our style as a firm. But, I think it's— probably a game that you could play with a pretty good chance of winning for— for a few more quarters.

BARTIROMO: A few more quarters. But, at some point— or is it today— would you be recommending selling into the rally?

GRANTHAM: Our institutional clients— sell very gracefully into this rally. We've already started to sell. We're not even— averagely weighted. We're modestly underweighted. And you must remember bonds are even worse than stocks on a seven-year forecast. So, you get caught in this paradox. It's very tempting— and this is what the Fed wants by the way.

It wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is don't play the game and hold money in cash.

And cash has a— a virtue that people don't appreciate fully. And that is its— its optionality. In other words, if anything crashes and burns in value— say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value.

You then have some resources if you have some cash. There's another complexity and that is that we believe that the old-fashioned, super blue-chip franchise companies like Coca-Cola are also much cheaper than the rest of the market. So, if someone put a gun to my head and s— said, "I've got to buy stocks. What should I buy?" I'd say, "Buy two units of the Coca-Colas. They're the cheapest group in— in the equity world. Buttress it with a fairly large dose of emerging markets. They're a little overpriced. But, they've got potential. And— a lot more cash than normal for opportunities should the bubble blow up."

BARTIROMO: What about commodities? I mean, clearly, the story of China and the demand coming out of China has boosted all sorts of commodities. Is that bull run still in place?

GRANTHAM: I have an eccentric view on commodities not necessarily shared by my colleagues or by— almost anybody. And that is we're running out of everything. I think it will become devastatingly clear to everybody. I— I think we went through a great paradigm shift about five years ago and— we'd spent a 100 years with almost all commodities declining. Perhaps oil was about flat in real terms, adjusted for inflation.

But, everything else was declining: copper, corn, and so on. And, now, you look back five years later, you can't see that clearly at all. A lot of them seem like they've been going up for 50 years, a 100 years: copper— iron ore— tin. But— and— and— and oil. Oil has clearly broken out. It spent a 100 years at $16 in— in our currency until 1974. And then it doubled when OPEC started and it's been 20 years trading around 35, plus or minus a lot.

And then I think it doubled it again, and I think the trend line is probably about 75. So, the world has changed. We're entering a period where we're running out of everything. The growth rate of China and India is simply— can't be borne by declining quality of— of resources. And— and I think we're in a period that I call a chain-linked— crisis in commodities.

So, it'll be a crisis in rice. It will triple and it'll come down. But, then— then it'll be followed by one in corn and— and barley and so on. And— and copper will go up a lot, and then that will come down. But, oil will be in crisis mode. From now on, we just better get used to it. So, if you're afraid of inflation, I think— and if you can bring yourself to have a long horizon— and when I say long, I mean ten to 20 years, not the usual ten to 20 weeks— that locking up resources in the ground is a terrific idea.

Or locking up— timber, agricultural land will do just fine. A great inflation hedge. You will win, in my opinion. Very high probability over a long horizon. Now, have these things gotten ahead of themselves in the short term? Quite possibly yes. And that— that's what makes investing so tricky. If they were to break for whatever reason at all in the next year, I— I would suggest that is a great buying opportunity.

BARTIROMO: And—

GRANTHAM: To— to buy here is to trade off the long-term high prospects of winning with quite a reasonable chance of— of— of buying at a— a— a short-term peak.

BARTIROMO: So, is there value in some of the commodities producers? The equities

GRANTHAM: If they have stuff in the ground. If they're just processors, forget them. Shoot them, in fact. Because they're the people who will pay the price of constantly having to raise their prices paying more for their raw materials. But— if they've got stuff in the ground. The oil industry since 2000 has doubled against the stock market. They didn't double because they got brilliant.

They doubled because oil in the ground became worth four times what it was. And that is a wonderful thing for an oil company with good reserves. But, the same if you had mineral reserve. That— that's the play, I think, on commodities.

BARTIROMO: It's extraordinary that people are putting so much money into such low-yielding, fixed income— products. And— ignoring dividend payers, which of course in equities are— are even more competitive than— than the yields that you're seeing. You're seeing no yield in— in fixed income. Is that a bubble?

GRANTHAM: I— I don't call it a bubble because it's not— it's not driven by huge animal stir— spirits. They're not doing it to sell it at a huge profit. They're doing it because they were severely frightened— in the great crunch. It was a devastating event. And it could have c— turned out much worse than it did. It— it should have frightened people. It did frighten people and they'll still frightened for quite a while.

And what the Fed is trying to do is to make cash so ugly that it will force you to take it out and basically speculate. And in that, it's very successful, of course, with the hedge funds. They're out there speculating. Finally, the ordinary individuals are beginning to get so fed up with having no return on their cash that they're beginning to do a little bit more purchasing of equities. And that's what the Fed wants.

It wants to have the stocks go up, to make you feel a bit richer so that you'll spend a little more and give a short-term kick to the economy. But, it— it's a pretty circular argument. For every dollar of wealth effect you get here, as stocks go from overpriced to worse, you will give back in a year or two. And you'll give it back like it— like it happened in— in '08 at the very worse time.

All of the kicker that Greenspan had engineered for the '02, '03, '04 recovery and so on was all given back with interest. The market overcorrected through fair value. The housing market that was a huge driver of economic strength and a— actually masked structural unemployment with all those extra, unnecessary houses being built. All of that was given back similarly at the same time. It couldn't have been worse.

BARTIROMO: What are you expecting from the economy in 2011?

GRANTHAM: (Sigh.) I'm expecting 2011, 2012 to— and— and 20 as far as I can see to be less handsome than it used to be. I think we— we're on a trend lying growth of about two percent. And— I think we'll muddle through— quite well. The problem is in the not too distant future, stocks will be too expensive and they'll crack again. Risky, fixed-income will be too expensive and that will crack again.

And unless we're lucky, we will have yet another crisis without being able to lower the rates 'cause they'll still be low, without being able to issue too much moral hazard promises from the Fed because people will begin to find it pretty hollow. Cycle after cycle, the Fed is making basically— is flagging the same intention. Don't worry, guys. Speculate. We'll help you if something goes wrong. And each time something does go wrong and it gets more and more painful.

And, eventually, even— even— fairly unintelligent investors might get the point that this is not a good game to play indefinitely. I am impressed, however, how eager we have been to return to the game. We got a— a practically mortal blow, and, yet, everyone was back in there swinging last year. It wasn't just that the S&P went up 80, which I did call by the way. I said it would race up to 1,100. And— but, it was speculative so the— the junky part of the market went up 120 percent. This is a formidable— recognition of what the Fed can do when it wants to.

BARTIROMO: What about the dollar? Where do you see it?

GRANTHAM: The dollar is on fundamental purchasing power— it's a— a fairly cheap currency. And— as long as there's QE three, four, five and six, you'd have to bet that it's more probable that it will go down. Now, if it stirs up— a currency war, all bets are off. We haven't had one since the 1930s. We— who knows how that will play out? That's one thing that can completely change the game, and— and— very hard for me or anyone to guess what that would do.

But, if we avoid that, I think you have to count on the dollar being at least irregularly weaker until we finish the Q game, which is ma— basically just running a printing press and using it to push down artificially— the bond rate. And let me point out that the Fed's actions are taking money away from retirees.

They're the guys, and near retirees, who want to part their money on something safe as they near retirement. And they're offered minus after-inflation adjustment. There's no return at all. And where does that money go? It goes to relate the banks so that they're well capitalized again. Even though they were the people who exacerbated our problems.

And, hopefully, the redeeming feature in that infamous trade is that your corporations go out there, borrow money, build factories, hire people, which they're not doing because consumption is weak and because they were also terrified by the crunch. I— I think, therefore, under these conditions, low rates is actually hurting the economy. It's taking more money away from people who would have spent it —retirees — than are being spent by passing it on to financial enterprises and being distributed as bonuses to people who are rich and, therefore, save more.

So, I think it's a— a— bad idea at any time and a particularly bad idea now.

BARTIROMO: So, final question here. What are you recommending to institutional clients today? How— how should they be investing?

GRANTHAM: We recommend a very heavy overweight in— in the great franchise companies: the Coca-Cola’s , Johnson and Johnson's . I'm not recommending those two names. They're just examples. We're recommending a modest overweight in emerging, an underweight— in everything else. Extra cash reserves and— patience. But, I think if you're willing to speculate, you might find that this is an interesting one more year to speculate.

BARTIROMO: And—

GRANTHAM: But, be aware the ice is thin. It's overpriced. It's a dangerous game. Don't believe that it's somehow justified. It is not justified by anything except the crazy behavior of the Fed.

BARTIROMO: You said, "The ice is thin." In terms of these cracks, how significant a crack would you expect when, in fact, we do see a crack?

GRANTHAM: The trouble with bubbles is when they go, it's very hard to know how painful it will be. But, typically, they go racing back to fair value. So, if this market goes to 1,500 in a couple of years, by then, fair value might be at 950— 950 is painfully below 1,500. And by the time it gets there, the mysteries of momentum in— in the market— everyone likes to go in the same direction, and they shout, "Fire."

It— it's— usually the case that it doesn't stop at fair value— 950. So, it might go to 700. And— and you're talking another market that halves. It halved in 2000, and we thought it would by the way. We predicted a 50 percent decline. It halved this time in— in '08, '09. And I think it might very well halve again if it gets back to 1500.

How Will It All End?

Faber: Nations Will Print Money, Go Bust, Go to War…We Are Doomed

Posted By Andrew Mellon On May 23, 2010 @ 5:28 am In Financial Services

Today the leading Austrian economic think tank, the Ludwig von Mises Institute ^[1] held a conference at the University Club in Manhattan in which Marc Faber, famed contrarian investor and publisher of the “Gloom, Boom and Doom Report” gave his perspective on the financial crisis and his outlook for the future.

Below are his main points and entertaining quotes:

• Central banks will never tighten monetary policy again, merely print, print, print
• Bubbles used to be concentrated in 1 sector or region in the 19th century, but off of the gold standard this concentration has ended
• “The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”
• “Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this
• US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US
• “You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004
• Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked
• The next 3-5 years will be highly volatile

• Americans must re-think what constitutes a safe asset; in a “traditional” period, one would generally rank from most to least safe assets: cash, Treasuries, corporate bonds, equities, commodities
• However, last year Economist Gregory Mankiw ^[2] articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum
• Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”
• As such, cash and longterm bonds will be a bad place to hold one’s money; equities are an avenue to preserve wealth (but this is a risky proposition, given the effects of rampant currency depreciation); precious metals are a sound place for wealth preservation
• As for the US being the most important economy for the world, there is a sea change going on right now; recently car sales in emerging economies (such as Brazil, China) are outpacing those of the US, Europe and Japan; oil consumption in emerging markets is increasing, while in the developed world it is contracting; the whole world does not depend on American consumption anymore – 60% of total exports are now going to the emerging world when one includes E. Europe; the US is still a large economy but it is not growing, while the growth in the emerging world is and will continue to be strong
• “People still think of emerging market economies as poor cousins, but because 80% of the world’s people are here, in aggregate the consumption is huge.”; these are not saturated markets and they are growing rapidly
• “Everybody should have 50% of their money in the emerging world, outside the West.”; people should also keep the custody of their assets overseas
• Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money
• The drivers of growth in the emerging world will be the urbanization of India and China; stocks won’t necessarily rise in the short term, but there will be significant growth in Asia in the long run
• The shift in economic power from West to East has been remarkable in speed, largely due to the rapid industrialization of the emerging world and the speed at which information travels today
• There will be a massive increase in resource-intensive industries and new export markets, met with increased volatility and tension around the world
• The supply/demand characteristics of oil are great due to the need for oil in China, India, rest of Asia
• Oil is the top priority for China, as they are now a net importer
• US has a huge strategic advantage over China given that we have access to our own oil, and that of Mexico, Canada, the Middle East and off the western Coast of Africa, in addition to the ability to travel on the Atlantic or Pacific Ocean; meanwhile, China sources 95% of their oil from the Middle East, and while they are building pipelines throughout Eastern Europe for example, their oil supply points in terms of ports for example are limited, and the US has defense bases surrounding these areas; Chinese subs could sink our boats however; the Russians are also not happy about our forces being in the region, and tensions will grow as the need for natural resources in these nations grows
• Eventually, there will be war and one will want physical commodities “not paper from UBS or JP Morgan”
• In war, cities will not offer safety because one can get bombed, water may be poisoned, electricity shut off; instead, one should buy a house in the middle of nowhere/on the countryside
• The tremendous economic Sophism of the day is that a nation can print its way into prosperity; “If debt and money printing equaled prosperity then Zimbabwe would be the richest country.”
• “Mugabe is the economic mentor of Ben Bernanke.”
• Our fiscal situation is much more horrendous than it is made out to be; total debt (public and private) as a percentage of GDP counting unfunded liabilities is an astounding 800% of GDP, more than double that during 1929
• Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money; US government leaders will try to postpone the hour of truth, pushing the problems off till succeeding Presidents and Congressmen
• If deficits didn’t matter as many like Economist James Galbraith ^[3] argue today, why should citizens even pay taxes? It would make everyone happier if they didn’t
• Faber is sure that the economists in academia are intelligent and they study the textbooks hard, but they study the wrong textbooks and are totally inconsistent in their philosophy
• In an environment of money-printing and high volatility that exists in the US and that will be created by future policy, physical gold is the best thing to own
• Once currency depreciation does take place, stocks may become very cheap, as happened when the Mexican peso depreciated by 95% in the early 80s, as the fund managers invested in Mexican equities completely undervalued them after currency collapse
• In a nutshell Faber says he is essentially bearish on everything, though he favors commodities (especially physical precious metals and agriculture), owning a house in the countryside, equities in emerging markets tied to resources (especially necessities like water and oil) and healthcare, and most of Asia including especially Japanese stocks
• There is no means of avoiding a total collapse in the West; at the first train station in 2008, the financial system went bust but didn’t die, at the next station nations will go bust (though this could take 5-10 years or less), but first they will print money as this is the most politically tenable option, and ultimately the world will go to war
• All of us will be doomed

Bear in mind that Faber said all of this quite matter-of-factly.

Even if you disagree with his points on the trajectory of the West, it cannot hurt to understand and prepare for the worst case scenario while still hoping for the best.