FactSet StreetAccount Summary – US Weekly Recap: Dow (0.31%), S&P (0.44%), Nasdaq (1.70%), Russell 2000 (3.11%)
U.S. Secular Growth: Donkey or Racehorse? (Jeremy Grantham)
A few extracts from a letter well worth your time:
(…) Negligible growth in population and man-hours offered to the workforce is the most important brake to growth, with a net drop of fully 1% from the pre-2000 trend. Less capital investment and growing income inequality do not help. But the most underappreciated important factor, in my opinion, is the drag on growth from the loss of sustained cheap energy as oil has moved from a $16/barrel 100-year trend pre-1972 to today’s approximate $75/barrel trend price. (…)
I am still just about certain about three things: first, our secular growth rate in the U.S. is indeed about 1.5% (at least as stated in traditional GDP accounting, wherein expensive barrels of oil increase GDP; perhaps closer to 1% in real life); second, economists move their estimates slowly and carefully in order to stay near the pack and minimize career risk (despite the recent IMF heroics); and third, that we do not like to give or receive bad news and, when in doubt, we tend to be optimistic. (…)
The key point here is that in our strange, manipulated world, as long as the Fed is on the side of a strong market there is considerable hope for the bulls.(…) Yellen, like both of her predecessors, has bragged about the Fed’s role in pushing up asset prices in order to get a wealth effect. Thus far, she seems to also share their view on feeling no responsibility to interfere with any asset bubble that may form. For me, recognizing the power of the Fed to move assets (although desperately limited power to boost the economy), it seems logical to assume that absent a major international economic accident, the current Fed is bound and determined
to continue stimulating asset prices until we once again have a fully-fledged bubble. And we are not there yet.
To remind you, we at GMO still believe that bubble territory for the S&P 500 is about 2250 on our traditional assumption that a two-sigma event, based on historical price data only, is a good definition of a bubble. (…)
We could easily, of course, have a normal, modest bear market, down 10-20%, given all of the global troubles we have. If we do, then the odds of this super-cycle bull market lasting until the election would go from pretty good to even better. So, “2250, here we come” is still my view of the most likely track, but foreign markets are of course to be preferred if you believe our numbers. Stay tuned.
BTW, Grantham’s 2250 bubble target would be right where the Rule of 20 would also see it as a bubble based on current earnings and inflation parameter:
Getting to 2250 from 2100 is +7.1%. Retreating to 1800 from 2100 is –14.2%. Here again, Grantham’s correction range would be validated by the Rule of 20.
In all, the bubble blowout would give +7.1%. The “easy” correction would take –14.2%. Pretty simple to calculate this unfavorable reward/risk ratio!