In Jeremy Grantham’s latest quarterly newsletter (which is always a must-read, IMHO), he says he’s throwing his hat in the deflation camp for the near future, at least:
Well, I, for one, am more or less willing to throw in the towel on behalf of Inflation. For the near future at least, his adversary in the blue trunks, Deflation, has won on points. Even if we get intermittently rising commodity prices, which seems quite likely, the downward pressure on prices from weak wages and weak demand seems to me now to be much the larger factor. Even three months ago, I was studiously trying to stay neutral on the “flation” issue, as my colleague Ben Inker calls it. I, like many, was mesmerized by the potential for money supply to increase dramatically, given the fl oods of government debt used in the bailout. But now, better late than never, I am willing to take sides: with weak loan supply and fairly weak loan demand, the velocity of money has slowed, and inflation seems a distant prospect. Suddenly (for me), it is fairly clear that a weak economy and declining or flat prices are the prospect for the immediate future.
The emphasis on government debt reduction in Europe is what apparently flipped Grantham – he continues:
The worrying news is that most European countries, led by Germany (not surprisingly in this case), are coming on more like Hoover than Keynes. More surprisingly, Britain and half of the U.S. Congress are acting sympathetically to that trend, which is to emphasize government debt reduction over economic stimulus. Yet, after a relatively strong initial recovery, the growth rates of most developed economies are already slowing, despite the immense previous stimulus. You don’t have to be a passionate follower of Keynes to realize that to rapidly reduce defi cits at this point is at least to flirt with a severe economic decline. We can all agree that we had a financial crisis, a drop in asset values, and an economic decline, all three of which were global (although centered in the developed countries), and all three of which were the worst since the Great Depression.
Grantham made a very prescient call right around the March 2009 lows that the S&P was tremendously undervalued, and due for a rally. At the time, he said he believed the S&P’s fair value was around 900 (it was trading in the high 600’s when he wrote this):
Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.
Ironically he did basically catch the low! So, with open arms, we welcome Grantham to the small but growing deflation camp!
Looking to fine tune your Deflation Investing Strategy? Here’s some further reading for you:
- The Globe and Mail: Deflation requires new strategy for investors
- Deflation Investing Strategy – 5 things you should know
Hat tip to good friend and reader Jonathan Lederer for the tip on this story!