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Jeremy Grantham’s Take on Economic Growth

Widely watched investor Jeremy Grantham has turned decidedly negative in his portfolio recommendations and remains disenchanted with U.S. economic leadership.

In his newly released quarterly letter to investors, asset manager GMO’s chief investment strategist has revisited his attention-getting early 2009 letter predicting “seven lean years.” At that time Grantham forecast 2% average annual GDP growth, down from a normal 3.5% rate. But economic performance since that time has been so weak that it would now take an economic miracle to reach a 2% annual growth rate, he says.

“Even to average 1.5% growth for the seven years from 2007 to 2014 would take 3% a year growth, which seems at the upper end of a reasonable range,” Grantham writes.

Grantham argues “the extra 4% to 5% of home ownership that resulted from sustained overstimulation must revert to its economically justified level,” meaning “house prices are unlikely to roar back.” Rather, “a multi-year sustained overrun on the downside has normally followed the breaking of a major bubble like the one just witnessed.”

Grantham sees another bubble-like recent development – “freakishly high corporate profits” – as likely to end badly: “A sub-average economic recovery, threatening to become painfully sub-average, has not stopped corporate profits from quickly rising to a level that is about as high as they have ever gotten.”

Following the U.S. debt ceiling agreement, which has initiated a new era of decelerating government spending, Grantham expects pressure on profits to intensify.

In his signature commentary on issues of leadership, Grantham discusses the propensity of Western political leaders to kick the can down the road. Calling his comment “Danger: Children at Play,” Grantham laments that the U.S. government allowed a sharp rise in its debt-to-GDP ratio over the past 10 years, then forced a last-minute choice between a cut in government expenditures at a time of economic weakness versus allowing a technical default that would damage the dollar and signal to the world “that the U.S. … is not a serious country and is probably past its prime.” Decrying both congressional Republicans “blackmailers” and “President No-Show,” Grantham argued our debt-ceiling performance makes the U.S. look like a “Banana Republic.”

Whether you agree with Grantham or not,  there are still many issues that create uncertainty and troubles for the economy in the future.  You should look to more income as an investment solution.  This can be accomplished by more dividends stocks and covered calls.  More importantly, you must protect your capital from wild market swings like we have seen in the markets lately.  This is where you need to use Blanket Puts to protect your investments from market corrections.  These are the investment strategies you will find in the Get Rich Monthly Income Plan.

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