GMO & Night of The Living Fed

[Zorrofan]

It appears that Jeremy Grantham is not a fan of the FED or of QE2.

 

http://www.gmo.com/websitecontent/JGLetter_NightofLivingFed_3Q10.pdf

 

It does raise the question: if things are improving so much why do we need QE2? I have read/heard arguments for and against QE2. It seems to me that this will do nothing to stimulate economic growth (the FED is pushing on a string given that more debt is not the answer to a balance sheet recession) and longer term the added debt is only going to cause more problems. The market however is pricing in QE2 as if the economy will recover much faster than I think is realistic. Are we setting up for a major correction or have I become too much a permabear?

 

cheers

Zorro

[goldfinger]

I am no permabear but have become very bearish over the last few months. What I am seeing out there, the rally included, only confirms this sentiment day after day. I think we are overdue for much more than just a correction...

It seems to me that the FED's QE2 move is actually a sign of panic and that it may already be realizing (if one listens to some of the FED's execs speak) that markets' reactions may actually bring fast undesired effects.

1. It seems doubtful that companies will be able to pass on increasing costs to consumers. Commodity markets are exploding upward putting pressure on margins. ArcelorMittal and Kmiberly Clark are talking about this already (http://www.bloomberg.com/news/2010-10-26/kimberly-clark-profit-falls-company-lowers-full-year-earnings-forecast.html?cmpid=yhoo) among others. It will take time to show up as we are barely done with adjustments companies made to cope with the crisis.

2. Currency and trade wars risks have been increased dramatically.

3. Markets are betting on the FED to deliver and inflation expectations or fears may be changing.

In the meantime, consumers will not borrow more because rates are slightly lower and the housing market is going down again rapidly with record inventory (official + shadow). This only is enough to change consumer psychology and QE2 won't change that (it actually may decrease confidence in the FED and the government).

I do not think we get a 4 or 5 years "recovery period" this time like after the dotcom crash. Data are slowly confirming a big slowdown to contraction again.

We may get more than a correction pretty soon, why not after the elections and when q3-q4 data provide a clear picture. QE2 may actually be one of the catalysts for a plunge if it brings obvious disappointments to the investment community.

[Myth465]

I am raising cash, I think one bump and we go down. I dont know how big the correction will be, but 10% - 20% cash does help a man sleep at night.

[Guest Bronco]

Myth,

 

I myself have mostly cash outside my retirement accounts (wish it was more!).  Some play money invested in CY calls, ITEX, BH, and FFH but no much else.

 

Everything else is in Loews.  But considering they have $4B in cash at the parent level, I sleep at night as well.  As Buffett says, your stock represents a piece of the underlying business (or at least how it should be).

 

 

[Myth465]

Just finished this. Its outstanding and should be required reading for investors and citizens. Grantham would make an awesome Fed Governor.

[twacowfca]

Just finished this. Its outstanding and should be required reading for investors and citizens. Grantham would make an awesome Fed Governor.

 

 

Awesome article!  Possibly the best macro perspective I've ever read!  Thanks very much, Zorrofan.