Edward Harrison — Grantham: The essence of every bubble is wonderful fundamentals, euphorically extrapolated

Jeremy Grantham sat down with Consuelo Mack at WealthTrack to expand upon his recent bullish comments about the US markets. However, far from being bullish, the essence of Grantham’s comments were extremely bearish, suggesting investors could expect only a couple of percent real return over the next couple of decades in US equities. The veteran investor also made bearish comments about the US bond market. His advice is to rotate out of US equities and pile into emerging markets, as much as you dare.

It must be noted first that Jeremy Grantham has called a few stock market bubbles — the tech stock bubble of the 1990s and the global credit bubble of the 2000s, to be sure. And he was spot on in timing the 2009 market bottom. See my February and March 2009, Jeremy Grantham: “Pull the trigger” and More bullishness from Jeremy Grantham.

So when Grantham, Co-Founder and Chief Investment Strategist at Boston-based fund manager GMO, talks of how to deal with a market melt-up, we should listen. In contrast to his written piece a couple of weeks ago, the views Grantham expressed in his WealthTrack interview show someone who is quite concerned about overvaluation in US markets, both in absolute and relative terms. I want to pick apart what he said and follow it with the video of his conversation.

Interesting tidbit.

He says,“the world has changed in many important ways I think,” suggesting he now believes corporate profit margins will not mean revert — that labor will not receive the same share of profits that it historically has done.

Demand problem that will be viewed as an over-supply problem.

Credit Writedowns
Grantham: The essence of every bubble is wonderful fundamentals, euphorically extrapolatedEdward Harrison

Mark Weisbrot — The International Monetary Fund’s world economic outlook in theory and practice

The International Monetary Fund (IMF) released its biannual “World Economic Outlook” (WEO) today, presenting a 300-page overview of the world economy and where it might be going. The Fund is one of the most powerful and influential financial institutions in the world. Despite the fact that this flagship publication, and the Fund’s hundreds of PhD economists, missed the two biggest asset bubbles in US and world history (the stock market bubble in the late 1990s and the housing bubble that triggered the Great Recession), the WEO is taken very seriously and contains much valuable data and analysis. 

The fall WEO is relatively upbeat for the world economy in the short run but is more worried about downside risks in the medium term. It lists a number of concerns that anyone who cares about social or economic justice, or progress, would be concerned with, such as:

The analysis is out of paradigm with MMT, but the post is interesting from the point of view of what the IMF is concerned about. Apparently, the top is getting somewhat jittery about rising social dysfunction and increasing political dissatisfaction.

Real-World Economics Review Blog
The International Monetary Fund’s world economic outlook in theory and practice

Mark Weisbrot | Co-Director with Dean Baker of the Center for Economic and Policy Research in Washington, D.C.

Raúl Ilargi Meijer — Debt Rattle January 6 2016

This does not portend well for 2016. It has the look and feel of wheels coming off socially, politically, and economically. This is just a representative sample.

The Automatic Earth
Debt Rattle January 6 2016
Raúl Ilargi Meijer

Bill McBride — The Future is still Bright!

Early this year I wrote The Future's so Bright .... In that post I outlined why I was becoming more optimistic, even though there might be too much deficit reduction in 2013. As I noted, "ex-austerity, we'd probably be looking at a decent year" in 2013. And of course - looking forward -Congress remains the key downside risk to the U.S. economy.

It still appears economic growth will pickup over the next few years. With a combination of growth in the key housing sector, a significant amount of household deleveraging behind us, the end of the drag from state and local government layoffs (four years of austerity mostly over), some loosening of household credit, and the Fed staying accommodative (even if the Fed starts to taper, the Fed will remain accommodative).....

Calculated Risk
The Future is still Bright!
Bill McBride

Bill McBride — Economic Outlook: Where are we?

So there are some reasons for a little optimism, but it is difficult to make projections without knowing the budget agreement.

Calculated Risk
Economic Outlook: Where are we?
Bill McBride

I will be on "The Kudlow Report" tonight at 7pm EDT

I will be on The Kudlow Report on CNBC tonight at 7pm EDT.

-Mike Norman