GMO’s Jeremy Grantham says those waiting for the U.S. to return to the 3%+ growth rates it has averaged over the past hundred years are going to be disappointed.
“The U.S. GDP growth rate that we have become accustomed to for over a hundred years … is not just hiding behind temporary setbacks,” Grantham writes in his third-quarter letter. “It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.”
Grantham estimates that GDP growth going forward will be about 1.4% per year, using conventional measures. But he says that doesn’t even tell the whole story. Current measuring techniques don’t properly account for the cost of resources. Resources costs have been rising by 7% per year, using a conservative estimate, since 2000, Grantham says, adding that that figure “might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together. Of course, with extraordinary, innovative breakthroughs we might do even better, but we certainly shouldn’t count on that. … Excessive optimism and doing little could be extremely dangerous.”
Accounting for the resource issue, GMO estimates U.S. growth will be about 0.9% through 2030, and then decrease to 0.4% for the next two decades. In addition to rising resource costs, Grantham says declining population growth will also inhibit growth. He offers a variety of intriguing data about population, productivity, and economic growth, as well as some insight into the impact that “fracking” to obtain natural gas could have on the economy. You can read the full letter on GMO’s website.
As 2013 approaches, top fund manager Donald Yacktman is focusing on high-quality stocks, as well as some much-maligned contrarian plays.
Yacktman tells Forbes that he likes stocks with high returns on assets, which generally means that the businesses have low capital requirements, nice market share, and the ability to fare well in good times or bad. An example is consumer goods giant Procter & Gamble, which makes such well known brands as Tide and Pampers. The firm generates tons of cash and also offers a nice dividend, two key things Yacktman looks for. “We are in an environment where PepsiCo and Procter are like AAA bonds, and the world is not rewarding you enough to go to actual AAA or AA bonds,” he says.
Yacktman also likes contrarian picks like C.H. Robinson, Research in Motion, and Hewlett-Packard. “What we try to do is to find the ideal business, which is like a beachball being pushed under the water, and the water is rising. Then, all you have to do is have patience. Eventually the pressure will come off, but the longer it takes, the bigger the pop when it finally does happen.”
When assessing a business, Yacktman uses a 10-year time horizon. “Most people just aren’t that patient. That’s one of the challenges in the investment business today,” he says. “The average stock market fluctuates about 50% from low to high in 12 months, and lower and lower transaction costs encourage speculation.”
Lakshman Achuthan of the Economic Cycle Research Institute is standing by his previous call about the U.S. having entered recession in the middle of 2012. Achuthan tells Bloomberg Surveillance that, while home prices have increased, “that does not mean you don’t have a recession.” He also says rising housing prices do “not mean an upturn in construction activity.” He says recessions are defined using four areas: production, employment, income, and sales. Both production and income peaked in July, he says.
Validea CEO John Reese says that investors who are worried about the fiscal cliff shouldn’t bail on stocks.
“History shows that even if we do go off the cliff, the consequences might not be as dire as many expect,” Reese wrties in his latest Forbes.com column. “A recent study by O’Shaughnessy Asset Management, the firm headed by quantitative investing guru James O’Shaughnessy, found that high or increasing tax rates [which the cliff would trigger] have historically had little impact on the stock market.”
For those whose fears are leading them to consider jumping out of stocks entirely, Reese says to “consider an option that can let you stay exposed to potential market gains while giving a bit of downside protection. It involves focusing on what you might call ‘Earnings All Stars’ — firms that have lengthy histories of increasing earnings per share, through both good times and very bad times.” He looks at a handful of such firms, including Tractor Supply Company.
Consumer confidence remains tepid but has been rising, recently hitting its highest level in four years. Is that good news for stocks? MarketWatch’s Mark Hulbert says no.
Hulbert analyzed three decades worth of confidence data and stock returns, and found that the biggest monthly jumps in confidence tended to be followed by sub-par stock returns, he writes. He also found that changes in the stock market tend to have a bigger impact on confidence than confidence does on the market. When stocks rise, confidence jumps, and when stocks fall, confidence falls.
“What these statistical results mean: Consumer confidence tells us more about how the stock market has already performed than it does about the future,” Hulbert says. “But insofar as consumer confidence tells us anything about the future, it’s that stronger readings are more negative than positive for the stock market. … The bottom line? Don’t get carried away by the apparently good news that consumer confidence is at its highest level in more than four years.”
Yale housing guru Robert Shiller says he’s still not convinced the housing recovery is real. Shiller tells CNBC that some 10 million homeowners are still underwater on their mortgages, and many will end up in foreclosure. Those foreclosures will add inventory to the housing market, he says, and economic risks at home and abroad are also a concern. “I still think it’s a risky market,” he says. Shiller also says that the potential elimination or reduction of the mortgage deduction as part of fiscal cliff negotiations could lead to a big shift from buying homes to renting homes.
Each week, we take a look at which stocks John Reese’s Validea.com Guru Strategy computer models have newfound interest in, and which they have soured on. Here’s a look at some of the stocks John’s strategies have upgraded or downgraded today.
Warren Buffett says Congress should enact a law establishing a minimum tax rate on the wealthy right now.
In an op-ed piece for The New York Times, Buffett disputes the claim that higher tax rates on the rich discourages investment. “Between 1951 and 1954, when the capital gains rate was 25 percent and marginal rates on dividends reached 91 percent in extreme cases, I sold securities and did pretty well,” Buffett says. “In the years from 1956 to 1969, the top marginal rate fell modestly, but was still a lofty 70 percent — and the tax rate on capital gains inched up to 27.5 percent. I was managing funds for investors then. Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.”
“Let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” Buffett says. “The ultrarich, including me, will forever pursue investment opportunities.”
Buffett says broader changes need to be made to the tax code, but he says Congress shouldn’t wait to establish a minimum tax on the wealthy. “The [broader] reform of such complexities should not promote delay in our correcting simple and expensive inequities,” he says. “We can’t let those who want to protect the privileged get away with insisting that we do nothing until we can do everything.”
Forbes’ Kenneth Fisher says his top stock to buy in 2013 is pharma giant Pfizer.
“It has near endless top-notch brand names, and a stream of new products will capture growth from an aging developed-world demographic plus new emerging middle classes overseas — all wrapped in a classically cheap stock,” Fisher says for the 2013 Forbes Investment Guide.
As for Fisher’s top pick to avoid, it’s food retailer Safeway. “What won’t rise in a bull market falls in downdrafts,” he says, adding that he thinks the firm’s CEO “badly misreads his consumers. Bad merchandising, getting outdanced by competitors of all genres, levered and unionized!”
Wells Capital Management’s Jim Paulsen sees a number of positive signs for the U.S. economy. Paulsen tells Bloomberg TV that third-quarter growth may have been around 3%, and that a number of factors — housing, job creation, and lending activity among them — are providing the economy with a boost. He sees growth coming in at about 3% in 2013.