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I tend to dole out my man-crushes -- for the uninitated, that's when one gentleman idolizes another, in a strictly platonic fashion -- very selectively. For a time, I strove to become Pete Sampras. Somewhere along the line, I was enamored of Steve McQueen. Well, those schmucks better move over. Following his deeply well-reasoned interview on CNBC yesterday, I might just add Jeremy Grantham's name to my man-crush roster.
Sure, he's a bit old, but ...
For years, Grantham has published brilliant periodical letters as chairman of the $100+ billion investment firm GMO. But it wasn't until this interview that I realized exactly how much the guy was working at another level. He's full of that ever rarer and more precious commodity: common sense.
In just less than 30 minutes, Grantham managed to intelligently dish on all things financial, including QE2, the state of capital markets, the theoretical versus the actual role of the Fed, and nearly everything in between. He took extraordinary complex topics and whittled them down to their most elemental levels for regular listeners like me.
Here are just a few gems from the CNBC interview:
On the real danger of the Fed:
The problem is they know very well how to stimulate the market. But, for whatever reason, they step away as the market gathers steam, and ... resign any responsibility for moderating -- a bull market that may get out of control as we saw in '98 and '99 with Alan Greenspan, as we saw in the housing market.
Cranking out the printing press irritates all the foreign countries. Why wouldn't it? It's manipulating the dollar downwards. It's causing inflationary fears. It's causing commodities to go through the roof. Not led by gold, by the way. Gold has gone up almost exactly the same in the last year as all the other metals. Everything is up. The commodity index in a year is up 35%.
On the future of the U.S. dollar:
[A]s long as there's QE three, four, five and six, you'd have to bet that it's more probable that it will go down. Now, if it stirs up a currency war, all bets are off. We haven't had one since the 1930s. We -- who knows how that will play out? That's one thing that can completely change the game, and ... very hard for me or anyone to guess what that would do. But, if we avoid that, I think you have to count on the dollar being at least irregularly weaker until we finish the Q game, which is ... basically just running a printing press and using it to push down, artificially, the bond rate.
On the value of holding U.S. dollars:
Cash has ... a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value -- say, the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is, is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value.
You then have some resources if you have some cash.
On bubbles and the Fed:
I think the Federal Reserve ... is in a very strong position to move against bubbles. Bubbles are the most dangerous thing -- asset-class bubbles that come along. They're the most dangerous to investors. They're also the most dangerous to the economies of [developed nations] -- as we have seen in Japan and in 1929 and now here. You've got to stop them.
The Fed ... could have headed off the great tech bubble. They could have headed off the housing bubble. ... They could have interfered with the quantity and quality of the subprime event. They chose not to.
On the current bubble forming:
The Fed is driving the S&P, which is overpriced -- the Standard & Poor's 500 -- a broad measure of the U.S. market, is driving it from already substantially overpriced into what I would call dangerously overpriced.
The trouble with bubbles is when they go, it's very hard to know how painful it will be. But, typically, they go racing back to fair value. So, if this market goes to 1,500 in a couple of years, by then, fair value might be at 950 -- 950 is painfully below 1,500. And by the time it gets there, the mysteries of momentum in the market -- everyone likes to go in the same direction, and they shout, "Fire!"
It is usually the case that it doesn't stop at fair value -- 950. So it might go to 700. And [then] you're talking another market that halves. It halved in 2000, and we thought it would, by the way. We predicted a 50% decline. It halved this time in '08, '09. And I think it might very well halve again if it gets back to 1,500.
See what I mean? The guy can deliver a concise, but educated (and humble) opinion. Classy dude.
Investing like Grantham
You don't need to tune in to the entire 30-minute interview to hear what Grantham's doing right now. He recommended that, in addition to holding lots of cash, investors should go after big, blue-chip, dividend-paying giants like Coca-Cola (NYSE: KO ) and Johnson & Johnson (NYSE: JNJ ) . He didn't get into a lot of details, but it seems his firm is doing precisely that.
To that short list, I'll add two of my own recommendations and personal holdings: Nike (NYSE: NKE ) and PepsiCo (NYSE: PEP ) . Just like the prior two companies, both of these businesses are stodgy, well-established names with reasonable price tags and very nice fundamentals. But I think the latter two have even greater promise in the developing world, an area of the market that Grantham mentioned still had some room to grow. Why not get a little bit of everything while you can?
Either way, I highly recommend that Fools tune into the entire interview here -- it's great stuff. You, too, might find yourself with a new man-crush. Got a different one? Share below.