Upon that cheery note, Grantham turned the microphone over to FPA Capital's Robert Rodriguez, who started by describing the financial markets as a "vast wasteland of value" that represented a "time for extraordinary protection." Before going any farther, Rodriguez was quick to mention that his firm had just announced it would close his own FPA Capital fund "because we can't find anything." Rodriguez has about 37% of FPA Capital's assets invested in cash.
Unlike Grantham, Rodriguez didn't see any near-term apocalypse looming. "We don't expect stocks to collapse this year," he told attendees. "It's very hard to deploy capital rationally. Earnings [growth] will decelerate rapidly in 2005 and 2006 and will start to approach the rate of nominal GDP growth. If interest rates rise, it will be tough for stocks."
But there are numerous other problems, like the threat of terrorism, on the horizon. "People are not being compensated adequately for unquantifiable risk," Rodriguez contended.
It was a sign of the times that the only modest bull on stocks in the group was the fixed-income expert, Deane. But even he was cautious about the structural risks embedded in the foundations of the financial systems. "I have a funny feeling that the carry-trade is bigger than it was two or three months ago," Deane warned, "The spread is the largest in history. The wind has been at your [equity investors'] back since 1981 and now it isn't. People really need to stress-test portfolios." Some bull, that Deane.
Grantham, the chief grump, quickly brought up two issues related to the carry-trade threat: debt and hedge funds. Emerging markets have been one of the few sectors he has favored. "Debt could really mess up emerging markets, which are now at 14 times earnings," he declared.
Like many sophisticated investors, Grantham was shocked that the Indian stock market could drop 25% in two short days this past spring. How did it happen? "Foreign hedge funds," he explained, adding that some emerging markets have declined 18% this year on rising earnings.
The less histrionic Rodriguez was far more subdued and patient. "There's this feeling out there that you have to do something," he warned. "You don't have to do something. You can wait. We're waiting until the investment odds are structured more in our favor."
While that was undoubtedly sound advice, the final word was Grantham's. He expressed what he called "nostalgia for March 2000." Back in those good old days, REITs yielded 9%, not 5.5%, and Treasury Inflation-Protected Securities were at 4.2%. Admitting that virtually all the bulls are now in hibernation, he lamented that there was no one left "to insult."
As someone who has watched Grantham on several occasions describe the inevitability of a staggering bear market in a manner so convincing that it induces laughter (or panic), this observer had the feeling that he was watching a brilliant actor giving a great performance for the 1,000th time while struggling to restrain himself from bursting into laughter on stage.
No matter how smart they are, no one can be that sure there will be a 1930s-style bear market. And the current bear market is looking much more like a bear market of time, a la 1966 to 1982, than the leap off of Mt. Everest that Grantham so delights in depicting.