The Long-Term Price Trend and Investment Perspective of Gold

Instead of trying to interpret each move, it would seem prudent to see Gold prices from the prism of long-term trends. 

Gold prices etched a new milestone this week.  

After bottoming in January 2016, gold’s uptrend began to trek upwards in August 2018. This upside momentum picked up speed in the middle of 2019 when the issues on the US financial system’s repo holdings surfaced.  

The US government’s response to COVID-19 further accelerated this upside, which has turned almost vertical last week to break past September 2011 acme. 

While the eyes of the public have fixated on the USD quotes, the record run in gold prices has signified a global phenomenon.

Or, surging gold prices have reached milestone highs against ALL fiat currencies, including the Philippine Peso, for the FIRST time since the end of the gold exchange standards, otherwise known as the Bretton Woods standards through the Nixon shock on August 15, 1971.  

This unprecedented moment also suggests that while the actions of the US Federal Reserve and the Federal Government plays a significant role in the recent uptrend, global factors have likewise contributed materially.   

 

Like all assets, gold prices operate in long-term cycles.  

The last two gold bull-market had a 9- to 10-year cycle.  

Since August 1971, gold’s run-up from $35 to $760 occurred in about 9-years. Of course, nothing goes in a straight line; there were countercyclical moves within the general trend.  

After two decades of inertia, Gold prices bottomed in 2001-2002, which set the stage for the next ten-year uptrend, rising from about $260 to $1,794. 

If history rhymes, gold’s recent breakout in USD, peso and other currencies will translate to a multi-year upside. 

Or, if this uptrend of gold prices (in USD and peso) will at least resonate with the past, we should expect gold mining issues (here and abroad) to echo the ascent of its product.  

 

The gold indices of the US HUI (NYSE Gold Bugs), XAU (Philadelphia Gold and Silver), and Barron’s Gold Mining recently surged to reflect the breakout of gold prices.  

 

The chart of Philex shows how its prices behaved during the previous 10-year gold market. PX rose from about Php .15 per share to Php 26.55.  

And for the first time, in recent years, prices of domestic gold mines appear to have diverged or decoupled from the mainstream issues to the upside.   

So regardless of whether gold prices are about resurgent inflation or systemic credit deflation or escalating collateral issues of the offshore dollar system, a resumption of the gold’s uptrend will provide a safe-haven to your portfolio and or generate promising returns, without requiring substantial risk exposure.  

And political obstacles have also diminished.  Back in 2016, I predicted that the war on mines will end*. 

Once the bubble economy begins to corrode and where prices of metals soar, such industry bullying will come to an end. Ban on mining will transform to welcome back mining! 

Why the War on Mining Will Fail!  June 26, 2016 

From GMA (July 23, 2020): Allowing some mining companies earlier suspended or closed by the late former Environment Secretary Regina Lopez could help generate much-needed revenues for the government to respond to the COVID-19 crisis, a top official of the Department of Environment and Natural Resources (DENR) said….Environment Secretary Roy Cimatu, on Thursday, confirmed that some mining firms closed or suspended by Lopez in her controversial industry-wide environment audit would be allowed to resume operations after onsite inspections and reviews found that the miners have rectified their violations and complied with corrective measures.  

Gold prices are presently overbought. Since no trend goes in a straight line, then profit-taking should be expected.  

And this pause would present a timely window for entry points.  

Quote of the Day: Never confuse faith with the discipline to confront the most brutal facts of your current reality

On September 9th, 1965, US Navy pilot James Stockdale was shot down over North Vietnam and seized by a mob.

He would spend the next seven years in Hoa Lo Prison, the infamous “Hanoi Hilton”.

The physical brutality was unspeakable, and the mental torture never stopped. He would be kept in solitary confinement, in total darkness, for four years.

He would be kept in heavy leg-irons for two years and put on a starvation diet.

When told he would be paraded in front of foreign journalists, he slashed his own scalp with a razor and beat himself in the face with a wooden stool so that he would be unrecognizable and useless to the enemy’s press.

When he discovered that his fellow prisoners were being tortured to death, he slashed his wrists to show his torturers that he would not submit to them.

When his guards finally realized that he would die before cooperating, they relented.
 

The torture of American prisoners ended, and the treatment of all American prisoners of war improved.

Jim Collins, author of the influential study of US businesses, ‘Good to Great’, interviewed Stockdale during his research for the book. How had he found the courage to survive those long, dark years ?

“I never lost faith in the end of the story,” replied Stockdale.

“I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining moment of my life, which in retrospect, I would not trade.”

Collins was silent for a few minutes. The two men walked along, Stockdale with a heavy limp, swinging a stiff leg that had never properly recovered from repeated torture.

Finally, Collins went on to ask another question. Who didn’t make it out ?

“Oh, that’s easy,” replied Stockdale. “The optimists.”

Collins was confused.

“The optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’

And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’

And Easter would come, and Easter would go. And then Thanksgiving. And then it would be Christmas again. And they died of a broken heart.”

As the two men walked slowly onward, Stockdale turned to Collins.

“This is a very important lesson. You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

This discipline versus faith narrative, which is very relevant to the current risk environment, is from Tim Price at the Sovereign Man

Quote of the Day: Why High Profits have a depressing effect on investment

Profit margins reflecting internal yields on US corporate assets have increased in the last few years. According to what Andrew Smithers disparagingly refers to as “stock broker economics”, high rates of profit are good for stocks. The Austrian economist Jesús Huerta de Soto makes an under-appreciated point about profit margins and stock prices. Pervasively high or increasing rates of profit may show that the rate of time preference is increasing, implying that the capital stock is shrinking. If not time preference, then the perception of risk may be increasing, which would have a similar depressing effect on investment.

(bold mine)

This is from Austrian economist Robert Blumen explaining the impact of Say’s Law on the stock market at the Ludwig von Mises Canada website.

So when the mainstream crow about high profits as justifying high valuations, beware the "curse" in disguise.

Why Strong Economic Growth Hardly Equals Outsized Equity Returns

Bulls have been sold to the idea that economic growth equals hefty stock market returns.

A recent report from Credit Suisse argues against such popular thinking for three reasons[1]. 

First because everybody already knows and has priced in growth, “To use public information to try to predict the market is to bet against the consensus view set by a multitude of other smart and informed global investors.”

Second, in the context of risk reward tradeoff, lesser risks means lower returns, “the strategy of buying companies that are on average becoming less risky, and hence offer a lower expected return. It is more risky to invest in companies in distressed economies”

Lastly popular issues and markets deliver lower returns not only because of risk reward balance but because growth assets have been overvalued relative to undervalued distressed assets. “There is extensive evidence that investors bid up the prices of growth assets, to the point that their long-run return is below the performance of distressed assets (sometimes referred to as ‘value’ investments).

What do they recommend as a strategy? BUY DISTRESS-SELL GROWTH; “The strategy would be to buy equities in distressed markets and to short-sell securities in fast-growing markets”

So even in the assumption of the absence of a potential Black Swan, from the conventional perspective, growth assets may not be conducive to deliver ALPHA returns.

I have no idea if the authors or Credit Suisse practice on what they preach, but from their analysis, one would understand why foreign selling on growth markets, e.g. Philippines stocks, has NOT been irrational.

Yet I offer a fourth reason. Strong economic growth may come from credit bubbles and therefore represents artificial statistical growth. Naturally since credit bubbles are not sustainable, when the inflation chicken comes home to roost, “growth” may segue into “recession” and for stocks, “boom” segue into “bust”.

So yes I second the motion: Buy distress (bust/fear) Sell growth (boom/greed).

---

[1] Credit Suisse Research Institute Credit Suisse Global Investment Returns Yearbook 2014 February 2014 p.29

1929 Stock Market Chart Parallels and Real Private Businesses Investing

Sovereign Man’s Simon Black makes a reasonable case for investing in real private business than to gamble in financial markets by showing this chart. 

Mr. Black eloquently writes:

But as we have pointed out before, world stock and bond markets are heavily manipulated, if not rigged, by central bankers who control the money supply.

Fundamentals no longer matter. If one single person (now Fed Chair Janet Yellen) says she will print, stocks go up. If she says she will taper, stocks go down.

This isn’t investing. It’s gambling. Financial analysis has been replaced by soothsaying and tasseography (reading the tea leaves), hoping to detect some hint in the direction that central bankers are leaning.

This is the chief reason why I seldom participate in public markets anymore; it seems ludicrous to pile on a giant tidal wave of paper currency and entrust central bankers with my investment returns.

Not to mention, it’s uncertain how long they can keep this party going as the following (rather scary) chart shows. There’s an eerie parallel between the market’s performance today and the runup to the crash of 1929.

Financial markets dependent on Central Bank steroids is a real concern.

However, before I deal with investing in real private business, there has been an objection to the above chart.

Stock market bulls at the Businessinsider downplayed the above calling the former “flawed logic” by presenting another chart.

The bulls didn’t address how and why the nominal based chart pattern parallel of the 1929 chart had been “flawed”, but rather shifted their objection by framing another chart in terms of “percentage”. 

This devious way of challenging the original premise is called the alternative substitution—i.e. in behavioral finance, when people are faced with a difficult question, the response would be to  “answer a related but different question, without realizing that a substitution has taken place.”

History is no guarantee of future outcomes. From this premise we understand that patterns may just be patterns, whose outcomes may or may not repeat. I pointed years back how the father of fractal geometry, Benoit Mandelbroit advised people not to trust charts: (bold mine)

And in the fun-house mirror of logic of markets, the chartists can at times be correct...But this is a confidence trick: Everybody knows that everyone else knows about the support points, so they place their bets accordingly. It beggars belief that vast sums can change hands on the basis of financial astrology. It may work at times, but it is not a foundation on which to build a global risk-management system.

And if history does repeat, it will not be in exactitude of the past but rather as American author and humorist Mark Twain says History rhymes. 

And any repetition of history hasn’t just because patterns repeat, but rather such reveals of people’s underlying responses to certain conditions.

The reason “cycles” exists can be imputed or traced to on the admonitions of Spanish born philosopher and essayist George Santayana who wrote “Those who cannot remember the past are condemned to repeat it.”

Essentially what underscores a potential repetition of the 1929 scenario are the ‘real’ fundamentals behind them. 

Since US stocks have been rising driven mainly by massive debt accumulation (record net debt margin and various record bond market issuance), the question is at what or how much degree of additional debt load can the US economy and financial markets absorb in the face of rising yields of USTs just to push up stock market values? What if the capacity to absorb more debt hits the brick wall? What if the rate of return of stock markets will be eclipsed by the rate of increases in the cost of servicing debt, how will all these affect the stock market? 

You see, the mainstream thinks that debt is a free lunch thing that has no repercussions. This kind of thinking is a recipe to a rude awakening. 

Moreover, people hardly realize how the severe distortions from the easy money landscape has influenced earnings and economic coordination. With Fed Chairwoman Janet Yellen’s debut who appear to echo on policy path of  the previous chair Ben Bernanke on “tapering”, how will reduced monetary accommodation impact asset prices whose foundations have been built on easy money? The violent response in emerging markets have been manifestations of the drastically changing environment. What if a periphery to core will occur whose transmission mechanism will simply be higher rates in the face of massive debt?

As you can see these are questions that will determine whether the Dow Jones parallels of the 1929 today will be repeated.

Going back to real business. I don’t deny that investing in business should be a viable alternative. But my concern is that if earnings and the general economy has been massively skewed in favor of bubble blowing activities, putting up a business based on assessment of current conditions may lead to serious miscalculations therefore potential losses.  Besides, the current inflationary boom has already been inflating the cost of doing business. Unstable prices adds to the uncertainty. Compounding such uncertainty has been the equally fickle political environment.

So unless potential businesses would deal with some sort of niche, whose markets are going to be least affected from any downside economic volatility, investing in real business should be thoroughly scrutinized.

Importantly, if 1929 should ever rhyme, then this means shades of the great depression.

Wikipedia describes the post-1929 stock market crash

The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1930 and lasted until the late 1930s or middle 1940s. It was the longest, deepest, and most widespread depression of the 20th century.

In the 21st century, the Great Depression is commonly used as an example of how far the world's economy can decline. The depression originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday).

The Great Depression had devastating effects in countries rich and poor. Personal income, tax revenue, profits and prices dropped, while international trade plunged by more than 50%. Unemployment in the U.S. rose to 25%, and in some countries rose as high as 33%.

Cities all around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by approximately 60%. Facing plummeting demand with few alternate sources of jobs, areas dependent on primary sector industries such as cash cropping, mining and logging suffered the most.

A rhyming of 1929 stock market crash also means that even real businesses will take a hit.

Donald Coxe: Underweight US Markets, Overweight Commodities, Canada And Emerging Markets

Donald Coxe in his December issue of Basic Points has some interesting recommendations (hat tip: Prieur Du Plessis)

From Mr. Coxe: (bold and italics highlights mine)

1. Remain underweighted in US equities - as a percentage of equities within global portfolios, and as a percentage of assets in US balanced portfolios. Underweight US bonds in global portfolios.

The long-term financial projections for the US are scary, even if one accepts the Obama assumptions: ten years of large deficits, no recessions, strong, sustained economic growth, and a mere 1% increase in Treasury yields. Those numbers make no allowance for the costs of health care, which will be huge. Debilitating tax increases are inevitable, even if the global warming “cap and tax” legislation does not pass.

2. Within US equity portfolios, underweight US economy-related stocks and overweight stocks tied to foreign economies.

US stocks outperformed after Obama’s election, but that created what could be called erogenous risk for investors. As long as the KRE [Regional Bank Index] continues to underperform both the BKX [Philadelphia Bank Index] and S&P, risks of a double-dip economy remain.

3. Overweight Emerged Markets (such as China, Hong Kong, Brazil, India and Korea) within global and international equity portfolios.

These markets should no longer be discounted heavily because of assumed gaps between their accounting and American practices. The credibility gap has been narrowed significantly. The FASB’s capitulation to Congressional pressure on big banks’ balance sheets is a sign that Volcker-style virtue is outdated.

4. Remain overweight commodity stocks within balanced accounts and equity-only accounts.

Strong commodity-oriented companies are tied to global growth trends, led by the Asian powerhouses, which means they have less endogenous risk than companies tied to the US and Europe.

5. Emphasize gold stocks in commodity stock accounts.

Gold and other precious metals appear to have entered a period of above-average volatility, but the unprecedented creation of paper money and national debts means ownership of the metals and producers will tend to reduce endogenous risk in most portfolios. The stocks will tend to outperform bullion on the upside; the bullion will outperform on the downside.

6. Continue to overweight the agriculture stocks.

The best-performing commodity group in the past three months has been the agricultural stocks, led by the machinery and fertilizer stocks. Street analysts turned negative on these groups during the summer, when it looked as if US crop production would reach painful levels. Then the weather intervened. We remain of the view that the best of the agriculture stocks are among the best-quality core positions among all equities.

7. Maintain exposure to the energy stocks, but continue to emphasize oil producers and to de-emphasize natural gas producers.

Oil and natural gas are both in oversupply at the moment. The difference is that crude oil prices remain strong despite oversupply, as oil companies and speculators hoard oil in anticipation of stronger demand next year - and in fear of a new Mideast war. Shale gas may be too readily available to be good short-term news for either the profits or stock prices of oil and gas producers - but Exxon’s move on XTO Energy shows what having huge shale reserves can do for takeover values in politically-secure terrain.

8. Base metal stock prices are somewhat riskier than those of other commodity groups, but are worth holding.

The producers are dependent on China’s willingness to continue to buy more metal than it needs for current consumption.

9. Within balanced portfolios, emphasize long-duration, high-quality bonds at the expense of Cash. Canadian bonds should be used by foreign investors, where possible, as alternatives to Treasurys and US corporates.

Cash isn’t a true risk reducer, because it delivers no yield and cannot rise if there’s a new panic. If you must own something that pays you nothing, buy gold. In contrast, long-duration bonds are the best hedge against a renewed economic downturn.

10. Canada offers better government, better governance, a better currency, and a better stock market than the USA. Buy Canadian.

The flip side to this is a wise balance sheet policy for Canadian companies. Borrowing in American dollars makes sense for Canadian exporters and resource companies - and for some other Canadian industries. Take advantage of (1) Bernanke’s heroin injections into US debt markets, and (2) Canada’s new financial prestige to reduce your endogenous currency risk by bulking up your borrowing in greenbacks.

Read the rest of Mr. Donald Coxe's report here.

BMO Capital Markets Basic Points Dec 2009

10 Investing Guidelines From Richard Bernstein

Prolific blogger and fund manager Prieur Du Plessis profiles former Merrill Lynch strategist Richard Bernstein in his website, Investment Postcards.

We’ll quote the article interspersed with my comments in green (all bold highlights are mine).

``Respected Global Investment Strategist Richard Bernstein left Merrill Lynch this week after 20 years at the firm.

``Bernstein, who also wrote Navigate the Noise: Investing in the New Age of Media and Hype, was voted to the Institutional Investor All-America Research Team in each of the last 14 years.

``Writing his last Investment Strategy Update, Bernstein listed what he views as ten of the most important investment guidelines he has learned over the past 20 years. These guidelines are shared below.

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

[my interpretation: in the stock market, dividends matter a great deal]

2. Most stock market indicators have never actually been tested. Most don’t work.

[my interpretation: “holy grail” investing is a mirage and a hokum.]

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

[my interpretation: this is where the stock market becomes a personal casino. Combined with no.2 you don’t need fundamental or technical analysis when scalping or engaging in day trades. Over the short term, noise dominates signals. And when playing for luck, you can do the Burton Malkiel’s blindfolded monkey throwing darts approach]

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

[my interpretation: For the average stock market participants, this “cheering” and chasing prices during bull markets are very common. During bear markets, panic selling at the bottom and or blaming everyone else but themselves are familiar traits. Yet as Mr. Bernstein recommends, the opposite is required- buying on fear and selling on cheers. Nevertheless going against the crowd requires the aptitude of emotional intelligence.]

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

[my interpretation: the present crash tells us that only gold and the US dollar managed to diverge from the generally tightly correlated assets.]

6. Balance sheets are generally more important than income or cash-flow statements.

[my interpretation: the disintegration of the major US investment banking institutions are vivid examples]

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

[my interpretation: mainstream analysts tend to utilize analytical methodologies that suits or conforms to their biases.]

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

[my interpretation: the current environment can be construed as having scarce capital.]

9. Investors should research financial history as much as possible.

[my interpretation: people make the same mistakes through the ages. That’s why we should learn from history]

10. Leverage gives the illusion of wealth. Saving is wealth.

[my interpretation: AMEN!!!]

Video:Breaking Down Buffett's Letter

courtesy of CNBC

Note: Despite the "Sage of Omaha"'s controversial "Buy American, I am" encouraging Americans to support equity markets, the fact is that he hasn't been buying much equities since (only $1.3 billion according to Mario Gabelli), and even sold some positions recently. 

I don't share the views that most of the recent liquidations from Berkshire's Portfolio were meant to be rotated into "banks", simply because Berkshire balance sheet remains substantially cash rich. In short, you don't need to rotate when you have so much available or spare cash. Liquidity isn't the issue. Mr. Buffett sold parts of his flagship's holdings period. Yet, most of the recent positions have been into banks' "preferred stock" which is a fixed income investment derived from recent "special" deals during the meltdown last September. 

As an Obama supporter, the folksy Mr. Buffett appears to have been transformed into a sweet talking politico or had been used as a political instrument. 

Nonetheless, on the positive side, there are many amusing but worthwhile investing lessons from his annual shareholder's letter. Although as usual, you'd be disarmed by his candor to his shareholders. 

Another Grizzly Bear Transforms To A “Cautious Bull”: Jeremy Grantham of GMO

In his latest outlook Reaping the Whirlwind, one of my favorite and distinguished “perma” bear Mr. Jeremy Grantham (JG) of GMO, wrote some very important insights (all highlights mine/charts from Jeremy Grantham):

JG: ``Global profit margins, the second near certainty, are also declining rapidly, but have a long way to go. The estimates of future earnings that we have been sniggering at for a year are still inconceivably high. Why do they bother? To repeat our mantra: global profit margins were recently at record highs. Profit margins are the most provably mean reverting series in finance or economics. They will go back to normal. After big moves, they almost invariably overrun. With the current set of global misfortunes, they are very likely to overrun considerably this time.”

My interpretation:

The impact to the real economy of the imploding bubble and credit crunch has yet to filter into corporate profits. This means markets may overshoot to the downside as they will eventually reflect on the downscaling of profit expectations amid the unraveling recessionary environment.

JG: ``The real growth in the index has historically been only 1.8% per year for the S&P, but for technical reasons (low payout rates in particular) we have allowed for moderately more real growth in recent years. In the six years since October 2002, the trend line has risen to 975 (plus or minus a little – we are constantly fine-tuning a percent here or there). Needless to say, two weeks ago the market crashed through that level, producing Exhibit 1. So now all 28 burst bubbles are present and accounted for. Long live mean reversion!”

My interpretation:

Reversions to the Mean have always been a truism for markets. It has happened before (in 28 previous bubbles) and has reinforced its applicability again today. Serious investors have always to keep this in mind.

JG: ``Full disclosure requires that we add that, in our opinion, this is not as brilliant as it sounds, for markets have been more or less permanently overpriced since 1994 and have not been very cheap since 1982-83 and perhaps a few weeks in 1987. There is also a terrible caveat (isn’t there always?), and that is presented in Exhibit 3, which shows the three most important equity bubbles of the 20th Century: 1929, 1965, and Japan in 1989. You will notice that all three overcorrected around their price trends by more than 50%! In the interest of general happiness, we do not trot out these exhibits often and, until recently, they would have been seen as totally irrelevant and perhaps indecent. But, after all, it’s just history. Being optimistic like most humans, we draw the line at believing something so dire will happen this time.”

My interpretation:

US markets today have fallen below trend line, but lessons of the past shows (see two charts above by Mr. Grantham) that there is that risk that markets can extend to the downside in as much as it has overreached to the upside. Don't forget markets are emotional than rational during major inflection points.

JG: ``On October 10th we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will therefore be steady buyers at these prices. Not necessarily rapid buyers, in fact probably not, but steady buyers. But we have no illusions. Timing is difficult and is apparently not usually our skill set, although we got desperately and atypically lucky moving rapidly to underweight in emerging equities three months ago. That aside, we play the numbers. And we recognize the real possibilities of severe and typical overruns. We also recognize that the current crisis comes with possibly unique dangers of a global meltdown. We recognize, in short, that we are very probably buying too soon. Caveat emptor.”

My interpretation:

US and global stocks have reached reasonable valuation or “cheap” levels. But since market timing is difficult, for Mr. Grantham, they will be gradual accumulators, in the understanding that markets could risk a downside overshoot.

JG: ``The global economy is likely to show the scars of this crisis for several years. In particular, the illusion of wealth created by over-inflated asset prices has been dramatically reduced and, though most of this effect is behind us, a substantial part of the housing decline in some European countries and the U.S. is still to occur. We were all spending and, in the case of the U.S., importing as if we were much richer than is in fact the case. Particularly here in the U.S., increasing household debt temporarily masked some of the pain from little or no increase in real hourly wages for 20 to 30 years. Household debt since 1982 has added over 1% a year to consumer spending. Unfortunately, this net benefit does not go on forever.”

My interpretation:

Following the bubble burst and the credit crunch, we transit o the next stage -the impact to the real economy.

The painful adjustment process will take time to heal which in the market’s vernacular translates to a cyclical shift into a “bottoming out” process.

JG: ``At under 1000 on the S&P 500, U.S. stocks are very reasonable buys for brave value managers willing to be early. The same applies to EAFE and emerging equities at October 10th prices, but even more so. History warns, though, that new lows are more likely than not. Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look okay for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry! Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower. Good luck with your decisions.”

My interpretation:

There are vast and select opportunities out there but an investor’s time horizon should extend to over 18 months, as bouts of volatility from the market clearing process will continue to surface intermittently until most of the required adjustments would have been attained.

Over the interim, inflation will not be much of a concern because of the deflationary impact from the ongoing debt destruction process.

Thank you, Mr. Grantham.

Thus, Mr. Grantham joins other contrarian former “bear” gurus as Warren Buffett and Dr. John Hussman to the cautious "bull" camp.