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Bram de Haas
Bram de Haas
Articles (294)  | Author's Website |

-3.9% Annualized Return for the Next 7 Years: Any Takers?

Asset class forecasts are very bleak and well-known superinvestors are sounding the alarm and tempering expectations

October 06, 2017 | About:

fish, fish market, price

Recently I came across a superb quarterly letter by Grey Owl Capital. The firm is run by Eric Brugel and Jeffery S. Erber and in the latest letter they review the macro environment and GMO’s seven-year asset class forecasts:

"Today numerous factors (most prominently, central banks fixing interest rates near zero) have led to a macro backdrop where U.S. profit margins are near peak AND investor risk sentiment is so risk seeking that multiples on different measures of corporate fundamentals are at their highest level ever. From today’s starting point, future returns on U.S. equities are expected to be negative over a seven-year period. That is, investors who buy the Standard & Poor's 500 (or other U.S. equity indices) today should plan on losing money. In today’s environment, a similar situation exists for almost every single global asset class (e.g., foreign equities, U.S. bonds, foreign bonds, etc.)."

In the letter they continue to quote two famed investors for having made extremely cautionary comments on the current investment environment.

"Given that I am no longer involved professionally in managing money, I believe the standards in the industry are being compromised; monetary policy has so totally distorted the capital markets. You are now into the eighth year of a period that is unprecedented in the likes of human history."  Robert Rodriguez, former FPA Capital

"In the vast majority of asset classes, prospective returns are just about the lowest they’ve ever been. The Shiller Cyclically Adjusted P/E Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles." – Howard Marks (Trades, Portfolio), Oaktree Capital

The only thing in the letter I didn’t agree with is how two distinguished and highly accomplished investors offered cautionary remarks. It is hard to find a great investor with a track record of decades who is not preaching caution. Here are some of my favorites:

"Those who know their companies the best believe valuations have become full or excessive." – Seth Klarman (Trades, Portfolio), Bloomberg

Baupost went to 40% cash.

"The value of the stock market relative to the size of the economy should be terrifying to a central banker." – Paul Tudor Jones (Trades, Portfolio), Bloomberg

"It seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937. During such times conflicts (both internal and external) increase, populism emerges, democracies are threatened, and wars can occur." – Ray Dalio (Trades, Portfolio), "Now Is The Time To Tactically Reduce Risk"

"But in the market today, the danger is that you have all this money pouring in America into ETFs, and ETFs are sort of almost blind buying. You just buy these ETFs, and I always question the fact that if you're buying these stocks and you really don't know what you own, you're prone to these periods of time – there could be some kind of crisis and there could be a problem." – Carl Icahn

"Financial markets are telling you there is not much reward. The return is going to be much lower and the risk much higher. You are buying high and crossing your fingers." – Bill Gross

"These valuations can only be justified by assuming cyclically high corporate margins will persist, a certainty of lower corporate tax rates and a risk-free rate that stays near all-time lows. We are skeptical of all of the above." – Jeff Ubben, ValueAct Capital

ValueAct started returning capital to investors.

It extensively references GMO’s famous seven-year asset class forecasts which is notoriously bleak. The end of March was very, very bleak. I was only able to find a March forecast that isn’t the absolute latest, but it is pretty close:


U.S. large caps are the worst and set to return -3.9%. But seven out of 10 type of stock and bond forecasts are negative. GMO may be well known for its conservative outlook, but it was also almost exactly on the money with its forecasts issued in '08 when equities traded at a record high CAPE ratio. Today, they trade at the second-highest ratio ever. It seems like a great time to be very selective buying stocks and bonds.

About the author:

Bram de Haas
Bram de Haas is the managing editor of The Black Swan Portfolio.

Visit Bram de Haas's Website

Rating: 5.0/5 (5 votes)



Enjoylife premium member - 1 year ago

Hi Bram,

Thank you for the article but this message seems to be fear mongering and misleading.

GMO has been predicting the end of the world since 1990 while the market has continued to do fantastic. In fact GMO has been so bad at predicting actual occourances that they have lost over a third of all their assets under management in the last few years. Over 40 Billion dollars leaving due to under performance. Detailed here:http://www.marketwatch.com/story/investor-bail-on-granthams-gmo-as-assets-at-company-fall-by-44-billion-2017-01-09

I guess if you always predict a fall you will eventually be right. But at what cost?

Seth Klarman (Trades, Portfolio) has been concerned about the market valuation since 2010 and stating he went to 40% cash means nothing since he sits at 40-50% cash on average.

Here is a link to an article by Ben Carlson quoting Klarman saying he was the most worried he has ever been about the market. http://awealthofcommonsense.com/2017/09/markets-are-hard-seth-klarman-edition/

The problem is the quote is from 2010 and the market has nearly tripled since!

Eventually there will be another recession and prediciting it is hard. But being out of the equity markets is much more damaging than living through draw downs.

And the valuations on international developed equity markets and emerging equity markets are at or below historical levels where they have delivered real returns of over 5%. These can be review at current levels in the JP Morgan quarterly guide to markets.


So my take: Are US Equity markets high relative to history? Yes

Does that mean the expected return over the next decade is negative- No

Should we consider diversifying internationally- Yes

Could we experience a major drawdown in equities? Always

Does that mean we should go by the most negative forcasts and shun the best performing asset class of the last 200 years across all markets? Absolutly not!!!

Bsamsel premium member - 10 months ago

great article and a great comment (above)

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