Jeremy Grantham Predicts A Tough Road

Today's must-read is Jeremy Grantham's quarterly letter (you can download it from his site here). The title sums it up: "The Last Hurrah and Seven Lean Years."

First, the good news. Grantham says we could be in for a big equity rally thanks to massive government stimulus plans designed to keep the global economy on track, with a good chance the S&P could hit 1000-1100 before year's end. It's a bit of rare bullishness from Grantham (don't worry, it gets worse later). From the letter:

If the stock market is many times more sensitive to financial stimulus in the short term than the economy is, then we could easily get a prodigious response to the greatest monetary and fiscal stimulus by far in U.S. history. Second, if you don’t think there is a special, one-off, super colossal dose of moral hazard out there today, you are sadly uninformed. The moral hazard in play today is of a massively larger order than any we have ever seen.

Some pretty backhanded praise, but it could be enough to get a second half rally. The bad news: It'll be over fast and probably just mark the start of a long, painful road for investors.

A large rally here is far more likely to prove a last hurrah … a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.

The reasons are myriad (more rational consumers, broad deleveraging, enduring global imbalances) but the best line is this one:

To be honest, I believe that most of you readers are likely to be grandparents before you see a new inflation-adjusted high on the S&P.