US wealthy lose $20 trillion, says strategist
Renowned strategist Jeremy Grantham, founder of US asset manager GMO, estimates individuals in the US have suffered a $20 trillion loss of wealth in the past 15 months -- but their riches were mostly illusory in the first place.
This illusion was worth $50 trillion at the market's peak in 2007, according to Grantham. In his quarterly review he writes: "How could we kid ourselves that we were suddenly rich and didn't need to save for our pensions when were sitting in the very same buildings we bought in 1974? We have not lost wealth, but just the illusion of wealth."
He says the situation has led to a run down in savings and a build up in debt: "Now the illusion of wealth has been lost with formidably negative effects on animal spirits." Advisers serving the lower reaches of the high net worth community could be facing quite a challenge: profits growth at the majority of private banks is tending to ebb away.
Grantham points out that personal wealth following write downs in equities, housing and commercial real estate now totals $30 trillion while debt remains stuck at $25 trillion.
Credit standards have tightened up but more illusory wealth needs to disappear before the US economy will start to recover: "To be successful we need to halve the level of debt. Somewhere between $10 trillion and $15 trillion will have to disappear."
He says: "We will certainly take some painful debt liquidations. This crisis will almost certainly take far longer than normal to play out. Probably before a new equilibrium is reached we will see inflation rates well above normal."
But following the collapse in equity values Grantham - contrary to his reputation as a perma-bear - believes the time has come to start buying high quality US and emerging market stocks.
He warns however that prices could drop a little further over the next year and takes issue with remarks by Warren Buffett in October that stocks were cheap: "His announcement made the market seem so much more exciting than boring old fair value. So what are the posibilities? Was he performing a civic duty?"
Grantham goes on to add: "Research should be directed into portfolios that can resist both inflationary problems and potential dollar weakness."
click here to read the letter
- Grantham's letter - Web link
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