Recap 2014-11-18: Thoughts on the GMO Letter and the BAML FMS survey


It appears the secular stagnation thesis is starting to get more adherents, and that is starting to affect perceived ‘fair’ valuations for asset classes. The most recent GMO letter was good as usual, but quite important is their emphasis of the possibility that the low return environment is here to stay (i.e. where cash yields averaged 0% real) vs most of post WW2 history. (where cash yields averaged 1.25% real) They took it so seriously that they published a separate set of asset return forecasts, (labeled “Hell”) which are quite different from their previous forecasts. (which are labeled “Purgatory” below)

They also estimated the impact of the drop in the discount rate on the present fair value of various asset classes:

Note that using GMO’s assumption of a 4.5% risk premium for equities, ‘fair normalized PE’ on US equities would be ~22. That’s been my estimate for ‘fair PE’ for a couple years now, so it’s gratifying to see other managers coming around to that view. Note also that GMO recommended a ‘shorter duration way’ to take equity risk. I’d note that this is exactly what I recommended a year ago, via my S&P call purchase recommendation. Having said that, I still have some quibbles with the GMO projections – but mainly on the international and EM side. In particular, I think a lot of the assumptions regarding the relationship of corporate profits and equity valuation vs economy-wide aggregates do not apply in many countries. But that’s a topic for another day.

Separately, the BAML Fund Manager Survey for November was published today. Some highlights:

The consensus is that oil is cheap:

Cash balances remain high:

But the long Japanese equities trade is the most popular since April of 2006:

And real estate globally seems to be unusually popular as well:

The European FMS also had a couple interesting charts. ECB QE is expected by almost half of the respondents in 1Q next year:

Finally, I thought this post is very good:


  • Draghi: "other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds". In this context, Mr Draghi also said that "the ECB has not been created to ensure that governments actually do the right things … we have a mandate".
  • The minutes of the November RBA notes the China property slowdown poses one of the key risks to the Australian economy. The RBA Board Minutes predate the more detailed Statement on Monetary Policy and there is no major change in views.
  • UK CPI improved to 1.4% YoY vs 1.2% exp and prev. The Core measure was stable at 1.5% vs 1.6% exp
  • German ZEW jumped to 11.5 vs 0.5 exp and -3.6 prev
  • US Core PPI rose to 1.8% YoY vs 1.5% exp and 1.6% prev
  • NAHB Survey improved to 58 vs 55 exp and 54 prev


  • Wed: BoE Minutes, US Housing Starts, Fed Minutes, Japan Trade Balance, PMI, China HSBC PMI
  • Thu: EU PMI, US CPI, Jobless Claims, Markit PMI, Philly Fed, Existing Home Sales, EU Consumer Confidence
  • Fri: Canada CPI
  • Mon: German IFO, US Markit Services PMI, BoJ Minutes, BoJ Deputy Governor Nakaso speaks
  • Tue: Canada Retail Sales, US House Prices, Consumer Confidence