In GMO’s fourth-quarter letter, Ben Inker says the firm is finding better opportunities abroad than in the US, and Jeremy Grantham offers his thoughts on what’s going on with oil prices — and where they are headed.
Inker talks in-depth about the relationship between GDP growth, value, and stock performance. “It is probably a pretty accurate statement to say that the outperformance of the U.S. stock market over the last few years has been due to the superior economic growth in the U.S. over the period.,” he writes. “Forecasters are projecting that superior economic growth to continue into 2015 and beyond. History strongly suggests that investing in the U.S. due to that forecast is a bad idea. Not only are economic forecasts notoriously inaccurate, but the driver of profits and equity returns is really about the macroeconomic surprises, which are almost by definition difficult to forecast. Investing where the valuations are lower has been a far better strategy historically, and, despite all of the worrying features of the economic environment outside of the U.S. today, we believe that investing in the various bad and ugly places in the world is going to wind up far more rewarding than the admittedly good-looking U.S.”
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Grantham, meanwhile, says that the plunge in oil prices is just about completely explainable by supply issues created by the US fracking bonanza — not any sort of global demand issue. “In a few months (six to nine?) I believe oil supply is likely to drop to a new
equilibrium, probably in the $30 to $50 per barrel range.,” he writes. “For the following few years, U.S. fracking costs will determine the global oil balance. At each level, as prices rise more, fracking production will gear up. U.S. fracking is unique in oil
industry history in the speed with which it can turn on and off.”
But Grantham thinks that in five to eight years, U.S. fracking production will start to peak, with the full cost of an incremental barrel of traditional oil again becoming the main factor in oil prices. “This is believed to be about $80 today and rising,” he says. “In five to eight years it is likely to be $100 to $150 in my opinion.”
That’s because fracking is not a long-term fix. “U.S. fracking reserves that are available up to $120 a barrel are probably only equal to about one year of current global demand,” Grantham says. “This is absolutely not another Saudi Arabia.”
To download GMO’s letter, click here.