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Despite The Global Crisis, The World Is Getting Better

If you’re looking to the world’s top investors for advice on which way to turn in today’s unnerving environment, you may wind up more confused than ever. Two brilliant investment managers, Barton Biggs and Jeremy Grantham, agree on the short-term outlook but part ways when it comes to the long view.

In separate interviews, both Biggs and Grantham recently predicted the stock market rally will continue in the short term, fueled by government stimulus money and growth in emerging markets. However, Grantham predicted the current rally will prove to be fueled by “false hope” and will be followed by seven “lean years” in the markets as a result of “major systemic problems in the global financial system.”

Biggs predicted the Standard & Poor’s 500 stock index would hit 1,050 and economic expansion in emerging countries would then continue to fuel market growth, albeit within a potentially limited trading range.

Grantham is the founder of GMO, a Boston investment firm. Biggs is the co-founder of Traxis Partners, a hedge fund in New York City, and former chief global strategist for Morgan Stanley. Both are legendary Wall Street strategists.

So whose advice should you take? They cannot both be right about the future.

Biggs and Grantham agree there are two primary factors to consider—world government stimulus efforts and emerging markets. Speaking at the 2009 Morningstar Investment Conference in Chicago, Grantham said the globally coordinated government stimulus effort would provide the hope necessary to push the current market rally further upward, and he predicted the S&P 500 Index would reach 1,100. However, this rally has “nothing to do with reality,” he said, and eventually will fade as the effects of stimulus money play out and the global economy remains stuck with the same structural problems that caused the economic crisis. He discussed the massive fiscal imbalance among nations, with the United States, among others, needing to rein in spending while other countries such as Japan and Germany should be spending more.

Investors will pour money into developing countries in the near term because they still boast healthy growth rates, and that will fuel a rally. But Grantham warned that emerging markets will form the next big investment bubble, and when it bursts it will set the stage for seven years of worldwide market stagnation.

His advice? Avoid trying to make up for recent losses by pouring everything into the current rally. Instead, decide how much money you want to invest in the stock market and divide it by 15, then invest that fraction each month for 15 months, to better allocate your resources.

In contrast, in a Bloomberg TV interview, Biggs predicted the current market rally will have legs. “There is a huge amount of very aggressive money on the sidelines that is experiencing great pain,” he said. “We could have a ‘melt-up’ buying panic.”

Biggs characterized the current run-up as “a relief rally that the world’s not going down the drain.” He said he believes the global stimulus measures are working, both fiscally and in regards to monetary policy, and will have a positive effect over the long term. “There have not only been improvements in sentiment; now there are some real signs that growth is actually resuming in certain economies,” he said. “There are real signs of positive growth, albeit from very depressed levels, in Korea and Japan.”

Growth in the developed world will remain slower going forward, Biggs said, perhaps at a 2% annual rate rather than 3%. But the positive side of that is a lack of any serious inflation threat. Noting that emerging markets such as China are likely to grow significantly faster, Biggs said investing in emerging markets will fuel stock market growth for years to come. “I think we’re going to be in a world very similar to the period from 1974 to 1982, where the market was in a big broad trading range,” he said. “I want to be there, but we’re going to have to be more market timers.”

As you ponder which team to join, remember that while the 2008 market meltdown has shaken the investment world to its core, the smart money has always gone with the optimistic view over the long term, while staying diversified and rebalancing as a specific sector disproportionately advances or declines. The very underpinning of investment is a belief in the future, a faith in progress. Bad times come along periodically, but the people of the world react by using innovation and creativity to move forward and create a better world.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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