What to make of all the data in the economy and turmoil in the markets? “Risk will be repriced,” Grantham predicts:
“Last year, a broad base of risk measures -- including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality versus low-quality stock values -- reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.
“For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better...
“Asset prices will be under broad pressure, and risky assets will be under extreme pressure.” Depending on the state of the credit market, Grantham thinks this could all happen very quickly.