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Grantham: Stocks Haven't Been This Cheap since 1987

Market seer Jeremy Grantham predicted financial debacle, and now he's buying.

A couple weeks ago I had a scary thought: Things are worse than Jeremy Grantham predicted. It's kind of frightening when one of the most bearish market seers has understated the risks and intriguing at the same time because he was really on the money. So, I checked in with him on Monday, Oct. 13 to see what he makes of the current situation. The markets were up about 5% when we spoke, and Grantham thought it had come close to returning to fair value.

Back in July 2007, I spoke with Grantham, who predicted half of the hedge funds and at least one major U.S. bank would be wiped out. Grantham is chairman of asset manager GMO LLC which runs mutual funds and hedge funds. He advocated going into all manner of anti-risk baskets such as Treasury bills and TIPS as a way of preserving capital while waiting for markets to get cheaper. Back then he sounded like a prophet of doom, but now he just sounds like a prophet. In fact, his firm, GMO, got its 10-year predictions for returns on the S&P 500 and emerging markets for the period ended third quarter 2008 almost exactly right. (Read more here; registration is required.)

In July 2007, Grantham warned of a financial bubble as hedge funds, private equity, and homeowners gorged on debt.