The latest GMO quarterly letter is now available (at least the first part), with some very interesting commentary on the US market. Some of the things discussed are:

  • American businesses have written down about $1 trillion in debt, but if conventional lending standards are applied they should write down as much as $12 trillion more.
  • Japan’s two decades of equity underperformance may actually be one of the easier ways out of such a situation as long as people aren’t willing to accept the full extent of their losses immediately.
  • Most of the losses weren’t in real wealth, and people will come to see that in time.

Although these may be seen as dire warnings, I don’t expect the future to be that bad (and not just beecause most of my investments are outside the US). While it may take some time for people who were counting on the market value of their assets at the peak of the market to get back there, they will recover eventually. For everyone else – particularly those who are buying now – the drop in prices makes the future much more promising.

As usual this is an enlightening perspective on recent events that’s rarely discussed, and well worth the read.