Who's Right? Jeremy Grantham Or Ben Bernanke?

It's a battle of titans, between GMO's Jeremy Grantham and Federal Reserve Chairman Ben Bernanke. Grantham came out with a

and said the S&P 500 is not worth more than 950, while Bernanke is telling us for the next two years, cash is going to earn nothing, so put your money into risky assets to make money. In his letter, Grantham said, "On a regular time horizon, I would continue to overweight quality stocks, which may well be on a roll. They are not priced to make a fortune, but they are priced to give approximately 4.5% to 5% real return, which I think is acceptable for low-risk assets. They have also delivered dependable downside – risk off – relative performance for several years, which is a characteristic generally in short supply." Grantham went on to say: "As for the rest of global equities, they range from unattractive (August 2) to very unattractive. The S&P 500, for example, is worth no more than 950 on our estimates." In general, risk avoidance looks like a good idea. Cash – despite its manipulated low rate, deliberately designed to make us reach for risk – should be seen as a safe haven replete with important optionality: dry powder to take advantage of possible opportunities. As mentioned in previous quarterlies, the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical. That is, instead of quickly recovering, markets will become cheap and stay below long-term averages for several years as was the case pre-Greenspan. Twenty years is a long time, so most investors think that dipping to fair value for a minute and bouncing is normal. It is, in fact, highly aberrant historically. Markets staying down and washing away a whole generation's false expectations, high animal spirits, and excessive risk-taking – that would be normal. In the long run, a prolonged period of lower priced assets would lead to a much-improved, less risky, and less bubble-prone environment. In short, a more manageable world." Conversely, Bernanke told us yesterday to go long everything in sight, including the S&P 500. Hes essentially announced Operation Twist 2 without telling us, and will more than likely enact a third round of quantitative easing sooner rather than later. No one knows how much QE3 will be, but some suspect it could be well over $1 trillion, or perhaps an open ended form of quantitative easing, with no end in sight until the Fed says so. Even with three dissenting votes yesterday, Bernanke seems hellbent on printing money to get us out of the recession. Savers be damned. Who do you think is right? Tell us in the comments.

Traders who believe that Grantham is right might want to consider the following trades:

Traders who believe that Bernanke is right may consider alternate positions: