Jeremy Grantham of GMO is another must read quarterly letter, this time around he writes about the dreams of opportunities, cultural differences, the potential of the biggest M&A boom to come and how equity markets are still likely to do fine, even though he expects returns to be sub-par on a 7 year basis. Enjoy.

If I were a potential deal maker I would be licking my lips at an economy that seems to have enough slack to keep going for a few years. Also, individuals and institutions did feel chastened by the crash of 2009 and many are just now picking up their courage. And as they look around they see dismayingly little in the way of attractive investments or yields. So, the returns promised from deal making are likely to appear, relatively at least, exceptional. I think it is likely (better than 50/50) that all previous deal records will be broken in the next year or two. This of course will help push the market up to true bubble levels, where it will once again become very dangerous indeed.

My final thought on this issue is the following point, which I failed to make in my bubble discussion last quarter: perhaps the single best reason to suspect that a severe market decline is not imminent is the early-cycle look that the economy has. And even Edward Chancellor last quarter conceded that there was as yet no sign of a bubble in the quantity of credit that was being created.

Source: GMO