I always look forward to Jeremy Grantham’s Quarterly Letter.  His April 2010 letter is now available for free on GMO’s site (free registration required).  Below are some excerpts I found noteworthy:

“The massive bailout program stopped the meltdown of the financial system and engineered at least a temporary economic recovery. We know the obvious cost of this bailout: unprecedented deterioration of the Federal balance sheet. But what of the less obvious costs incurred by taking away the rewards of caution by saving the reckless and incompetent? These weak enterprises, financial and other, were not gobbled up by the stronger, more prudent,and more competent natural survivors, and there is a longterm cost in that.”

 ”If, however, the economy only limps along, which seems more likely to me, then we run a very real danger of a third dangerous bubble in stocks and in risk-taking in general. For in that event, Bernanke will defi nitely keep rates low quarter after quarter and speculation will surely respond.
Again? Yes, I’m afraid so. In that environment, Bernanke will do nothing to let the air out gently. His lack of antibubble action is pretty much guaranteed. The end of such events is always hard to predict, but usually bubbles break for almost any reason when they are big enough. Of course, the larger the asset bubble, the bigger the shock to the economic and financial system.”

“…the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break. If that happens, rates will still be low
and thus diffi cult to use as a jump starter, the fi nancial system will still be fragile, and the piggybank will be more or less empty. It is remarkably silly for the Fed to allow, even encourage, this fl ight path. It is also remarkably silly for investors to be so carefree, given their recent experiences. Fortunately, there are several less likely outcomes that collectively, I hope, are equally probable. We are defi nitely playing with fi re and need some luck. The best kind of luck would be that Bernanke gets bitten by a Volcker bug.”