Jeremy Grantham: Lessons learned from the past decade
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chairman of Boston-based GMO has just published the Q4 edition of his quarterly newsletter entitled “What a decade!”.
Grantham’s letter begins with a short addendum (“Stop the Presses!”), which addresses two newsworthy items, namely “Volckerization” and the scrapping of the limit of the money corporations spend to influence political outcomes.
“What a Decade!” follows, providing Grantham’s thoughts on the past decade including the following list of lessons learned:
• The Fed wields even more financial influence than we thought.
• Low rates have a more powerful effect on driving financial assets than on driving the economy.
• The Fed is capable of being extremely out of touch with the real world – “What housing bubble?” – plus more doctrinaire – “No, the low rates had no effect on housing” – than anyone could have imagined.
• Congress is nearly dysfunctional, primarily controlled by large corporations, and hamstrung by the supermajority now routinely required in the Senate.
• Government administrations can be incompetent for long periods.
• Poor leadership can really damage a country’s hard-won reputation in a mere 10 years.
• Obama is not a miracle worker!
• The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.
• The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.
• Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.
• Developed countries, including the US, are past their prime compared with developing countries: it is indeed a new world order.
• Education and training are the keys to increasing wealth on a sustainable basis and the US is in danger of losing its once large edge here.
• We all live on an island, which can be overexploited and turned into a barren Easter Island if we are not careful. Resources are finite and biodiversity is fragile, and both must be protected. Carbon emissions are the single greatest threat.
• Being a global policeman is expensive, and somewhere between difficult and impossible.
• The Fed learns no lessons!
The Appendix to the report is a summary of Grantham’s part in a debate entitled “Financial Innovation Boosts Economic Growth”, sponsored by The Economist. The video of the debate follows below.
Click here for Grantham’s full report.
Source: Jeremy Grantham, GMO, January 2010.
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