Jeremy Grantham: Lessons learned from the past decade

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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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1 comment to Jeremy Grantham: Lessons learned from the past decade

  • I strongly urge all your readers to dload and read, carefully, Jeremy’s letter. Marvelous piece of work in general, very blunt and to the point and demonstrating a real sense of social responsibility.
    One area where, imho, he does fall victim slightly to his own critiques in arguing that the Fed was primarily responsible for the Housing Bubble and has learned no lessons. They did fail to enforce regulatory authorities under ideological influences but a)the interest rates pursued were exactly what should have been done if you follow some sort of modified Taylor Rule (cf. Macroblog’s careful consideration of the issue a while back) and b) the infamous l.t. rate conundrum was more due to excess world savings which in reality was global trade imbalances combined with the very dysfunctions in the Finance Industry he criticizes so heavily and correctly. Aside from that little quirk a marvelous summary, lessons learned and outlook.

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