What’s on Jeremy Grantham’s mind? Ten things, and in his second quarter letter, the renowned value investor lays out the lot of them.
As usual, Grantham’s areas of interest go far beyond those of most investment managers. Here, from Barron’s, which published his letter, is his list of the 10 things that “really matter”:
- Pressure on gross domestic product growth in the U.S. and the balance of the developed world
- The age of plentiful, cheap resources is gone forever
- Climate problems
- Global food shortages
- Income inequality
- Trying to understand deficiencies in democracy and capitalism
- Deficiencies in the Federal Reserve
- Investment bubbles in a world that is, this time, interestingly different
- Limitations of homo sapiens
Grantham talks about each one of these issues, many of which link back to #1 — struggling GDP growth. His discussion of natural resources and commodities is particularly interesting, as is his take on how the combination of misguided Federal Reserve policies and huge stock-option-heavy executive bonuses that are not linked to performance has negatively impacted GDP. “This pattern [of stock-option bonuses] has meshed very well with the policy of the current Fed regime – now internationalized – of encouraging higher stock prices so that the resulting wealth effect can help the economy,” Grantham says. “Since Greenspan’s early days, this has led to long, drawn-out six- to eight-year bull markets, interrupted with short bear markets. What could possibly be better for a stock option culture (as Andrew Smithers calls it)? In a decline, they rewrite their options. In a market advance, senior corporate officers cash in again and again, basically diluting stockholders’ value. They do this, all the time knowing that the Fed’s well-known asymmetry is on their side: Stumble and we at the Fed (and the Treasury, if necessary) will immediately help out – interest rate declines in early 2000 and 2008 and the giant 2008-09 bailouts are great examples – but succeed and we will not interfere, even in the midst of the most extreme housing or tech bubble.”
This, Grantham says, has led to companies spending most of their cash buying back their own stock rather than investing in their businesses. “And why should we be surprised?” he asks. “For how risky it is to build new factories and shake them down in a world where things can go wrong and corporate raiders lurk. How safe it is to buy your own stock and how likely that doing so will push prices higher, thus increasing option values (making it easier for CEOs to go from earning 40 times the average worker in 1965 to over 300 times today) and enlarging the Fed’s wealth effect at the same time!” The problem, he notes, is that such behavior leads to less corporate expansion; less GDP growth; lower job creation, and lower wages.