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More Great Thoughts from Jeremy Grantham

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I always look forward to Jeremy Grantham’s Quarterly Letter.  Grantham is the Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), an investment management firm, entrusted to oversee approximately $97 billion in client assets.

Unlike many asset managers, Jeremy Grantham has a social conscience.  As a result, during the past few years we have seen him direct some sharp criticism at President Obama, Tim Geithner, Ben Bernanke and – of course – Goldman Sachs.  Grantham fell behind schedule when his Third Quarter 2011 Letter was delayed by over a month.  As a result, Grantham’s Fourth Quarter 2011 Letter was just released a few days ago.  At 15 pages, it earned the title “The Longest Quarterly Letter Ever”.  As usual, Grantham has provided us with some great investment insights – along with some pointed criticism of our ignorant legislators and mercenary corporate managers.  What follows are some selected passages.  Be sure to read the entire letter here (when you have time).

To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value.

To move from the problem of long time horizons to the short-term common good, it is quickly apparent that capitalism in general has no sense of ethics or conscience.  Whatever the Supreme Court may think, it is not a person.  Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business?  Ethical CEOs can drag a company along for a while, but this is an undependable and temporary fix.  Ethical humans can also impose their will on corporations singly or en masse by withholding purchases or bestowing them, and companies can anticipate this and even influence it through clever brand advertising, “clean coal” being my favorite.  But that is quite different from corporate altruism. Thus, we can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow.

It gets worse, for what capitalism has always had is money with which to try to buy influence.  Today’s version of U.S. capitalism has died and gone to heaven on this issue. A company is now free to spend money to influence political outcomes and need tell no one, least of all its own shareholders, the technical owners.  So, rich industries can exert so much political influence that they now have a dangerous degree of influence over Congress.  And the issues they most influence are precisely the ones that matter most, the ones that are most important to society’s long-term well-being, indeed its very existence.  Thus, taking huge benefits from Nature and damaging it in return is completely free and all attempts at government control are fought with costly lobbying and advertising.  And one of the first victims in this campaign has been the truth.  If scientific evidence suggests costs and limits be imposed on industry to protect the long-term environment, then science will be opposed by clever disinformation.

*   *   *

Capitalism certainly acts as if it believes that rapid growth in physical wealth can go on forever.  It appears to be hooked on high growth and avoids any suggestion that it might be slowed down by limits.  Thus, it exhibits horror at the thought (and occasional reality) of declining population when in fact such a decline is an absolute necessity in order for us to end up gracefully, rather than painfully, at a fully sustainable world economy.  Similarly with natural resources, capitalism wants to eat into these precious, limited resources at an accelerating rate with the subtext that everyone on the planet has the right to live like the wasteful polluting developed countries do today.  You don’t have to be a PhD mathematician to work out that if the average Chinese and Indian were to catch up with (the theoretically moving target of) the average American, then our planet’s goose is cooked, along with most other things.  Indeed, scientists calculate that if they caught up, we would need at least three planets to be fully sustainable.  But few listen to scientists these days.  So, do you know how many economic theories treat resources as if they are finite?  Well, the researchers at the O.E.C.D say “none” – that no such theory exists.  Economic theory either ignores this little problem or assumes you reach out and take the needed resources given the normal workings of supply and demand and you can do it indefinitely.  This is a lack of common sense on a par with “rational expectations,” that elegant theory that encouraged the ludicrous faith in deregulation and the wisdom of free markets, which brought us our recent financial fiascos.  But this failure in economic theory – ignoring natural limits – risks far more dangerous outcomes than temporary financial crashes.

*   *   *

As described above, the current U.S. capitalist system appears to contain some potentially fatal flaws.  Therefore, we should ask what it would take for our system to evolve in time to save our bacon.  Clearly, a better balance with regulations would be a help. This requires reasonably enlightened regulations, which are unlikely to be produced until big money’s influence in Congress, and particularly in elections, decreases.  This would necessitate legal changes all the way up to the Supreme Court.  It’s a long haul, but a handful of other democratic countries in northern Europe have been successful, and with the stakes so high we have little alternative but to change our ways.

*   *   *

Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence.  Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems:  it only currently fails in two or three.  Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.

Keep in mind that the foregoing passages were just from Part II of the Quarterly Letter.  Part III is focused on “Investment Observations for the New Year”.  Be sure to check it out – it’s not as bearish as you might expect.  Enjoy!



 

How The Democrats Self-Destruct

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June 29, 2009

For the past few days, we have been inundated with news reports detailing the self-destructive behavior of the late singing sensation, Michael Jackson.  Perhaps it is this heightened awareness of self-destruction that is causing people to take a closer look at the self-destructive behavior taking place within the Democratic Party.

Most notable is the behavior of President Obama.  As his Inauguration approached, many people were surprised to learn that some principal players selected for Obama’s economic team were the same people responsible for creating this mess during the Clinton years.  The most prominent of these is Larry Summers, who is expected to replace Ben Bernanke as Chairman of the Federal Reserve in January.  On June 24, Robert Scheer, on his Truthdig website, bemoaned the fact that Obama is following the “trickle down” strategy of bailing out the big banks, while doing nothing to really solve the mortgage crisis:

It’s not working.  The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis is a huge bust.  The financial moguls, while tickled pink to have $1.25 trillion in toxic assets covered by the feds, along with hundreds of billions in direct handouts, are not using that money to turn around the free fall in housing foreclosures.

*    *    *

Here again the administration, continuing the Bush strategy, is working the wrong end of the problem.  Although President Obama was wise enough to at least launch a job stimulus program, a far greater amount of federal funding benefits Wall Street as opposed to Main Street.

*    *    *

Why was I so naive as to have expected this Democratic president to not do the bidding of the banks when the last president from that party joined the Republicans in giving the moguls everything they wanted?  Please, Obama, prove me wrong.

If President Obama doesn’t prove Robert Scheer wrong, Obama might find himself facing some hostile crowds at the “town hall” meetings as 2012 approaches.

The President might also be surprised to encounter large-scale Democratic grassroots disappointment over his proposed “overhaul” of the financial regulatory system.  As I pointed out on June 18, President Obama’s financial reform proposal, released on that date, drew immediate criticism for the expanded powers granted to the Federal Reserve.  On June 24, The Nation (which prides itself on having a liberal bias) ran a harshly critical piece by William Greider, entitled:  “Obama’s False Reform”.  In addition to criticizing the expanded powers granted to the Federal Reserve, Greider emphasized that the proposal did not contain any significant measures, or “hard rules”, to reform the financial system.  Beyond that, Greider took Obama to task for the false claim that the regulatory system was overwhelmed by “the speed, scope and sophistication of a 21st century global economy”.  The article emphasized the need to “slow down the rush to weak solutions” by taking the time to find out about the root causes of the breakdown and then to address those causes:

Give subpoena power to Elizabeth Warren the Congressional Oversight Board she chairs.  Hire some of those investigative reporters who have no political investment in digging deeper into the mulch.  What exactly went wrong?  Who has bloody hands?  Where are the fundamental reforms?  If the economy returns to “normal’ rather soon, the ardor for serious reform might dissipate with much left undone.  That is a small risk to take, especially if the alternative is enacting the bankers’ pallid version of reform.

President Obama is now taking pride for the passage in the House of Representatives of the “climate change bill” (H.R. 2454, the American Clean Energy and Security Act of 2009).  Despite the claim of House Majority Leader Steny H. Hoyer (D-Md.) that the bill’s passage in the House was “a transformative moment”, 44 Democrats voted against the bill.  One harsh critic of the bill is Democrat Dennis Kucinich.  Here’s some of what Mr. Kucinich had to say:

It won’t address the problem.  In fact, it might make the problem worse.  It sets targets that are too weak, especially in the short term, and sets about meeting those targets through Enron-style accounting methods.  It gives new life to one of the primary sources of the problem that should be on its way out — coal — by giving it record subsidies.  And it is rounded out with massive corporate giveaways at taxpayer expense.

*   *   *

.  .  .  the bill does not require any greenhouse gas reductions beyond current levels until 2030.

Worse yet is the Democrats’ fumbling and bumbling with their efforts at healthcare reform legislation.  Polling wiz Nate Silver of fivethirtyeight.com, did a meta-analysis of the polls conducted to assess public support for the so-called “public option”in healthcare coverage, wherein people have the option to buy health insurance from the government.  The insurance companies obviously aren’t interested in that sort of competition and they have launched advertising campaigns portraying it as controversial and flawed.  Nevertheless, Nate Silver’s report revealed that five of the six polls analyzed, demonstrated lopsided support for the public option, exceeding 60 percent.  Despite the strong popular support for the public option, Mr. Silver pointed out in another posting, how there is a great risk that Democrats might oppose the measure due to payoffs from lobbyists:

Lobbying contributions appear to have the largest marginal impact on middle-of-the-road Democrats.  Liberal Democrats are likely to hold firm to the public option unless they receive a lot of remuneration from healthcare PACs.  Conservative Democrats may not support the public option in the first place for ideological reasons, although money can certainly push them more firmly against it.  But the impact on mainline Democrats appears to be quite large:  if a mainline Democrat has received $60,000 from insurance PACs over the past six years, his likelihood of supporting the public option is cut roughly in half from 80 percent to 40 percent.

Awareness of this venality obviously has many commentators expressing outrage.  On June 23, Joe Conason wrote such an article for The New York Observer:

If Congress fails to enact health care reform this year –or if it enacts a sham reform designed to bail out corporate medicine while excluding the “public option” — then the public will rightly blame Democrats, who have no excuse for failure except their own cowardice and corruption.  The punishment inflicted by angry voters is likely to be reduced majorities in both the Senate and the House of Representatives — or even the restoration of Republican rule on Capitol Hill.

*  *  *

The excuses sound different, but all of these lawmakers have something in common — namely, their abject dependence on campaign contributions from the insurance and pharmaceutical corporations fighting against real reform.

*  *  *

Whenever Democratic politicians are confronted with this conflict between the public interest and their private fund-raising, they take offense at the implied insult.  They protest, as a spokesman for Senator Landrieu did, that they make policy decisions based on what is best for the people of their states, “not campaign contributions.”  But when health reform fails — or turns into a trough for their contributors, who will believe them?  And who will vote for them?

Those Democrats inclined to oppose the public option don’t appear to be too concerned about public indignation over their behavior.  Take California Senator Dianne Feinstein for example.  Do you really believe she gives a damn about voter outrage?  She was re-elected in 2006, despite criticism that as chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  So what if MoveOn.org is targeting her for ambivalence about the issue of healthcare reform?  MoveOn.org is also targeting other Democrats who are attempting to eliminate the public option.  If these officials have so much hubris as to believe that they can get away with scoffing at the public will, they had better start looking for new jobs now  . . . because the market isn’t very good.

The C Word

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June 8, 2009

I always find it amusing when politicians adopt the catch phrases and other expressions, obviously created by their lobbyist/puppeteers.  One of my favorites is “foreign oil”, as in:  “We need to end our dependence on foreign oil”.  Do they expect people to believe that Jesus made our oil different from that “Muslim oil”, which causes air pollution?  The expression:  “foreign oil” is obviously being used to vilify Arab countries for last year’s inflated gasoline prices, caused by oil speculators and American oil companies.  (Let’s not forget the price gouging by gasoline retailers.)  Most Americans realize that we have a serious problem with our dependence on petroleum products and, more generally fossil fuels, including coal, as sources of energy.  According to a March, 2009 Gallup poll, 60 percent of Americans are “worried a great deal or fair amount” by global warming.  Although this is down from last year’s 66 percent, 76 percent of Americans are “worried a great deal or fair amount” by air pollution itself, independent of the global warming consequences (according to the same poll).

Attention is increasingly focused on the concept of “clean coal” as an energy source.  In his February 24 address to the Joint Session of Congress, President Obama made it clear that he supported Congressional financing of the development of “clean coal” as a viable energy source.  The timing seemed intended to coincide with the aggressive advertising campaign against “clean coal”.  In case you’re wondering just what “clean coal” is  .  .  .  Ben Elgin wrote an article for Business Week last year, entitled:  “The Dirty Truth About Clean Coal”.  Here’s some of what he had to say:

The catch is that for now — and for years to come — “clean coal” will remain more a catchphrase than a reality.  Despite the eagerness of the coal and power industries to sanitize their image and the desire of U.S. politicians to push a healthy-sounding alternative to expensive foreign oil and natural gas, clean coal is still a misnomer.

*    *    *

Corporations and the federal government have tried for years to accomplish “carbon capture and sequestration.”  So far they haven’t had much luck.  The method is widely viewed as being decades away from commercial viability.  Even then, the cost could be prohibitive:  by a conservative estimate, several trillion dollars to switch to clean coal in the U.S. alone.

Then there are the safety questions.  One large, coal-fired plant generates the equivalent of 3 billion barrels of CO2 over a 60-year lifetime.  That would require a space the size of a major oil field to contain.  The pressure could cause leaks or earthquakes, says Curt M. White, who ran the U.S. Energy Dept.’s carbon sequestration group until 2005 and served as an adviser until earlier this year.  “Red flags should be going up everywhere when you talk about this amount of liquid being put underground.”

*    *    *

Companies seeking to build dozens of coal-fueled power plants across the country use the term “clean coal” liberally in trying to persuade regulators and voters.

Needless to say, President Obama’s advocacy on behalf of the “clean coal” lobby has outraged more than a few people.  Will Harlan wrote an article for the March 20 edition of Blue Ridge Outdoors magazine, entitled:  “The Dirty Truth Behind Obama’s ‘Clean Coal’ Stimulus”.  In addition to addressing the problems yet to be overcome with carbon capture, as well as the problems associated with mountaintop removal mining, sludge spills, dam breaches, poisoned wells, skyrocketing cancer rates, childhood asthma, premature deaths, slurry ponds, coal ash waste and mercury emissions, Harlan pointed out that:

Obama has also committed to reviving a boondoggle coal facility that even the Bush Administration decided to kill:  the FutureGen Carbon Capture and Storage Plant, which just happens to be located in Obama’s home state of Illinois.  Even though the facility costs have soared well beyond budget, and it is nowhere close to developing cost-effective technologies to safely capture and store carbon, Obama continues to support it.

Why are we letting Obama get away with greenwashing coal by perpetuating the “clean coal” myth?  The Democrats received close to $1 million in “contributions” in 2008 from the coal mining industry.  And southern Illinois is part of the country’s coal belt.

Eugene Robinson deserves a hat tip for his June 5 Washington Post column, criticizing Obama’s stance on this issue.  The strongest point made by Robinson was the cost/benefit analysis:

The Obama administration is spending $2.4 billion from the stimulus package on carbon capture and storage projects — a mere down payment.  Imagine what that money could do if it were spent on solar, wind and other renewable energy sources.  Imagine if we actually tried to solve the problem rather than bury it.

It should come as no surprise that the Greenpeace website would feature an essay, critical of “clean coal” with the following conclusion:

“Clean coal” is an attempt by the coal industry to try and make itself relevant in the age of renewables.  Existing CCTs do nothing to mitigate the environmental effects of coal mining or the devastating effects of global warming.  Coal is the dirtiest fuel there is and belongs in the past.  Much higher emission cuts can be made using currently available natural gas, wind and modern biomass that are already in widespread use.  Clean, inexpensive.  This is where investment should be directed, rather than squandering valuable resources on a dirty dinosaur.

Nevertheless, what does come as a surprise is that the very same article quoted above appears on Barack Obama’s Campaign for America website.  In case you’re wondering how to reconcile that point of view with Obama’s enthusiasm for “clean coal”, you have to read the disclaimer appearing at the end of the article on the Campaign for America site:

Content on blogs in My.BarackObama represents the opinions of community members and in no way should be interpreted as endorsed or approved by the campaign.

In other words:  “Don’t be dumb enough to believe that President Obama is really going to support anything you read here”.

In his June 4 opinion piece for The Washington Post, E.J. Dionne observed how the media are:

… largely ignoring critiques of Obama that come from elected officials on the left.

This was brought home at this week’s annual conference of the Campaign for America’s Future, a progressive group that supports Obama but worries about how close his economic advisers are to Wall Street, how long our troops will have to stay in Afghanistan and how much he will be willing to compromise to secure health-care reform.

To the objective observer, it is becoming increasingly obvious that Barack Obama is as much of a hypocrite as any other politician who found his way to the White House.