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.
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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.
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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.
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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!
Manifesto
For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense. From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008. Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis. The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent. Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.
I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website. Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe. Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances. It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious. Be sure to read it. What I present here are some hints as to the significance of this important essay:
For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). My favorite comment from Mish appeared near the conclusion of his summary:
On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:
David Reilly began the Bloomberg Business Week piece this way:
That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:
At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers. In the United States there is no such concern. The public is much more compliant. Whether that will change is anyone’s guess.