When it comes to commentary on the economy and the financial markets, there is no more entertaining grouch, grump and grinch than GMO's Jeremy Grantham. Call him what you want, but whenever Grantham's quarterly commentary appears in my e-mail, it's always worth a read.
After stating that his confidence has increased "enormously in recent weeks in all areas outside of finance," the sunny sage at GMO cheerily predicts that "it seems likely that, in terms of economic pain, 2009 will be the worst year in the lives of the majority of Americans, Brits and others."
An avowed Keynesian, Grantham delights in skewering the pointy-head purveyors of free-market ideology in their ivory towers, including Greenspan, Bernanke, Milton Friedman and implicitly others who guzzled Ayn Rand's potent Kool Aid, like the Fama-French "efficient market" boys. Describing himself as formerly exultant over Obama's election-imagine how that sits with GMO client Dick Cheney-Grantham now finds himself lamenting the new president's economic team of "Rubinesque retreads." Summers, whose primary achievement is never letting anyone forget he is smarter than they are, Paulson, Geithner and Schapiro all failed to see the tsunami coming. Many of them, and other perma-bulls like Larry Kudlow, Ben Bernanke and Ben Stein, dismissed the sub-prime debacle as a minor disturbance, even in mid-2007 when it was in clear view.
Still, while chiding another icon, Warren Buffett, for announcing he personally was buying stocks on October 16 when the S&P 500 stood at 950, Grantham adds that's his estimate of fair value. (Other serious observers, like Pequot Capital's Byron Wien, peg fair value at closer to 1200.) It's at 840 now, but Grantham notes it well could overshoot and go to 600.
One can argue with most everything Grantham says, but it's tough to challenge his take on what went wrong with economic policy in the past few decades. Here's a sample:
In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior, career risk management, and ?at-out bursts of irrationality. The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles -outbursts of serious irrationality-could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures. Of more recent importance, it was why Bernanke could dismiss a dangerous 100-year bubble in U.S. housing as being nonexistent. It was why Hyman Minsky was marginalized as an economist despite his brilliant insight of the "near inevitability" of periodic ?nancial crises. It was why the suggestion in academic circles of stock market inef?ciencies, let alone major dysfunctionality, was considered a heresy. It was why Burton Malkiel could rationalize the 1987 crash as being an ef?cient response to 12 or so triggers. These triggers, however, had a trivial weakness: seasoned portfolio managers at the time had never even heard of most of them. Never underestimate the power of a dominant academic idea to choke off competing ideas, and never underestimate the unwillingness of academics to change their views in the face of evidence. They have decades of their research and their academic standing to defend. The incredibly inaccurate ef?cient market theory was believed in totality by many of our ?nancial leaders, and believed in part by almost all. It left our economic and governmental establishment sitting by con?dently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives, and wickedly complicated instruments led to our current plight. "Surely none of this could happen in a rational, ef?cient world," they seemed to be thinking. And the absolutely worst aspect of this belief set was that it led to a chronic underestimation of the dangers of asset bubbles breaking-the very severe loss of perceived wealth and the stranded debt that comes with a savage write-down of assets. Well, it's nice to get that off my chest once again!
Thanks, Jeremy, and keep smiling.