Precisely 3 months ago, I made the
first post about Jeremy Grantham and his quarterly letter and how crystal clear and realistic his views about the world were. So here we are again, his
Q4 letter is again full of insights, with which I mostly agree, and even worse, I feel like he sometimes is writing exactly what I wish I had the time and the patience and the writing skills to write myself :-)
Two things I highly disagree with him, before I forget: Keynes is his hero (!!!) and he believes that the market has reached fair value.
[NOTE: I do not have time to add comments now, but I will update this post with additional info]
Here what some quotes [emphasis mine]:
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 flat-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.
Indeed, I would recommend reading Bill Fleckenstein's book:
Greenspan's Bubble - the Age of Ignorance at the Fed[...]
But after exulting in Obama’s election, I couldn't even reach his inauguration before finding fault![...] But in the critical financial arena, he appears to have brought in Rubinesque retreads, “yes men,” or both, none of whom appeared to have seen the most obvious developing bubbles in the history of finance.
One can only admire Bob Rubin’s ability to retain influence and have his protégés in powerful positions. Rubin is the guy who was last seen exhorting Citibank to take more leverage and keep swinging. No, come to think of it, he was last seen paying a visit to Hank Paulson, his relatively recent underling at Goldman Sachs. He pleaded with his old chum, with brilliant success, for an unprecedented bailout. He was part of the establishment that failed to express early, loud concerns over slipping financial standards, and in fact helped to create an environment where prudence was a career risk and CEOs felt obliged to keep dancing.
His man Summers has proven he has some bite. Because he has written often for the Financial Times we at least know his public stance on matters financial. Well, let’s put it this way: he runs no risk of being on any of the many lists of people who gave clear warnings of potential financial disaster. And dozens did. Summers was emphatically not a whistleblower. He did not rail against falling financial standards. What he did, with his allies Greenspan and Rubin, was beat back a heroic attempt in late 1998 by Brooksley Born, then boss of the CFTC in Chicago, to supervise OTC derivatives. They held her off, presumably in the Greenspanian spirit of “the less regulation, the better.” Obama appointed Gary Gensler to lead the CFTC. Gensler has a good reputation, but was hired into Treasury by … you’ve guessed it … Robert Rubin.
And as for Tim Geithner! The FOMC minutes are available, so at least we know what he added to Greenspan’s and Bernanke’s meetings. Over the Greenspan years, there were a few cautionary words from other members – a very, very few from a rather spineless group – and we know from the records how they were greeted. A typically precise response from Greenspan was: “So, this seems like a good time to break for coffee,” or words to that effect. And we can study Geithner’s objections to the Fed’s long journey down the primrose path, but our study period will not be a long one, for he questioned nothing! He was, if anything, a cheerleader, and wrote in support of the new era of “Great Moderation.” He, however, was not picked by Rubin. No, he was picked by Summers, who was picked by Rubin. These guys are very, very loyal!
Mary Schapiro, appointed to head the SEC, has been greeted with great enthusiasm by the financial industry precisely because she has been a great supporter of the industry’s financial well-being during her career, which has included positions at the SEC and the CFTC. She is seen as one who poses no threat by way of introducing nasty, inconvenient new regulations. Where is Brooksley Born when we need her? (In the interest of space, this anti-Schapiro section is brief. To help out, on January 15, there was a detailed criticism of her for being a softy in The Wall Street Journal, of all newspapers. Bush would have been proud to hire her!)
What a missed opportunity this all is. Obama was given a mandate that could have included some serious bottom kicking. We could have quickly taken quite a few steps down the long road leading to a credible financial system deserving of respect. The time to do that was now.
Obviously, Obama is the same as his predecessors, the likes of Bush, Clinton, etc. who are just there to perpetrate the continuity of the current masquerade and rob the people blind. Those who believe in Obama will get a major disappointment...
This blog deals with these issues on a daily basis, but here are just a few related posts:
[...]
So it would be very encouraging if there were someone included in Obama's appointments who had actually blown the whistle on the spiraling Ponzi scheme that our leveraged financial system had become (which is why the Madoff fiasco is such a fitting capstone to our troubles). If only there were someone with real toughness who could do unpopular things. Someone, say, like Volcker. Oh, wait a
minute. Didn't he get a job? Or was that only a game to get obstreperous characters like me on board with the program? Unfortunately, I have a sneaking misgiving that Volcker was indeed window dressing for the Presidential campaign. Dollars to donuts he has not been pestered around the clock for advice so far. And I'll tell you one thing. You don't have to know him well to know that he'll resign within a year if they don't get serious.
[...]
I am among the people who believe that Volcker will resign in a matter of months. Interestingly, I have also heard the same coming from Peter Schiff. I believe realists are getting this one right as well : Volcker has a great reputation and will not allow it to be tainted by the current establishment.
Most of our society got richer in the last 20 years, but there is not a hint of research that suggests we got happier, and plenty that suggests the reverse. In the process, we took some giant steps toward ruining the planet and had to live with the sight of many wealthy firms funding expensive PR programs that attempted to obscure the science and suggest that coal is clean and all is well.
[...]
Indeed, it's been 20 years that no real progress has been made on cleaner and more efficient energy sources as the big oil corporation, pretending to invest in these technologies are actually doing their best to divert investments from them (and themselves do not invest at all, prefering to pay off huge dividends and bonuses instead) or worse, destroying any new company that could emerge with a great solution (I don't have proof of this). It's also interesting to read John Perkin's
Confessions of an Economic Hitman and its sequel
The Secret Story of the American Empire.
First, Warren Buffett. At about 950 on the S&P on October 16, he announced that he was a personal buyer of U.S. stocks because they were cheap and their prices reflected widespread fear. This is not typical for him, but he certainly did it in 1974. When he said it back then, every stock in our portfolio at Batterymarch yielded almost 10%! The portfolio P/E was below 7.5x. Even with hindsight, if you value the market in 1974 using our current methodology, it was very much cheaper than it is today at 950, which is what we calculate as almost precisely fair value.
His recent announcement made the market seem so much more exciting than boring old fair value. So what are the possibilities? Was he performing a civic duty? Certainly, animal spirits are a critical component of any recovery, so encouragement to take risk from an authoritative source makes perfect sense. Does he believe that 1974- type cheapness can never return, or is very unlikely in this particular case? If that were the argument, we would disagree; we suspect that cheaper prices are not just possible but probable, although admittedly far from certain. Has he perhaps a tactical market timing model that produces his obvious excitement, despite these ordinary values? Most unlikely, given his style. Or are our numbers wrong? Perish the thought! In any case, it is all an interesting conundrum.
We have been several times over Buffett's course of action here:
