Jeremy Grantham's January Letter To Investors

I love the Internet.  Direct access to real people and their real thoughts is such a great thing.  Here is Jeremy Grantham's January Letter Investors.  It's a fantastic read.  In fact, he references a piece that I highlighted awhile ago in the NY Times by Einhorn and Lewis as "a great job of summarizing where we are and how we got here, as well as offering some helpful advice for the future".  Couldn't agree more.

First, who is Jeremy Grantham and why do I listen to him?  From Wikipedia:

Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets. Grantham started one of the world's first index funds in the early 1970s and currently manages approximately $120 billion US. Grantham's quantitative research has revealed reversion to the mean in all bubbles in all commodity, stock and bond markets studied excluding timber.

This guy knows his stuff and has been very right about the direction and severity of our current crisis.  I don't think he's a "broken clock" either, he seems to me to be right for the right reasons -- a critical distinction.  This is why I take his perspectives on how we got here very seriously (that and the fact that meshes well with my own understanding of things).

Here's a key quote from the letter that I am in love with:

Ingenious new financial instruments certainly facilitated and exaggerated these weaknesses, but they were not the most potent ingredient in our toxic stew. That honor goes to the economic establishment for building over many decades a belief in rational expectations: reasonable,

economically-induced behavior that would always guarantee approximately effi cient markets. 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.

He's taking another pot-shot at economists and Objectivism again, which I'm perfectly fine with.  If you're a regular reader of this blog, you know that I have been aggressively illustrating the fallacy of relying on economists as a source of financial guidance.  And don't get me started on Ayn Rand or Objectivism! 

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.

I wish I could transmit my thoughts with such clarity.  Until that happens, I will settle for surfacing the great works of others.

Ever notice that WSJ Opinion Pieces don't allow comments?

It's probably because they're all pretty lame.  Latest piece which is tops on the most read list on WSJ is one titled:  "'Atlas Shrugged':  From Fiction to Fact in 52 Years".

Really?

I always wonder about the delusional capacity of people who believe that Atlas Shrugged should be used as a template for real-world action.  It's a piece of fiction.  It's like it has become the greedy capitalist's version of The Lord of the Rings.  Stephen Moore, the piece's author, seems to believe that current events are playing out as a direct corollary to the book's themes (Atlas Shrugged, not LOTR.  Although analogies with that book might be pretty entertaining).

His main thesis is thus:

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

Government programs create havoc and poverty?  Really?  I love this sweeping assumption which has no basis in fact at all.  It's just a prejudice that Republicans love to hide behind, kind of like a religion.  Is there any support for this?  Not really, there have been many, many government programs that have been extremely helpful to our society.  Highways are pretty helpful.  They help companies transport supplies and goods and stuff.  Guess what?  Government built that.  Shocking, I know.  Weights and Measures departments are pretty useful as well.  I like knowing that someone out there is checking each gas station to ensure that when I pay for a gallon of gas, I'm getting a gallon of gas.  Revolutionary stuff that a private company without oversight would eventually screw up.

The idea that private corporations are the answer to all of society's problems is so wrong, it's farcical.  I honestly don't know how all of these Randian/Objectivist wingnuts actually function in society with these beliefs.  Clearly a lot of people believe this crap and in fact there are a lot of successful people who are fervent believers.  Many of our top executives are big-time Randian/Objectivist followers.

But they're also wrong.

Exhibit #1:  Alan Greenspan -- thought that rational self-motivation would cause banks to properly assess and manage risk.  Completely wrong.  So wrong, it f'd up our economy.  And this guy did it by the book.

The fact that they don't understand that there are some things in society that need to be a public good and the best way to fund and provide for them is in the form of a government program confounds me.  Can you imagine if our highway system was built by private corporations?  The amount of toll friction to get anywhere would completely overwhelm the freedom from geography we currently enjoy.  Additionally, I can easily see a scenario prices would skyrocket if there was a natural disaster and people needed to flee a certain area.  Look what happens after natural disasters, prices of replacement goods go through the roof.  Yes, it reflects market mechanisms.  No, it's not good for society and generates results that suck for everybody.

Exhibit #2:  Enron -- these guys were the ultimate free-marketeers.  They were also the guys who took joy in "ripping off Grandma's face" in terms of higher electricity prices created through false scarcities.  They fraudulently gamed a system for pure profit motives to the detriment of our largest tax-generating state.

What frustrates me most is that I haven't seen a good, fundamental refutation of Objectivisism being publicly discussed.  Objectivism (plus Religion) has been the core philosophy of the Republican government that has destroyed the functioning of our markets.  The removal of governmental oversight from our largest financial markets is largely responsible for much of the mess we're in.

Exhibit #3:  Fannie Mae/Freddie Mac -- now this isn't quite as clear cut because they are hybrid governmental/capitalistic vehicles.  And frankly as much blame can be put on the Clinton adminstration for encouraging these guys to pursue subprime markets.  But if you read Bill Burnham's great post on this, you'll see that this can be traced back to a very sophisticated lobbying effort started by the officers of the companies who were, get this, just trying to put into place a strategy that maximized their compensation.  A very Randian thing to do.

The opinion piece is here.  Read it if you want to witness a delusion in action.  It would be pretty funny if most of our current Republican apparatachick didn't fervently believe it.

So let's hope the WSJ turns on comments for their opinion pieces.  It's time someone ripped these guys apart.