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.

Paulson's Capital Cram has no Multiplier

I have to change my anti-media rants because there are some outlets and some writers who refuse to submit to the errors of their business overlords and the mediocrity of their colleagues.  NYT and Newsweek, I'm looking at you.  Great article in the NYT discussing how smaller, healthier banks are hoarding the money they received through the TPILF...I mean TARP.  The author, Mike McIntire, did a very simple thing, he went through the transcripts of as many earnings calls and investment conferences, he was able to get a more candid view of the banks plans for the money than what they are providing through worthless press pronouncements.

“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.” (Walter M. Pressey, president of Boston Private Wealth Management)

This has some amazing implications.  Before the TARP was approved, I had a discussion with a friend of mine who invests in financial institutions for a big-time money manager.  His argument was that TARP should be approved because it would inject money into the economy, which through the magic of an economist's Multiplier Effect would have an outsized effect on the economy.  Looks like Boston Private is exhibit #1 in how that's not going to happen.  If the banks take the money and sit on it, as it appears they are more than happy to do, then it doesn't have any impact other than making already healthy banks wealthier.

And they just approved part II of this beast?  Not only is our government not responsibly regulating bad industries, they now appear to be magnifying their bad decisions.

I'm pretty sure that putting $750 Billion dollars into the hands of the lower economic stratus of our economy would have a much, much larger multiplier effect than these idiots.

Can we put a bullet in Economists yet?

Heard on Bloomberg radio this morning as stated by Chris Whalen of Institutional Risk Analytics:  "The Fed is full of economists.  They know nothing.  They need our help.  Let's help them understand that putting more money into the banks will not do anything to help our economy."  (Or words to that effect.)

Yes, brother, yes!