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CNBC Transcript: Jeremy Grantham
CNBC Transcript: Jeremy Grantham
MARIA BARTIROMO
The only weapon they have is the so-called wealth effect. If you can
drive the market up 50 percent, people feel richer. They feel a little
more confident, and the academics reckon they spent about three
percent of that. So, the market went up 80 percent last year. They
should be spending 2.4 percent extra of— of the entire value of the
stock market, which is about two percent of GDP. And that's a real
kicker.
You don't see it because of the enormous counter drag from the
housing market— and— and its complete bust. But, it would have
been worse with— without this. The problem is, they know very well
how to stimulate the market. But, for whatever reason, they step
away as the market gathers steam, and— and resign any responsibility
for moderating— a bull market that may get out of control as we saw
in '98 and '99 with Alan Greenspan, as we saw in the housing market.
GRANTHAM: The consequences are you get boom and bust. You—
stimulate in '91. You let it get out of control. You have this colossal
tech bubble in '99. Sixty-five times earnings for the— for the growth
stocks. Then you have an epic bust. Then, of course, they're panic
struck. They race back into battle with immense stimulus with
negative real rates for three years.
And you get another— rise of risk taking and everything risky—
prospered in '03, '04, '05, '06, '07 until we had what I called the first
truly global bubble. It was pretty well everywhere in everything. It
was in real estate. Almost everywhere. It was in stocks absolutely
everywhere. And— and it was in the bond market to some
considerable degree.
And that, of course, broke. They all break. That's the one thing they
can't control. You can drive a market higher and eventually — of its
sheer overpricing, it will eventually pop. And, typically, it seems to
pop at the most inconvenient time. So, we're going to drive this one
up, and this time there isn't much ammunition. In 2000, the Fed had
a good balance sheet. The government had a good balance sheet.
In '08, it was still semi respectable, and— and now it's not. It's not
very respectable at all. So, what are they going to use as ammunition
if they cause another bubble and it breaks, let's say, in a couple of
years? Then we might have some real Japanese-type experiences.
BARTIROMO: Where are the solutions then, if not this? What do you
think ought to be done?
The kind of people who were building the extra million-dollar— sorry—
extra million houses in— in '05, '06 and '07. And find— and find jobs
for them. We have an infrastructure that is decades behind schedule.
He pays about half price because he pays a lot. He, the government—
it, the government, pays a lot for someone sitting down unemployed.
All the— all the many ways— that unemployed get— get helped plus—
the government carries the atrophying of the skills. Society loses that,
the longer they're unemployed.
The Fed has enormous power to move markets. And it— not
necessarily immediately, but give them a year and they could bury a
bull market. They could have headed off the great tech bubble. They
could have headed off the housing bubble. They have other
responsibilities— powers. They— they could have interfered with the
quantity and quality of the sub-prime event. They chose not to.
I wouldn't start the journey from here if I were you when you ask—
the way. You— you really shouldn't allow the— situation to get into
this shape. You should not have allowed the bubbles to form and to
break. Digging out from a great bubble that has broken is so much
harder than preventing it in the first place.
Japan has paid 20 years for the price of the greatest land— bubble and
the greatest stock bubble in history. Far worse, in my opinion, than
the South Sea bubble or the tulip bubble in many ways. The land
under the Emperor's Palace really was worth the whole state of
California, which is quite remarkable. But, we spent quite a few hours
checking it, and it seemed to be true. And the price they paid— to dig
out of that has, of course, been legendary.
And we better hope that we don't pay anything like that price. But,
that is a risk. It's not— it's not certain that we will escape— without
several years of— sub-average growth and— and stress to the system.
It— it's these movements between the great asset classes that make
you money. And I'm happy to say that that's the group that, GMO, I
work with— asset allocation where we are students of bubbles. And—
and— and, basically, financial history. It's a very entertaining job, I
might say, which has made me forget the question.
GRANTHAM: I'm pleased to say two and a half years ago, I did a
quarterly letter called the Emerging Emerging Bubble, and I argued
that in the following five years, the case for emerging would be seen
as so crystal clear— that it could not possibly help but outperform and
go to a premium PE. Now, up until then, they had always sold at a
discount. Sometimes a substantial discount.
But, I — the case is this, they are growing at about six percent real.
Six percent plus inflation. We are growing in the developed world at
about two. Before '95, there was no difference. Before 1995. And
now it's three to one. My argument two and a half years ago is what a
simple bull case? You want to grow? Buy emerging.
You want to be conservative? Buy utility companies or the blue chips
of— of— of the developed world. If you're going to grow at six,
you're— you're— it is very appealing that you would outperform a
world growing at two percent. And the developed world is slowing
down. I— I say it has an incurable case of middle-aged spread.
It's just been there, done that. It's a little old. It's a little pastured.
Doesn't have the population profile. Emerging does. And they have
the attitude, and they have good finances. And— and they're really
showing— a— a clean pair of heels to the developed world.
Now, it turns out that you— it's a bit more complicated. You don't
actually find a strong correlation between— top-line GDP growth and
making money in the market. It— it seems like you should. The
fastest-growing countries should give you the highest return. They
simply don't. But, there's only four of us— that— that believe that
story. Everyone else in the world believes that if you grow fast like
China, you'll outperform in the stock market.
And so, I'm reasoning two and a half years ago, everybody will think
this way pretty soon. And surely— emerging countries will go to a big
premium on— every dollar of earnings that they make. And they're
beginning to. But, I think they've got at least a few years left. The
bad news for us, because we're fairly purest value managers for
mainly institutional clients, is we don't like to play games with
overpriced assets.
And that's the world that we're in now. The Fed is driving the S&P,
which is overpriced— the Standard & Poor's 500— a broad measure of
the U.S. market, is driving it from already substantially overpriced into
what I would call dangerously overpriced.
This is about the boundary line. We expect on a seven-year horizon
one percent only plus inflation from the U.S. market. And now, as you
push it up another 20 percent perhaps in the next year, it becomes
dangerously overpriced. A bubble territory and ready to inflate to
considerable pain. That's what we have to worry about.
And cash has a— a virtue that people don't appreciate fully. And that
is its— its optionality. In other words, if anything crashes and burns in
value— say the U.S. stock market, if you have no resources, it doesn't
help you. If the bond market crashes, and you have no resources, it
doesn't help you. And what cash is is an available resource. It buys
you the right to buy the U.S. market if the S&P drops from 1,220
today to 900, which is what we think is fair value.
You then have some resources if you have some cash. There's
another complexity and that is that we believe that the old-fashioned,
super blue-chip franchise companies like Coca-Cola are also much
cheaper than the rest of the market. So, if someone put a gun to my
head and s— said, "I've got to buy stocks. What should I buy?" I'd
say, "Buy two units of the Coca-Colas. They're the cheapest group
in— in the equity world. Buttress it with a fairly large dose of
emerging markets. They're a little overpriced. But, they've got
potential. And— a lot more cash than normal for opportunities should
the bubble blow up."
And then I think it doubled it again, and I think the trend line is
probably about 75. So, the world has changed. We're entering a
period where we're running out of everything. The growth rate of
China and India is simply— can't be borne by declining quality of— of
resources. And— and I think we're in a period that I call a chain-
linked— crisis in commodities.
So, it'll be a crisis in rice. It will triple and it'll come down. But,
then— then it'll be followed by one in corn and— and barley and so on.
And— and copper will go up a lot, and then that will come down. But,
oil will be in crisis mode. From now on, we just better get used to it.
So, if you're afraid of inflation, I think— and if you can bring yourself
to have a long horizon— and when I say long, I mean ten to 20 years,
not the usual ten to 20 weeks— that locking up resources in the
ground is a terrific idea.
BARTIROMO: And—
They doubled because oil in the ground became worth four times what
it was. And that is a wonderful thing for an oil company with good
reserves. But, the same if you had mineral reserve. That— that's the
play, I think, on commodities.
And what the Fed is trying to do is to make cash so ugly that it will
force you to take it out and basically speculate. And in that, it's very
successful, of course, with the hedge funds. They're out there
speculating. Finally, the ordinary individuals are beginning to get so
fed up with having no return on their cash that they're beginning to do
a little bit more purchasing of equities. And that's what the Fed wants.
It wants to have the stocks go up, to make you feel a bit richer so that
you'll spend a little more and give a short-term kick to the economy.
But, it— it's a pretty circular argument. For every dollar of wealth
effect you get here, as stocks go from overpriced to worse, you will
give back in a year or two. And you'll give it back like it— like it
happened in— in '08 at the very worse time.
All of the kicker that Greenspan had engineered for the '02, '03, '04
recovery and so on was all given back with interest. The market
overcorrected through fair value. The housing market that was a huge
driver of economic strength and a— actually masked structural
unemployment with all those extra, unnecessary houses being built.
All of that was given back similarly at the same time. It couldn't have
been worse.
BARTIROMO: What are you expecting from the economy in 2011?
And unless we're lucky, we will have yet another crisis without being
able to lower the rates 'cause they'll still be low, without being able to
issue too much moral hazard promises from the Fed because people
will begin to find it pretty hollow. Cycle after cycle, the Fed is making
basically— is flagging the same intention. Don't worry, guys.
Speculate. We'll help you if something goes wrong. And each time
something does go wrong and it gets more and more painful.
But, if we avoid that, I think you have to count on the dollar being at
least irregularly weaker until we finish the Q game, which is ma—
basically just running a printing press and using it to push down
artificially— the bond rate. And let me point out that the Fed's actions
are taking money away from retirees.
They're the guys, and near retirees, who want to part their money on
something safe as they near retirement. And they're offered minus
after-inflation adjustment. There's no return at all. And where does
that money go? It goes to relate the banks so that they're well
capitalized again. Even though they were the people who exacerbated
our problems.
So, I think it's a— a— bad idea at any time and a particularly bad idea
now.
BARTIROMO: And—
GRANTHAM: The trouble with bubbles is when they go, it's very hard
to know how painful it will be. But, typically, they go racing back to
fair value. So, if this market goes to 1,500 in a couple of years, by
then, fair value might be at 950— 950 is painfully below 1,500. And
by the time it gets there, the mysteries of momentum in— in the
market— everyone likes to go in the same direction, and they shout,
"Fire."
It— it's— usually the case that it doesn't stop at fair value— 950. So,
it might go to 700. And— and you're talking another market that
halves. It halved in 2000, and we thought it would by the way. We
predicted a 50 percent decline. It halved this time in— in '08, '09.
And I think it might very well halve again if it gets back to 1500.