Leeches; Pumas; Grantham & Capitalism
Board: Macro Economics
I was down in the new marsh above the pond. It used to be a meadow, but the spring storms caved in part of the ridge, interrupting the natural riparian flow, so now instead of a meadow and a pond I have two marshes, one waxing and one waning.
I was wearing high boots, long pants, a long sleeved work shirt, gloves, a Willie Nelson bandana, and the old 2nd Infantry Division cap the Colonel gave me when he came back from Korea – and trust me, when I wear that cap, I mean business; anything less would dishonor it. Those boys went up the creek and over the mountain, and I tip my hat to them even now, sixty years later.
I also had an inch of Vaseline smeared on every inch of exposed skin – my face, neck, even hair – and another bandana loosely around my neck and mouth, for breathing air unencumbered by flies and mosquitoes. Forget DEET; it is just a hors d’oeuvres for these West Virginia bloodsuckers – but even they can’t burrow through an inch of Vaseline. They try, for sure, but they suffocate; that layer of Vaseline pretty quickly becomes a sort of high-ridge cologne -- a dense layer of dead flies and mosquitoes entombed in petroleum jelly.
So I cut quite a fine figure there in the marsh, with the August sun hammering down, and I was having a good old time, swinging my mattock like there was no tomorrow, blasting through the muck and fallen rock like old John Henry. I was hotter than blazes and sweating up a storm, but the flies and mosquitoes and leeches and ticks could not get to me, and I never felt better.
And then my cell phone rang, up on the big flat rock under the beech tree. It was sitting there, buzzing and hopping around, right beside my thermos of iced lemonade. I stood there knee deep in muck, sweating and steaming, gasping for breath through my bandana under a huge black cloud of flies, wanting to keep on blasting ahead – but wanting, just a little bit more, to engage with that thermos.
So I slogged my way out of the muck and up the slimy slope, slipping and sliding and, truth be told, saying a few things I would not want my kids to hear, and I sat down on the sparse grass, with my back against that rock, and I did that lemonade proud. And that was maybe the finest minute or two in recent memory, and I recommend it to sundry and all.
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Now, before I go on, let me say something.
I do indeed have an investing thought or two of a macroeconomic nature, and I am working my way toward laying them out, but I see that my path is a bit on the meandering side. And I do not want to waste the time of the serious investors who populate these boards; on the other hand, I write these posts mostly for my children, and for them certain things are revealed in the course of a meandering path that may ultimately be more important than the investing thoughts that lie at the final destination.
So here is my effort to be fair to all: my kids have no choice, they have to read this whole post; there will be a test! But for everyone else, I will signal the beginning of the investing ideas with a bunch of capital Q’s, like this: QQQQQQQQQQQQQQQQQQ. You can skip everything up to the Q’s and not miss anything except a few random thoughts springing from life on a West Virginia ridge.
Speaking of which . . . .
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After I drained the lemonade, I sat there for a minute, pinching ticks off of my pants and contemplating the idea of a short nap, until I remembered that the whole lemonade adventure began because the phone had rung. So I climbed up on the rock and checked – and saw that it was my middle daughter, the Last American Communist, who was spending the summer studying wildlife high up in the Rockies.
I dialed her back. “Hi, LAC, this is Dad. You called?”
“Hi, Dad! Guess where I am!”
“No! I am ON TOP OF GOTHIC MOUNTAIN -- 12,600 feet high! I hiked up this morning, and believe it or not, I am calling you on my cell phone from the summit!”
“That is great, honey! I’ll bet the view is grand!”
“Oh, yes . . . and guess what, Dad! Yesterday morning, as I was hiking out to my observation post around 5:00 AM, I came around a rock and there on the path, maybe 20 feet away, was a huge mountain lion . . . . “
“. . . . He seemed pretty interested in me – I think maybe he was stalking me. But I made myself big like they teach us . . .”
<big? 115 pounds is not big! Do you realize that a mountain lion can leap 40 feet – that it has the strength of many men in its powerful front legs – that it can kill a full-grown deer in seconds . . . .?>>
“. . . . and pretty soon he just melted away into the bushes. It was awesome; he was unbelievable!”
“Wow, what an experience! But it sounds as if that might be a dangerous lion – are they doing anything about it? Trying to trap it or eliminate it?”
A pause, then LAC’s dead serious voice – “Dad, you know better than that. You can’t have it both ways. If you care about the environment – if you care about our future on this planet – then you care about apex predators. And if you want healthy apex predators, you have to be prepared to coexist with them.”
“Of course you are right, honey – and I am proud of you. But keep an eye out, OK?”
And I hung up, and sat on the rock, watching the little baby ticks and leeches crawl up my pant legs and thinking about mosquitoes and mountain lions and clean air and genetic diversity, and how nothing is simple, everything involves a balance between costs and benefits . . .
. . . and this, of course, quickly led me to think about the Invisible Hand of the Free Market, and Capitalism, and Jeremy Grantham, and – looking at a leech struggling on my boot – Ayn Rand and her (IMO) simplistic philosophy that serves mostly to insulate people from their better selves.
But enough about the related topics of leeches, ticks, mosquitoes, and Ayn Rand (I am sorry; I know many people on these boards hold Ms. Rand in great esteem, and I respect their opinions in most areas, just not this one).
Let me instead focus on the quid and the pro quo of capitalism, and the curious reception that the recent quarterly letters of Jeremy Grantham have received.
Let’s start with a brief discussion of Mr. Grantham. Frankly, it is almost impossible to imagine him mucking out a marsh in West Virginia -- he is British, almost frail, reserved and elegant in appearance, with a tiny bit of Malcolm McDowell about him (not the Clockwork Orange character played by McDowell; just McDowell the person).
Grantham is most famous for investing based on the assumption that large-scale measures of economic behavior – as embodied in metrics such S&P 500 earnings, overall market performance, asset class pricing, and the like – will typically revert to the mean. Pragmatically speaking, this emphasis has allowed him to be astonishingly accurate in spotting bubbles and avoiding the ensuing crashes – strangely, this accuracy seems unimpressive in hindsight (where his conclusions seem almost obvious), but his views were certainly less obvious prior to the events that proved them accurate, when they were typically ignored or even ridiculed by almost everyone.
For example, Grantham predicted and avoided the crashes following the Japan and real estate bubbles of the eighties, the dot.com bubble of the late nineties, and the credit-fueled bubble that exploded in 2008, in each case to the amusement of the masses, which largely ignored him.
And this brings me to another difference between Grantham and your typical West Virginia country gentleman: Grantham is very restrained in commenting upon the fact that he has been almost uniformly right in his large macro-economic predictions, whilst his critical colleagues have lost literally billions of dollars for their clients by ignoring what he had to say. (Did you notice the “whilst?” That is a tribute to Mr. Grantham’s British origins.) Grantham will occasionally drop a soft little zinger into a speech, but honestly he is pretty darned restrained in light of all the grief he has taken over the years.
Now, here in West Virginia, we would behave very differently if we were in Grantham’s shoes. For example, I would be hanging out day and night around all those naysayers, beer in hand, reminding them about how I was right and they were wrong, riffling through a wallet full of hundreds, asking them if they needed a few bucks to make it through to Friday, and just generally getting payback for all the grief they had given me.
Anyway, even though Grantham leaves something to be desired when it comes to enjoying the fruits of victory, he is a pretty impressive guy, which is probably why his nickname is “Legendary Investor Jeremy Grantham.” Do you think I am kidding? Go ahead and Google that phrase, I will wait.
(While I am waiting, let me note that here in West Virginia we do a bit better in the nickname department – for example, my neighbor’s wayward son is “Three-Peat” and one of my poker buddies is “Wet Toad”(his last name sounds a lot like “Sprocket”). I just can’t imagine sitting there at the poker table saying, “OK, Legendary Investor, it is ten to you.” But I guess they do nicknames differently in Boston and Britain.)
Did you do the Google search? See what I mean? The guy is an investing stud. To summarize, (i) he is the expert on reversion to the mean in the investing world, (ii) he has an unparalleled record of spotting long-term macroeconomic situations – bubbles and inverse bubbles, and (iii) he is a great capitalist, effectively managing almost $100 Billion through GMO (his company).
With this background, let us look at the three main things that Grantham is saying these days. These have been recurring themes in his recent quarterly letters, which can be accessed here:
First, Grantham has reached a remarkable conclusion – the High Priest of Mean Reversion has announced, after massive research and analysis (done in the trenches by GMO’s elite corps of brilliant young economists and analysts), that this time, things are different, at least in one key area.
Specifically, the long-term trend in commodity prices is broken; there will be no reversion to the mean. Instead, many key commodities will rapidly become scarce as the world population grows and third world economies mature, and this scarcity will both (i) make long-term investments in such commodities highly profitable and (ii) result in wide-scale human suffering.
Perhaps you have a knee-jerk reaction as you read this, thinking “he is ignoring the consequences of technological innovation,” or “he does not understand the long term importance of solar energy,” or “sure, the five most dangerous words in the English language – ‘this time things are different!’”
Well, you can of course think anything you want, but decades of experience demonstrate that it is a bit foolish to take Grantham lightly in this area where he is the undisputed expert. He is not speaking lightly, and he has not ignored anything. He might be wrong, but he is certainly not being cavalier. So we ignore him at our peril.
Second, Grantham has suggested an investing strategy flowing from the above conclusion. Specifically, he recommends that people invest in stuff in the ground – much of which is admittedly expensive and even inflated at today’s prices, but which over the long term Grantham expects to rise dramatically in price. So, buy a little now and add opportunistically over time. When Grantham speaks of stuff in the ground, he means timber, farm land, certain key commodities (especially certain fertilizers), and commodities such as oil, metal ores, etc.
How has this Grantham advice been received? Well, it has gotten *a lot* of attention – when this great investor speaks about investing, people listen. For example, a quick Google search of “Grantham in the ground” gives 2,730,000 hits.
Finally – the third of the three main things Grantham is saying these days – Grantham states another conclusion resulting from his first point outlined above. Recall that his first point was that there is a new paradigm under which certain key commodities will become increasingly scarce, with large consequences for both commodity prices and human suffering.
Grantham’s third idea -- the point that this great capitalist clearly believes is the most important thing he has to say to us – is that capitalism, as excellent a system as it undoubtedly is, is completely unable to deal with the long term consequences of commodity scarcity (or, put another way, with the long term consequences of burgeoning population and profligate consumption).
The gist of Grantham’s analysis – which again is not off-the-cuff rhetoric, but instead is based upon massive research by scores of brilliant gnomes working in dimly light sub-basements (OK, I admit I am guessing just a bit about the GMO work force and working conditions) – is that capitalism weighs the *present values* of various alternatives in deciding on the appropriate course of action. As a result of this process of discounting future consequences to arrive at a present value, even the most disastrous possible consequences do not have much impact on a capitalistic calculation if those consequences are sufficiently far out in the future -- even the certainty of a disaster in 100 years has little present weight.
Grantham uses farming examples and catch phrases such as “your grandchildren have no value” to make these points, but they are not really all that hard to understand. In a sense, if we emphasize our self-interest by largely discounting future consequences (which will happen to others or from which we will be insulated by the accumulation of wealth prior to facing such consequences), it is not surprising that we are fouling the pond for our grandchildren.
And how have these thoughts – from old “Legendary Investor” himself -- been received? Well, as far as I can tell, they have not been received at all. It is as if Grantham’s quarterly letters suddenly start being written in Tasmanian or something when they get to this point – no one even talks about this stuff. For example, a Google search of “Grantham capitalism” turns up only about 1/5 of the hits of the prior search (about “in the ground”), and many of these are unrelated to this topic. And I never see any discussion of Grantham’s urgent points on any of the investing forums that I frequent.
What is going on here?
Well, first, when people read Grantham’s essays, they are looking specifically for investing advice – they are not in philosophy mode. So it is understandable that many readers will just skip the material that does not provide specific investing tips.
But this is not the whole story, not when one of the most acclaimed investors in the world speaks repeatedly and emphatically about something, and no one pays attention. Something else is going on.
My best guess – a guess that sort of explains the inattentiveness to Grantham’s key message and maybe also the peculiar staying power of Ms. Rand – is this: for many, capitalism is not a system, or a theory, or a method; it is instead a religion. And being a religion – a “true belief” in the Eric Hoffer sense -- it is immune from comment, criticism or analysis. Faith means ignoring evidence to the contrary – that is really all that it can ever mean (if there is no evidence to the contrary, there is no need for faith; reason will take you to the same place) – and apparently many people have “faith” in capitalism.
Now, it is clear that capitalism has great strengths. But it is neither scripture nor a natural law – it is not one of the Ten Commandments, or general relativity – it is simply a tool, a set of rules for regulating human behavior. And like any tool, it must be evaluated for the specific task at hand, whatever that task may be.
For example, should the military forces be established and regulated under the rules of a free market? Well, history can help us here; Rome had private armies, and we all know what happened -- in 49 BC, Caesar crossed the Rubicon and the Roman Republic was soon history. So perhaps for the military a different approach makes sense – few would dispute that idea, I expect.
Similarly, we should not recoil reflexively and close our ears when someone suggests that we need to take a different approach to addressing our long term economic problems – when someone suggests that capitalism is not up to that particular task.
Now, through a process of self-selection, the people on these Motley Fool boards tend to be self-sufficient and individualistic – they have decided to at least some extent to take financial matters into their own hands. As a result, they embody some of the best virtues of capitalism – they tend to shoulder their own loads without expectation that others will help, and they are probably more productive than the average person. And, they expect such behavior of others.
As noted, I admire these virtues and attitudes; they are important foundations of the greatest society our world has ever known. But they are not the only virtues, and they are not the only foundations upon which our society is built. We are also characterized by generosity of spirit and concern for our fellow man – and, Ayn Rand notwithstanding, most of us understand the benefits of cooperative action for our common benefit, and even for eleemosynary ends.
So, although our common attitude on these boards may be a certain disinterest in, or even disdain for, long term concerns about our shared future when manifested in the form of environmentalism (and Grantham is, no doubt, an environmentalist), it probably would not hurt to abandon preconceptions – especially preconceptions based on something as insubstantial as an overweening faith in the superiority of free market capitalism in all circumstances – and give Grantham’s ideas a fair reading. (Of course, Grantham may well be wrong, although I am not expert enough to identify errors in his thinking – but a fair reading is by no means the same thing as concurrence.)
Anyway, I do not want to get into the specifics of Grantham’s points – he is much smarter than I; he is and should be a trusted source; and he has gone to great length and expense to articulate his thinking carefully in letters that are accessible at the above link.
Instead, let me just instruct my children (and suggest to any other unfortunate soul who has actually read this far) to go ahead and read Grantham’s last four quarterly letters with an open mind.
And now I have to get back to my muck raking . . . .
A Drumlin Daisy
who has developed a test that helps me evaluate people -- basically, it involves trying to imagine their reaction to watching the movie The Adventures of Buckaroo Banzai Across the Eighth Dimension. This is just one data point; you should probably seek at least one more independent data point before reaching a final conclusion about someone.
Let’s try it, just for fun: imagine the reactions to the following movie scenes by various politicians, business leaders, Ayn Rand . . . .
Buckaroo Banzai : Remember, no matter where you go, there you are.
Buckaroo Banzai: I've been ionized, but I'm okay now.
Mission Control: Buckaroo, The White House wants to know is everything ok with the alien space craft from Planet 10 or should we just go ahead and destroy Russia?
Buckaroo Banzai : Tell him yes on one and no on two.
Mission Control : Which one was yes, go ahead and destroy Russia... or number 2?
Buckaroo Banzai : You remind me of someone I once knew.
Penny Priddy : Was she... very beautiful?
Buckaroo Banzai : She was... Queen of the Netherlands