The Grantham manifesto<http://ftalphaville.ft.com/blog/2011/08/10/649506/the-grantham-manifesto/> Posted by *Neil Hume <http://ftalphaville.ft.com/blog/author/humenmh/>* on Aug 10 14:30.
Albert Edwards has a soul mate — GMO’s Jeremy Grantham. Like the SocGen strategist, he too is worried about the massive transfer of income<http://ftalphaville.ft.com/blog/2011/08/09/648126/edwards-says-this-has-nothing-to-do-with-that-downgrade/>to the very rich that has occurred and has been tolerated only because Central Bankers have created housing booms. So worried is Grantham that he thinks debt forgiveness and changes to the tax system may be needed if America is ever to prosper again. >From Grantham’s latest letter to investors (emphasis throughout ours): *Opening remarks* My worst fears about the potential loss of confidence in our leaders, institutions, “and capitalism itself” are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the “average hour worked” and the fortunes of the average worker. Walking across the Boston Common this morning, I came to realize that the unpalatable (to me) *option of some debt forgiveness on mortgages looks increasingly to be necessary as well as the tax changes I discuss here *. To go further, if we mean to prosper long term, I am sure we need to act to make debt less attractive to everybody: it really is a snare and a delusion. *The problem* Productivity has been very high – remarkably so compared to the rest of the developed world average – *but the U.S. continues its odd and long history of fl owing all economic gains to corporations and the very rich and basically none to the average hour worked*. Therefore, it should come as no surprise that we are facing weak demand. For 30 years to the year 2000, consumers compensated for their lack of progress in hourly wages partly by working harder and longer and in greater numbers (i.e., a higher participation rate) and partly by borrowing. But in the 10 years after 2000, the participation rate in the workforce has dropped dramatically (see Exhibit 2) and hours worked per person has flattened *so that the only way for individuals to grow their consumption more recently was by borrowing even more and, to some extent, by speculating in housing*. *Rising house prices provided the (apparently) real backing for more debt and, even where that backing did not exist, the ingenuity (and, we must admit, greed) of the financial system still supplied the debt. And all of that has gone.* The solution. If we want to dig out of our current morass, don’t we have to change this equation and isn’t the most direct way of doing this to divide the pie more evenly? *That would mean lower income and sales taxes for the bottom 75% of earners and higher taxes for the top 10%!* We have allowed the vagaries of globalization and the plentiful supply of cheap Chinese labor to determine our income distribution, which has become steadily steeper, to the point where we have become one of the least egalitarian developed societies. *Wouldn’t it be better for us to decide deliberately and by ourselves that income distribution which creates the best balance of social justice and incentive to work? * I am not suggesting that we become some goody two-shoes Scandinavian country. *But how about going back to the levels of income equality that existed under the Presidency of that notable Pinko, Dwight Eisenhower (see Exhibit 4). And don’t think for a second that this more equal income distribution somehow interfered with economic growth: the 50s and 60s were the heyday of sustained U.S. economic gains. * And finally the warning: If we continue to drift around rudderless, if we don’t develop some real leadership soon, then seven lean years may be the least of it. When I was fi ve years old there was a globe on my grandparents’ landing. The British Empire and Commonwealth bits were in red. You have no idea how red the globe was … India, Pakistan, Bangladesh, Burma, Malaysia, Africa from Egypt to South Africa, and so on. It was undeniably the largest Empire by far in history, both geographically and in population.* And 20 years later it was gone. Too many wars, sloppy and sometimes very unenlightened management, not enough money in the till, and, simply, a changing world.* Sound familiar? Exhibit 2 and 4: <http://av.r.ftdata.co.uk/files/2011/08/Civilian-employment-and-Labor-Force-GMO.jpg> <http://av.r.ftdata.co.uk/files/2011/08/Income-shares-GMO.jpg> *Addendum.* Grantham’s view on the markets: As mentioned in previous quarterlies, the main long-term risk is that after two massive bubbles and two equally massive resurrection programs, the Fed may be out of ammunition. *Should more building blocks fall (government bond downgrade and further market declines have missed my deadline) and a serious global double-dip develop, then the pattern of market behavior this time may be more historically typical.* That is, instead of quickly recovering, markets will become cheap and stay below long-term averages for several years as was the case pre-Greenspan. *Twenty years is a long time, so most investors think that dipping to fair value for a minute and bouncing is normal. It is, in fact, highly aberrant historically. *Markets staying down and washing away a whole generation’s false expectations, high animal spirits, and excessive risk-taking – that would be normal. In the long run, a prolonged period of lower priced assets would lead to a much-improved, less risky, and less bubble-prone environment. In short, a more manageable world. It would also mean much higher returns from investing at lower prices. Long-term benefits from short-term pain. Just the kind of trade-off that the children in charge now would never make deliberately. But it may well happen anyway. -- Best Regards, Jay Shah, FRM *Expect the unexpected!!! * -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
