A Malthusian Who Knows Markets

From a profile of Jeremy Grantham published in the New York Times a couple days ago.

Here are a few snippets:

On his track record:
Grantham has a long track record. He was right about indexing, an investment strategy he took a lead role in inventing, when everyone else assumed that you should try to beat the market rather than join it, and about the long rally in small-cap stocks in the early 1970s, the bond rebound in 1981 and the resurgence of large-cap growth stocks in the early 1990s. He was also, well in advance, right about one bubble after another: Japan in 1989, tech stocks in 2000, the U.S. housing market and financial markets and global equities in 2008 (in the wake of which, when investors were still reeling, he made a celebrated and early bullish call in a letter titled, Reinvesting When Terrified
On prognosticating and environmentalism:
When he reminds us that modern capitalism isn’t equipped to handle long-range problems or tragedies of the commons (situations like overfishing or global warming, in which acting rationally in your own self-interest only deepens the harm to all), when he urges us to outgrow our touching faith in the efficiency of markets and boundless human ingenuity, and especially when he says that a wise investor can prosper in the coming hard times, his bad news and its silver lining come with a built-in answer to the skeptical question that Americans traditionally pose to egghead Cassandras: If you’re so smart, how come you’re not rich?
On climate change policy:
Grantham says that corporations respond well to this message because they are “persuaded by data,” but American public opinion is harder to move, and contemporary American political culture is practically dataproof [my boldface]. “The politicians are the worst,” he said. “An Indian economist once said to me, ‘We have 28 political parties, and they all think climate change is important.’ ” Whatever the precise number of parties in India, and it depends on how you count, his point was that the U.S. has just two that matter, one that dismisses global warming as a hoax and one that now avoids the subject.
On bubbles and animal spirits:
Grantham, who says that “this time it’s different are the four most dangerous words in the English language,” has become a connoisseur of bubbles. His historical study of more than 300 of them shows the same pattern occurring again and again. A bump in sales or some other impressive development causes people to get excited. When they do, the price of that asset class — South Sea company shares, dot-coms — goes up, and human nature and the financial industry conspire to push it higher. People want to hear good news; they tend to be bad with numbers and uncertainty, and to assume that present conditions will persist. In the financial industry, the imperative to minimize career risk produces herd behavior. As John Maynard Keynes, one of Grantham’s heroes, put it, “A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” All these factors contribute to a surge of what Keynes called “animal spirits,” which encourages people to convince themselves that this time prices will just rise and rise.

I'm noting Grantham track record and think he's making a lot of sense.  But I wonder: How many connoisseurs of bubbles have worked to find the controls?  That is, find the historical episodes where there was a rapid market adjustment that may have appeared to be a bubble to the rare connoisseurs but then it turned out not to be a bubble.   After the fact, maybe all bubbles look alike.  But looking at it from hindsight doesn't really count.

But now Grantham is saying this time is different:

So it’s news when Grantham, who has built his career on the conviction that peaks and troughs will even out as prices inevitably revert to their historical mean, says that this time it really is different, and not in a good way. In his April letter, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” he argued that “we are in the midst of one of the giant inflection points in economic history.” The market is “sending us the Mother of all price signals,” warning us that “if we maintain our desperate focus on growth, we will run out of everything and crash.”
That sounds even more pessimistic than me, especially that last sentence.  Prices will rise, which will keep us from running out.

But while I'm nowhere near as confident as Mr Grantham, it seems very possible to me that the long downward trend in commodity prices has reversed permanently.


  1. Thanks for this Mike. I enjoyed your commentary on the profile.

  2. Can you give the name of the study on 300 previous bubbles?


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