Our Chat With Jeremy Grantham

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월스트리트저널금요일, 20. 9월 2013, 23:31:00 KST

He called the Internet bubble, then the housing bubble. What alarm bell is Jeremy Grantham, the chief investment strategist at GMO, ringing about now?

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Jeremy Grantham

JEREMY GRANTHAM'S GOT A TRACK RECORD that's impossible to ignore—he called the Internet bubble, then the housing bubble. While moves like those have earned the famed forecaster the nickname "perma-bear," in early 2009 he also told clients at GMO, his $100 billion, Boston-based money-management firm, to jump back into the market. It was the same week that stocks hit their post-Lehman low.

Now, however, the outspoken Yorkshireman, who is chief investment strategist at GMO, is making headlines with a new prediction: Dire, Malthusian warnings about environmental catastrophe. To hear him tell it, the world is running out of food. Resources will only keep getting more expensive. And climate change looms over it all. Indeed, at times he sounds like someone Greenpeace would send door-to-door with a clipboard. (He's not above likening the coal-industry spin to the handiwork of Goebbels.) If it were anyone else, Wall Street would probably laugh him off. But because it's Jeremy Grantham, they just might listen.

Q: You've been ringing alarm bells about commodity prices. Why all the worry?

A: They came down for a hundred years by an average of 70 percent, and then starting around 2002, they shot up and basically everything tripled—and I mean, everything. I think tobacco was the only one that went down. They've given back a hundred years of price decline and they gave it back between '02 and '08, in six years. The game has changed. I suspect the game changed because of the ridiculous growth rates in China—such a large country, with 1.3 billion people using 45 percent of the coal used in the world, 50 percent of all the cement and 40 percent of all the copper. I mean these are numbers that you can't keep on rolling along without expecting something to go tilt.

Q: This led to some surprising conclusions, like your concerns about natural resources most of us have barely heard of.

A: We went through one by one, and we decided the most important, the most valuable and the most critical was phosphate or phosphorous. Phosphorous cannot be made, only placed. It is necessary for all living things. And we are mining it, and it's depleting. And I like to say, if that doesn't give you goosebumps, then you're tougher than me. That is a terrible equation. So I went to the professors, and I said, what's going to happen, and they said, 'Oh, there's plenty of phosphorous.' But what's going to happen when it runs out? 'Oh, there is plenty.' It's a really weak argument. We do have a lot, but 85 percent of the low-cost, high-quality phosphorous is in Morocco…and belongs to the King of Morocco. I mean, this is an odd situation. Much, much more constrained than oil in the Middle East ever was—and much more important in the end. And the rest of the world has maybe 50 years of reserve if we don't grow too fast.

Q: What are investors supposed to do?

A: The investment implications are, of course, own stock in the ground, own great resources, reserves of phosphorous, potash, oil, copper, tin, zinc—you name it. I'd be less enthusiastic about aluminum and iron ore just because there is so much. And I wouldn't own coal, and I wouldn't own tar sands. It's hugely expensive to build coal utilities, and the plants they have to build for tar sands are massive, and before they get their money back I suspect that the price of solar and wind will have come down so much.

So I wouldn't use that, but I think oil, the metals and particularly the fertilizers, I would own—and the most important of all is food. The pressures on food are worse than anything else, and therefore, what is the solution? Very good farming, which can be done. The emphasis from an investor's point of view is on very good farmland. It's had a big run. You can never afford to ignore price and value, but from time to time you can get good investments in farmland, and if you're prepared to go abroad, you can do it today. I wouldn't be too risky. I would stay with distinctly stable countries—Australia, New Zealand, Uruguay, Brazil, Canada, of course, and the U.S. But I would look around, in what I call the nooks and crannies. And forestry is the same. Forestry is not a bad bargain, a little overpriced maybe, but it's in a world where everything is overpriced today, once again, courtesy of incredibly low interest rates that push people into investing. A wicked plot of the Federal Reserve.

Rising Commodities

Total return over 10 years (2003-2013)

Source: S&P Dow Jones Indices

Q: Why is this problem so hard for us to deal with? You've railed against short-termism.

A: A career politician has a very short horizon. They're not really interested in problems that go out five or 10 years. Secondly, you have what they call the discount-rate effect, which is a dollar in 10 years has a much lower value to a corporation than a dollar today. So they're only interested, at the corporate level, in the short term. And politicians, in the very short term. And you have a vested-interest effect. In other words, it's very hard to get change when the people who are benefitting very nicely, thank you, from the current situation don't want it. If the oil industry is making a bundle, which they are, they don't want to change to a system that recognizes climate change and the need to have a tax on carbon. And they can fund right-wing think tanks, and they do.

So you have vested interests fighting like mad to keep the situation the way it is. And that's always the case. So change is difficult, and with our politicians with the short-term election problems, it's nearly impossible. And when they depend so much on campaign contributions, and they find the campaign contributions come so much from the vested interests, the financial world, but more particularly the energy world, it's a bloody miracle anything gets done.

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Q: And that long-term perspective is important, not only to changing society, but also to investing. As an investor, you're known for that.

A: I like to get what I consider the central idea, which in the stock market is patience and value and mean reversion. And in society, it is resources and climate damage. That's plenty to go on, and that's a pretty strong focus. We have a shockingly short horizon in the stock market, as witnessed in the Internet bubble. And we have a shockingly short horizon about social problems, where all we want to hear is how rapid the growth will be and how good everything is.

Q: How about a stock forecast. You called the market's initial 2009 rally, but by 2010 you were predicting "seven lean years." So far, however, the market's soared.

A: And it can go a lot higher than this with the Fed pushing it. And we can have another real bubble. Based on the Fed's history, that seems to be what they like. You know we had one in 2000 with Greenspan, and then we had a housing bubble and a financial bubble with Bernanke and Greenspan. And it looks like Bernanke is perfectly happy to keep the rates down and watch as stock prices rise. They do that because as the rising stock prices give you a little consumer kick, you feel richer—and then, when you least need it, the whole thing bites you, and the prices go back to fair price or lower, like they did in '09, and the consumer reacts, and you have a recession and a bad stock market. But they've had two of these, and they seem bound and determined to do it a third time. As I've said, it's a workable definition of madness to keep doing the same thing and expect a different result.

Q: Like many Englishmen, you seem to regard Americans as wildly, fool-heartedly optimistic.

A: America is a very, very optimistic-biased society, as I believe, incidentally, Australia is, for whatever that means. We're the two great optimistic societies. You can have a conversation about a housing bubble in England, and they'll say, 'oh, is that right? Let me see the data.' If you have one in Australia, you have World War III! They hate you. They hate you for years! [laughs] The idea that you could suggest that they were having a housing bubble. [laughs]

Q: So the stereotypes about us are true?

A: Absolutely. Now, it's been very useful in enterprise, in venture capital...in start-ups. We have more failures here than probably every developed country added together, but in consequence, when the smoke clears, we tend to end up with the Amazons and the Googles. It's not an accident. We just throw more darts at the dartboard. The Germans are very conservative about throwing darts. We have an admirable risk-taking attitude, and we're very tolerant of failure.

Q: We benefit from it?

A: Absolutely, but the downside is you're willing to throw darts because you think you're going to win. American entrepreneurs all know they're going to win. Only 10 percent survive, but they all think they're going to win.