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The top 1 percent is hardly known for its altruistic, sharing-is-caring streak. Self-interest and self-absorption are more its M.O., as illustrated in my colleague Max Abelson’s at once hilarious and terrifying look at Wall Street “bonus withdrawal.”
Contrast the me-my-mine worldview with that of investor Jeremy Grantham of GMO, a $100 billion asset-management shop in Boston. Although he is hardly a starving poet, the 73-year-old, U.K.-born hedgie eloquently wears his conscience on his sleeve. Exhibits A, B, and C: Grantham’s self-proclaimed February “Longest Quarterly Letter Ever.” In this 15-page treatise, which draws from Hamlet and Western philosophy, Grantham looks back at a decade of prescient market calls. (See what he told us 10 years ago.)
Give the guy credit: When Grantham and I lunched in 2002, in the midst of the post-tech, post-9/11 market swoon, he told this young man to seek opportunities in stumpage—“timber,” as we plebeians call it—preferably in some developing economy with fecund forests. Emerging markets and natural resources turned out to be the most lucrative nexus of returns over the past decade. If I only had two nickels to rub together back then ….
Now, amid today’s prevailing complacency toward risk assets—the market is at a four-year high, junk bonds are loving life, volatility is nowhere to be found—Grantham is exhorting investors to bite on a grain of kosher salt:
The first [bear market] in the 20th century lasted for 10 years, 1910 to 1920. The second one lasted from 1929 to 1944. And the third one lasted from 1965 to 1982, 17 years. And in between you had mega-bull markets where you made 10 times your money as we did from 1982 to 2000. So this bear cycle won’t play itself out overnight.
So should you be having thoughts of diving headlong into risk assets, he warns:
Resist the crowd: cherish numbers only. We can agree that in real life as opposed to theoretical life, this is the hardest advice to take: the enthusiasm of a crowd is hard to resist. Watching neighbors get rich at the end of a bubble while you sit it out patiently is pure torture.
(Imagine all that in Grantham’s dour, cut-to-the-chase British accent.)
But what makes his latest quarterly letter so unique is how Grantham reserved the bulk of his inkwell to appeal to our intergenerational consciences, by calling out the shortcomings of capitalism (the very system he traffics in):
Damage to the “commons,” known as “externalities,” has been discussed for decades, although the most threatening one—loss of our collective ability to feed ourselves, through erosion and fertilizer depletion—has received little or no attention. There have been no useful tricks proposed, however, for how we will collectively impose sensible, survivable, long-term policies over problems of the “commons.” To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point: capitalism and corporations have absolutely no mechanism for dealing with these problems, and seen through a corporate discount rate lens, our grandchildren really do have no value. [My emphasis added]
Grantham excoriates widening income inequality, pointing out that total remuneration in the U.S. for corporate executives rose as a percentage of the average worker’s pay from 40 times in the Eisenhower era to more than 600 times today, “with no indication of any general improvement in talent.” Meanwhile, he adds, “the average hour’s pay stayed unprecedentedly unchanged for 40 years!”
For the time being, capitalism has tuned itself to rapid growth at almost any cost. Circumstances such as the hydrocarbon revolution and the ensuing population explosion have allowed for both high growth and high profit margins to sustain the growth. Sustained high margins have in turn trained capitalists—or corporate executives if you prefer—to set high hurdles for all investments. The 14 percent hurdle for discount rates that was considered a minimum in the late 1990s, for example, halves the future value of a dollar every 5 years, so that in 10 years today’s dollar is worth 25¢; in 20 years 6¢; and in 50 years one tenth of one cent! It is hardly surprising that any event out that far is ignored.
By way of illustration, Grantham considers the example of a corporation’s current actions costing society at large $1 billion dollars’ worth of harm in 50 years. Discount that price tag back to today under widely accepted accounting and finance practices, and that company’s management would feel only a $1 million hit today. “Why,” he asks, “should they care?” In contrast, he explains, with individual incomes compounding at most at 1.5 percent a year, their risk-free investments at an imputed zero percent (today’s 30-year bond minus inflation), and an equity investment at perhaps 4 percent, net of inflation and tax, the aforementioned $1 dollar pain at a 4 percent discount rate is going to feel to the average citizen not like $1 million, but like $100 million. All of which inevitably leads Grantham to contemplate, “Shouldn’t the value, and hence cost, of a child’s life in 50 years be identical to the value and cost today? The reader can easily see how a corporation’s outlook on potential future damage might be a painful mismatch with that of ordinary individuals and society at large. The consequences of this not only can be disastrous but probably will be.”
Days after I read it, Grantham’s stark conclusion still haunts this father:
Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence. Fifty and one-hundred-year horizons are important despite the “tyranny of the discount rate,” and grandchildren do have value. My conclusion is that capitalism does admittedly do a thousand things better than other systems: it only currently fails in two or three. Unfortunately for us all, even a single one of these failings may bring capitalism down and us with it.