My Review of Jeremy Grantham's "The Making of a Permabear:........."

Regression to the Mean?

 

I met Jeremy Grantham of GMO fame on several occasions many years ago and I had a working relationship with Dick Mayo, the M in GMO. Thus, it was a pleasure to read Jeremy’s autobiography written with the help of Edward Chancellor. Grantham is a value investor’s value investor and as such numerous times in his career he was out of step with a raging bull market, hence the title “Permabear." In the interest of full disclosure, I would characterize myself as a value investor.

 

Grantham was born in Yorkshire, England in 1938, just at the onset of the war that would kill his father. His background was middle class and he attended Sheffield University, a far cry from the Oxbridge of the elite. However, the future Nobel Laureate John Hicks read one of his papers. Nevertheless, by the dint of his efforts and natural intelligence he ended up at Harvard Business School and ultimately into investment management.

 

He broke off from Keystone, a prominent mutual fund manager in the early 1970’s to form Batterymarch Financial where he was a pioneer in the nascent index fund industry. He left them to form his own firm, and Dick Mayo soon joined him. The mid-1970’s was a heyday for value managers as the once exalted nifty fifty cratered and practically everything else moved higher. Simply put, value was having the sale of the century.

 

Like most value managers, Grantham believes that stock valuations and profit margins are mean reverting. Simply put, when the market’s price/earnings ratio gets down to around 7 or 8, the market as a whole is a buy and when the ratio is well into the 20’s on normalized earnings, the market is a sell. Grantham backed up his investment analysis with serious quantitative research that covered international markets as well.

 

The dot.com boom of the late 1990’s tested Grantham like no other. Valuations went to the sky from 1998 to early 2000 leaving GMO’s performance in the dust. Nearly half of its assets when out the door. Here Grantham is very astute in talking about business risk and career risk. Being bearish in a bull market brings with it enormous risks to investment managers and their principals. Trust me, as a sell-side equity strategist at Salomon Brothers I felt the brunt of career risk. Nevertheless, Grantham stuck to his guns and was buying REIT stocks that were yielding up to 9% at the time. I had the same instinct at the time and built a personal portfolio holding a basket of REITs. I later became the REIT analyst at Lehman Brothers. In early 2000 the dot.com boom crashed and burned, but unlike in the mid-1970’s the overall stocks market did not get really cheap.

 

In the early 2000’s GMO recovered dramatically, but by mid-decade Grantham blew the whistle on the unsustainable housing boom. Yet again he was early, but dead right. Although stocks suffered from a vicious bear market in 2008-2009, the averages only stayed cheap for a few short months by Grantham’s reckoning.

 

As I write this Grantham is again calling out what he perceives to be the outlandish valuation of the U.S. stock market. Profit margins are at an all-time high and the cyclically adjusted price/earnings ratio is just a touch away from its 2000 peak. What’s going on? Perhaps, the economy has changed so much that it is now dominated by a few highly profitable tech monopolies that are skewing aggregate profit margins. Furthermore, the emphasis has shifted from tangible capital to intangible capital. That was true until last year when the tech behemoths started to massively spend on data centers to support artificial intelligence. The big question is whether or not those investments will be sufficiently profitable to support today’s valuations.

Grantham, through his foundation, is a very active environmentalist. He almost went to jail in opposition to the Keystone XL pipeline. He rightly worries about climate change and chemical pollution. In his private life he attacks the major oil companies, but my guess is that as a value manager he holds the stock in those very same companies. In his environmental hat he applauds the decline in population growth, but as a money manager, he realizes that might have negative consequences for future profit growth.

 

To sum up, Jeremy Grantham is quite the character. and it comes through in his book. For those readers interested in the stock market, its contrarian take is well worth the read and if you are of value bent, like me, it will gird you for the market that lies ahead.

  

My Review of Bike Bird's "The Land Trap: A New History of the World's Oldest Asset"

 Civilization held Hostage to Land

 

Mike Bird, the Wall Street editor of The Economist, has written a detailed history of the role of land in society in general and the economy in particular starting with the Babylonian Empire. He makes three broad generalizations about land: it is fixed in quantity, it is immobile and it doesn’t depreciate. Although land is definitely immobile, it is not really fixed in supply, and it can depreciate. The application of capital to land can increase its supply. Witness a good portion of lower Manhattan buildings sitting on landfills and provisioning of water to desert lands to make them productive. Phoenix is a clear example here. Although there are no depreciation schedules for land, the value of land has suffered long term declines due to changes in the broader economy and environmental pollution.

 

Because I once headed real estate research at the old Salomon Brothers, I found Bird’s narrative particularly interesting. I was a careful student of the Japanese real estate bubble in the 1980’s and I chronicled the real estate boom and bust in the United States from the early 80’s to its nadir in 1992. In the Japanese and the U.S cases the collapse in real estate values caused a debt crisis in both countries. As Bird notes the ability to borrow on real estate can put a real estate cycle on overdrive, both on the upside and the downside. The 1990 real estate bust turned out to be small change when a collapse in real estate values triggered the global financial crisis in 2008. On the other owner occupied real estate has served as collateral to fund numerous businesses, some of which have become quite large. Bird cites McDonald’s as an example.

 

If there is a hero in Bird’s book it is Henry George, the author of “Progress and Poverty.” An 1879 best seller. George rightly argued that much of the gains associated with rising land values are the result of improvements in society and are thus unearned. The landowner just sits there and takes advantage of the improvement in society and the economy. George’s solution was to tax perceived unearned increment away to fund the government. At the time he thought a single tax on land would suffice. His ideas became all the rage, and he was almost elected mayor of New York City on his single tax platform. Unfortunately, his movement faded away.  

 

Bird is very cognizant of the fact that in much of the developed world today the ownership land has become a major driver of income inequality. Simply put, those who have it are far better off than those who don’t and because the value of land is very sensitive to interest rates, the easy money policy pursued by central bankers since 2008 has sent land prices skyrocketing. In a real sense, we are living in a neo-feudal world that separates the landed from the landless.

 

Aside from discussing the history of land in the Anglosphere, Bird discusses land policies in China, Taiwan, Hong Kong, Singapore, Korea, and India with the all-time biggest bubble ever taking place in China. In his discussion of Asian land policies, he cites the work of Wolf Ladejinsky a U.S. Department of Agriculture staffer and later private consultant who was instrumental in creating the land policies in Taiwan, Korea, and India. To Bird, Singapore comes across a model where the government own the land and leases it to condominium developers that attaches pricing regulation to make the units affordable. As a result, Singapore has the lowest house price/income ratio in the developed world. Albeit it is a very expensive program.

 

In sum Bird argues that society is trapped by the high price of land. For example, policies that would lower the price of land to make housing more affordable would have the knock-on effect of lowering the wealth of existing owners and possibly triggering a financial crisis if those owners default. This policy bind will be with us for a long time.

My Review of Victor Shvets' "The Twilight Before the Storm"

 The Times They Are A-Changin* 

Viktor Shvets, an investment strategist at Macquarie Bank, doesn’t like the baby boomers, especially the neoliberal order that generation brought into being. Drawing on the work of Neil Howe and others ( https://shulmaven.blogspot.com/2023/09/my-review-of-neil-howes-fourth-turning.html ) wherein generational changeovers drive history he argues that the neoliberal order of 1980-2010 is over and we poised enter a turbulent era with the Gen-Z and millennial generations taking power. He analogizes the coming epoch to that of the 1930’s where communism, fascism and social democracy fought it out for global supremacy which set the world on fire in the 1940’s.

To Shvets the change is being brought about by the merger of financialization with the technological revolution which is creating an unsustainable income distribution that has given rise to populism on both the Right and the Left. He calls this the Fujiwhara effect where two tropical storms merge to create a monster storm. I would note that his view of fairness is horizontal equity as opposed to vertical equity where people are free to enjoy the fruits of their labor and talents.

I am a big fan of Neil Howe and I have written a thus far five part series on “Reliving the 1930’s” (See: https://shulmaven.blogspot.com/2023/11/reliving-1930s-part-5.html ) As result a read Shvets’ book with some sympathy, but in my opinion he gets more than a few things wrong. I lived the 1960’s through the rise of neoliberalism as a hippy protestor to working on Wall Street. I know I am far from being the only one. However, his boomers are the ones who went to college, not the ones who fought in Vietnam, went to work in a factory, and suffered through the divorce epidemic of the 1970’s. 

 

While Shvets is critical of the individualism of the boomers in the economic realm, he fully supports their individualism with respect to sex, drugs, and racial tolerance. Basically, the rebels of the 1960’s won a complete victory in the culture war and lost the economic war. To me it was no accident that economic freedom went hand in hand with personal freedom, although you can certainly argue there are excesses in both areas.

 

Connecting our era to that of the 1930’s, Shvets’ believes that ideally, we would have a rerun of 1930’s America along a path toward Roosevelt-style social democracy that would include a universal basic income. However, that path might not be viable and it is not the only path. The social democratic path faces the fundamental reality that in the “Blue” cities of America that are far down the road toward social democracy we see abject governmental failure in the form of high taxes coupled with poor services, failed public education, fiscal bankruptcy, governmental fraud and the widest gaps between rich and poor. That future is hardly enticing.

 

Instead, the fourth turning could lead to a major cultural revolution towards a new religiosity in society. Where the Gen-Zers and the millennials have substituted environmentalism, socialism, feminism, and new ageism for religion, in place of the market fundamentalism of the Boomers, they may ultimately turn to the real thing. It won’t be the first time America has had a religious awakening, and it won’t be the first time that history surprises.

 

*-With apologies to Bob Dylan

Kevin Warsh and the Fed

President Trump announced this week that he selected, subject to Senate approval, Kevin Warsh to be the next chairman of the Federal Reserve Board thus ending this season's apprentice competition. Warsh seems to be a chameleon because doves see in him his call for a lower federal funds rates and hawks see his past positions that called for higher interest rates and a smaller Fed balance sheet. It seems the immediate market response was a collapse in gold and silver prices that were buoyed by the debasement trade.

In my view both hawks and doves will be disappointed. In the short run I think he will support lowering the Fed Funds rate by another 50 basis points taking it down to a 3%-3.25% range in the belief that rising productivity will lower the inflation rate to the Fed's long missed 2% target. As stated here previously, I think that is a losing bet.  ( See: https://shulmaven.blogspot.com/2025/12/2026-year-of-turbulence.html )  Further, consistent with recent market behavior I do not think that long rates will move lower thereby steepening the yield curve. Rick Rieder, Blackrock's CIO and former apprentice for the job) articulated a case for a 3-4-5 yield curve with funds at 3%, the 10-Year at 4%, and the 30-year at 5.5%. That looks like where we will end up this year, but with the 10-Year closer to 4.5%.

In the short run a Warsh Fed will let the economy run hot. That will bring with it higher profits, higher inflation, higher long term interest rates, and a volatile stock market with a downward bias. But if we step back a bit, it is becoming clearer by the day that we are in an era of fiscal dominance. The Fed would thus accommodate continual deficits of 6% of GDP that will put upward pressure on inflation. When the rubber hits the road the Fed will either be forced to tighten triggering a recession or adopt yield curve control to manage the long end of the curve. It will be only then that we will find out if Warsh is a hawk or a dove. If the Fed moves toward yield curve control the debasement trade will have legs.

Donnie Does Davos* and Mayhem in Minneapolis

 It was quite a week. We had President Trump on the scene in Davos doing his best to break up NATO with his threats to acquire Greenland by force. (See: Shulmaven: History Rhyming with Trump and Greenland ) His histrionics certainly put the conference back on the map and it made him the focal point of attention. That was his plan all along, because he quickly retreated. The conference ended with Trump's setting up his so-called Board of Peace which by its makeup looks more like a Board of War.

But not before Canadian Prime Minister Mark Carney gave him a scathing rebuke calling out his attempt to "rupture the world order." Indeed, the world might have changed last week. Carney is now the hero of the Davos set but I would your attention to the facts that he threw Israel under the bus by recognizing the Palestinian state and he has done nothing to bring a halt to the surging antisemitism in Canada. Thus he is hardly the paragon of Western virtue.

Meantime Minneapolis has exploded in a wave of mayhem culminating in ICE officers claiming their second (alleged) murder victim. With 3,000 ICE officers confronting 25,000 protestors on a daily basis in frigid temperatures things have and will continue to go south very quickly.  ICE looks like an occupying army out for revenge. Whatever Trump's motivations are, it is not helping his agenda as his polls collapse. Indeed, the entire enforcement operation is taking the focus off the real Medicaid scandal in Minnesota and he is making a hero out of the hapless governor, Tim Walz who is likely up to his eyeballs in corruption.

Finally, as of this writing Trump is a pulling an Obama (remember the Syrian redline of 2013) by failing to live up to his promise to support the Iranian protestors. Mass murder has taken place on his watch, and by encouraging the protestors, Trump set them up to be slaughtered on a mass scale by the Ayatollahs. 

*-With apologies to "Debbie Does Dallas" a 1978 porn classic.

Greenland Compromise: Rent, not Buy

Yesterday I wrote about how Trump is following in the footsteps of Hitler and Stalin over his demand to buy Greenland from Denmark. (See: https://shulmaven.blogspot.com/2026/01/history-rhyming-with-trump-and-greenland.html ) Today Trump said he would not use force to takeover the island, but he certainly did not rule out other forms of coercion. 

My sense is that Trump's art of the deal is aiming for de facto, but not de jure, control of Greenland. Denmark has been very adamant that Greenland is not for sale. Denmark has not commented on whether or not it could be rented. Remember, Trump is a real estate guy. So here goes my idea as one way that Trump could get what he wants.

Instead of purchasing Greenland, the U.S enters into a 99-year lease arrangement with Denmark. The lease terms would give the U.S. full operating control over the island in exchange for an annual lease payment amounting to X- $ billions.  That would more than fund Denmark's current obligations to the 56,000 member Greenland community and then some. Thus Denmark would still retain nominal sovereignty over the Greenland and the island would still fly the Danish flag. 

This result is not pretty, but that is the way negotiations could end up.

History Rhyming with Trump and Greenland

Mark Twain noted that history doesn't necessarily repeat, but it rhymes. This is exactly what is happing with Donald Trump's proposal to seize Greenland. Before Hitler took the Sudetenland in Czechoslovakia in 1938 he threatened to invade. Similarly, Putin made noises about taking Crimea in 2014 before invading that part of Ukraine. It seems that Trump is giving new life to my "Reliving the 1930's series. (See: https://shulmaven.blogspot.com/2023/11/reliving-1930s-part-5.html ) The difference here is that instead of acting like a leader, Trump is acting like a three year-old toddler. He neeeeds Greenland. Unfortunately, his tantrum is breaking up NATO and like the previous episodes I noted, it will make the world a far more dangerous place.