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 John Valliant's "Fire Weather"

 The Fire Beast of Fort MacMurray

 

Journalist John Valliant tells the horror story of the great fire that engulfed Fort MacMurray in May 2016. It was truly a beast that acted like a conquering army as it burned most of this city of 90,000 to the ground. Fort MacMurray is the home of the Canadian oil sands industry where oil is mined in the form of bitumen that requires huge energy inputs to process it. Hence it requires oil prices in excess of $60/barrel to be profitable. Although high in cost, it does not require any exploration costs, because the location of the deposit is known.

 

Valliant has really written three books in one. The first comes from eyewitness accounts of how the fire enveloped the city as brave firefighters and citizens fought a near hopeless battle. Remarkably the city was evacuated with minimum casualties. Here we see heroism in action.

 

The second is a history of climate science going back to the 1700’s. He particularly pays attention to boreal forests, like the one that surrounds Fort MacMurray, that have become exceptionally stressed in a hotter world. In May 2016, the temperatures rose to above 80 degrees and the humidity dropped to a desert-like 12 percent. In that environment any small spark could and did ignite a conflagration. Thus, in a hotter world the boreal forests of Canada, America and Russia are all set up for great fires in the future. Indeed, the release of the stored carbon resulting from the fire has the potential to undo much of the progress being made in decarbonizing society. This clearly is not a hopeful conclusion.

 

The third book is a screed attacking the oil companies and the “petroscene” age they brought about. He recounts the oil industry’s early research into climate change and then their campaign of denial. I think he overdoes it. Valliant also seems to look with disdain at the vehicle heavy lifestyle of the oil workers. With incomes of around $200,000 a year, the workers had the wherewithal to multiple cars and trucks and all-terrain vehicles, not a bad lifestyle for the Canadian working class.

 

Nevertheless, the main message of the book is that we will be living with great forest fires in the future and more fires in the wildland urban interface neighborhoods which are prevalent in the American west.

Random Thoughts on the Economy and the Stock Market

 *Last week the Commerce Department reported that real GDP increased at a 2.9% annual rate in the fourth quarter. Normally that would represent solid growth, but if we back out trade and inventories, domestic final demand increased at a meager 0.8%. Despite continued sub 200k unemployment claims, we are setting ourselves up for a modestly negative first quarter.

* The White House was really pissed about Chevron's $75 billion share buyback. They explicitly stated "“For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it,” White House spokesman Abdullah Hasan said in an emailed statement. “We continue to call on oil companies to use their record profits to increase supply and reduce costs for the American people.” (Source: Bloomberg) For a White House that believes that fossil fuel generated climate change represents an existential threat to humanity its statement represents the height of hypocrisy. 

* The January rally in the stock market continued last week the the NASDAQ Composite and the S&P 500 now up 11%  and 6%, respectively with January not yet over. My guess is that the bulk, if not all, of the gains are in for the year. 

* The Fed's open market committee meets this week. With stocks rising and housing apparently bottoming out, there is no need for them to even be thinking about a pivot to lower rates. The Fed Funds rate will likely go over 5% and stay there for the balance of the year.

My Amazon Review of Kim Stanley Robinson's "The Ministry for the Future"

A Disservice to the Politics of Climate Change

 

Sci-fi writer Kim Stanley Robinson has done a disservice to those of us who care about the peril of climate change. It isn’t clear from his book that he cares more about dismantling capitalism than solving the problem of climate change. His book will convince the diehard climate activists who are already convinced, but it rouses the suspicions of those of us who view the politics of climate change as a ruse to upend capitalism.

 

His Ministry for the Future, a U.N. body, is headed up by Mary Murphy a former Irish foreign minister. Operating out of Zurich in 2025 and beyond she is charged with solving the climate crisis. However, what could have been a very interesting personality, Murphy is a one-dimensional character as are all of the other characters in the book.

 

The book opens with a catastrophic heat wave in India and features the flooding of the Los Angeles plain along with other climate horrors. As the crises deepens Murphy convinces the central banks of the world to engage in quantitative easing by issuing a carbon currency. Although this sounds novel, it really is a modified cap and trade system, and it ignores the inflationary consequences of the currency issuance. Robinson is partial modern monetary theory (MMT), but the book was written before the inflation of 2021 and 2022 which discredited MMT and huge fiscal deficits.

 

Most troubling is Robinson’s tacit approval of eco-terrorism where swarms of drones take down aircraft and container ships triggering a global depression. Somehow the populace of the industrial west remains strangely compliant. Obviously, Robinson didn’t witness the panic of $5 gas in 2022 and how such enviro-friendly politicians as Bernie Sanders and Elizabeth Warren attacked the oil companies for high gas prices. Both of those politicians were cynically ignorant of the fact that high gas prices promote alternative energy.

 

Although Robinson to his credit seems to favor geo-engineering and carbon capture to reduce emissions, he does not mention nuclear power as a potential carbon free source of energy and further there is nary a mention of expediting permits for alternative energy projects. I guess he can only go so far for fear of losing his environmental constituency.

The book has a “happy” ending with climate emissions declining in the 2040’s, but Robinson’s path in getting there strains credulity. For example, has the northern plains depopulated and returning to grasslands and many corporations turning into industrial coops.

For the full Amazon URL see: A Disservice to the Politics of Climate Change (amazon.com)

An Open Letter to President Joe Biden

 

Mr. President:

 

I voted for you in the Democratic Primary. I did not vote for Bernie Sanders or Elizabeth Warren, but it seems you are trying to implement most of their policies to a T, a wholesale expansion of the welfare state. I guess you visualize yourself as the second coming of either FDR or LBJ. I hate to break it to you, but you do not have their raw political talent, and more importantly you don’t have their huge majorities in Congress to implement your program.  When I voted for you in the general election I had more modest aims, to restore respect for our government and achieve at least a modicum of competency. Given your predecessor that would be a huge accomplishment and you were terrific out of the starting gate.

 

However, with respect to competency, you botched up our withdrawal from Afghanistan, you are presiding over an immigration crisis on the Mexican border, and it appears, at times, that the CDC doesn’t know which end is up. Your climate agenda is a theme park of policy incoherence. You ask OPEC to pump more oil, while at the same time working to shut down domestic production. And you rejected out of hand a carbon tax which your Secretary of the Treasury fully advocated before she entered government. Further it is beyond me why you didn’t push for an immediate vote on the infrastructure bill when you had the chance. Its passage would have been a great confidence building measure all around. Instead, you listened to the shrill voices on the Left.

 

With each passing day I am losing respect for our government with a host of small unforced errors based on the faculty lounge world of political correctness.  Why did your Administration put out documents calling mothers “birthing people?” Your administration uses the term “Latinx,” a term by and large rejected by the Hispanic community. Come on Mr. President, these are not the words of a kid from Scranton.

 

In my view Senators Joe Manchin and Kyrsten Sinema are saving your presidency. The two of them are pushing you into the middle so you can be the candidate I and I believe most of the country voted for. Listen to them and the path will be open to a very successful presidency.

Its not Easy Being Green

Ten years ago the great Kermit the Frog introduced his classic, "Its not Easy Being Green." (https://www.youtube.com/watch?v=rRZ-IxZ46ng) Today's climate warriors face a similar dilemma.  An example of this can be found in today's Wall Street Journal (https://www.wsj.com/articles/solar-powers-land-grab-hits-a-snag-environmentalists-11622816381) where we have a story about Mojave Desert residents opposing an industrial scale solar farm for Facebook on narrow environmental grounds. Hello! If climate change is such an existential threat to the planet why say no to solar power?

This story will be played over and over as so-called environmentalists oppose high voltage transmission lines that will bring electricity from solar and wind farms to the great urban centers, offshore wind farms, the mining of copper, lithium, cobalt and rare earths that are so necessary for electrifying the economy, and the construction of carbon-free compact nuclear power plants. Something has to give and in paving the road to a carbon neutral economy environmentalists are going to have to give up on many of their long held shibboleths. And the Biden Administration is going to have to find a way to fast track their climate projects. 

 

Biden's "Infrastructure" Plan: A Bridge too Far

 

Last week President Biden offered up his $2.3 trillion “infrastructure” plan, but only $115 billion goes to highways and bridges and only $111 billion goes for improving the nation’s water systems. There is also $85 billion for public transit, $80 billion for rail, mostly AMTRAK; $100 billion for building out broadband, and $100 billion for extending and hardening the electrical grid. All to the good, except maybe AMTRAK. In terms of intangible capital, Biden’s program calls for a $180 billion increase in R&D spending. Indeed, with real interest rates below zero, now is the time to finance much needed infrastructure.

 

What is questionable is the $174 billion allocated for electric charging stations. It seems to me that the administration is making a huge bet on electric vehicles. That bet may pay off, but with fast moving fuel cell technology, the future may not all be in electrification. What is even more questionable is the $213 billion allocated to affordable housing and the $400 billion allocated to home care. Although arguably necessary affordable housing and home care are a stretch to being called infrastructure. Further if such programs are enacted they would likely be continued beyond the plan’s eight-year budget window making it far more costly than advertised.

 

Make matters worse is that the plan does not waive environmental permitting and the prevailing wage requirements of the notorious Davis-Bacon Act. By avoiding the waivers, the plan all but guarantees exorbitant costs and delays. Indeed, by failing to waive environmental reviews we can look forward to years of delays in siting power lines from wind and solar farms to our urban centers. In fact, the Biden Plan requires project labor agreements that would put the Davis-Bacon Act on steroids.

 

We also learned that the Biden Administration is not really serious about climate change. If it were, it would have offered to pay for at least part of the plan with a carbon tax, a tax that Treasury Secretary Janet Yellen spoke highly of as a private citizen. A carbon tax would be a far more efficient way of financing infrastructure than an increase in the corporate income tax. Moreover, there is no mention of investments in carbon capture/sequestration technology which most experts believe to be essential in reaching our climate goals. Thus, there is much to like in Biden’s program, but quite a bit to dislike as well.

A Green Moonshot, Not a Green New Deal

I just finished reading Douglas Brinkley’s “American Moonshot” and it came to me that what is needed to solve the problem of climate change is not an amorphous Green New Deal, but rather a focused Green Moonshot. (See https://shulmaven.blogspot.com/2019/05/my-amazon-review-of-douglas-brinkleys.html) The American space program of the 1960s is a far better analogy than the New Deal of the 1930s. This is especially true because the space program, although spending big bucks, did not require a remaking of American society while the supporters of the Green New Deal want to use it as an excuse to remake society in their social democratic image. The latter is not desirable and is politically impossible.

What a Green Moonshot would do is that it would focus attention not so much on alternative energy, carbon taxes and conservation which as important as they are, will not solve the problem. What is needed is a crash program to REMOVE carbon from the atmosphere. An April 7^th New York Times article on the subject was entitled, “Blamed for Climate Change, Oil Companies Invest in Carbon Removal.”  The process involves direct air capture to generate a flow of air over calcium hydroxide that captures the carbon and converts it into fuel.

There are other techniques to remove carbon dioxide from the air through cryogenics, expensive, but it works. What we have here is less a problem of pure science than a problem of chemical engineering. It is very much similar to the creation of the modern aluminum industry when the Hall- Hercoult process refined aluminum from alumina and note the chemical formula for alumina is AL2O3, not too different from carbon dioxide CO2. One is an aluminum oxide and the other is a carbon oxide.

Further unlike the space program which had to create the National Aeronautics and Space Administration (NASA) in 1958 we already have in place the National Oceanic and Atmospheric Administration (NOAA). It is though that agency a focused research effort in conjunction with private contractors that an economical solution to carbon capture problem could be solved within a decade.

Indeed such a program would be a far easier sell to those members of Congress who are skeptical of the Green New Deal. To be sure the climate deniers in the Republican Party probably won’t go along with this, but hopefully by 2021 cooler heads will prevail. To paraphrase President Kennedy we will do this not because it is easy, but because it is hard.

My latest USNews Blog, "Obama's Liberal Vision is not Economically Viable," January 23, 2013

For the full article see the url below:

http://www.usnews.com/opinion/blogs/economic-intelligence/2013/01/23/obamas-liberal-vision-is-not-economically-viable