Jeremy Grantham: The Ruinous Cost of Manipulation of Asset Prices

Before you think this is another anti-Fed rant from a Tea Party guy, you must know that Jeremy Grantham supports (or did support) President Obama and tends to be a rational fellow (not saying that supporting the President and rationality are mutually dependent).

Nonetheless, his quarterly letter is a MUST READ for anyone who professes to be a student of the markets and investing. This is the guy who lost 1/2 of his 160B dollar firm to redemptions because he wouldn’t put his clients into tech stocks in the late 90’s. He is a principled fellow indeed. In his latest later, he BLASTS the FED and categorically explains all of the mistakes made by “Easy Al” Greenspan and “Helicopter” Ben Bernanke in their monetary policy. Let’s sprinkle some quotes from Grantham here:

“If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet,  I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally.
Further, I would force it to swear off manipulating asset prices through artifi cially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing.”
I want to thank Pragmatic Capitalist for pointing out Chart number 4 in this report:

from Grantham's 3Q2010 Letter

Just look at the effects of Greenspan’s easy money on asset markets during his tenure. Then there’s this graph:

From Grantham's 3Q2010 Letter

Look at the change in housing prices in terms of standard deviation – a statistical term measuring how far from average a statistic is. Most data falls within 1 or 2 standard deviations (if it’s a truly random event). I read and watched NUMEROUS interviews where Grantham pointed out that house prices were 4 standard deviations above the historical mean which he often said was unsustainable. I used a quote of his in my real estate planning seminars (which I held from 2004-2008) where I would warn people to sell their homes – and get a look of disbelief, and almost scorn from 80% of the attendees.

Easy money inflated the housing bubble – remember, without cheap credit, there COULD BE NO ALT-A LOANS, NO LOW DOWN PAYMENTS AND NO MASSIVE YEAR OVER YEAR INCREASES IN HOUSE PRICES CAUSING A FRENZY. The cheap money, was like alcohol to an addict  –  remember famous quotes from the past 5 years such as Citigroup’ CEO Charles Prince, who, knowing this house of cards had to fall, kept playing anyway. His explanation was: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Read Jeremy Grantham’s letter – Night of the Living Fed here.

For more Jeremy Grantham – How to Spot Bubbles, The Efficient Market Hypothesis is Dangerous

Other great financial thinkers you may like whom I feature frequently on my site:

Jim Rogers – recent features: HERE, HERE, HERE

Marc Faber – recent features: HERE, HERE, HERE

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