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Jeremy Grantham Predicted Two Previous Bubbles. And Now?
FYI: (This is a follow-up article.) With the S&P 500 up more than 15% this year, it may be time for a reality check. To that end, we spoke with Jeremy Grantham, co-founder and chief investment strategist at Boston-based money manager Grantham, Mayo, Van Otterloo & Co. and a noted spotter of market bubbles. Regards, Ted https://www.wsj.com/articles/jeremy-grantham-predicted-two-previous-bubbles-and-now-1509937980
WSJ: You’ve famously called profit margins the most mean-reverting data set in finance. What’s keeping them high now?
MR. GRANTHAM:Some outsized margins are structural—the brand power of large corporations. I think what is [also] going on is new-fashioned bullying, not the old-fashioned monopoly. Bully politicians into getting favorable legislation. Bully the Justice Department into going to sleep. Bully regulatory agencies. It’s the power of corporations—better regulations and favoritism for giant companies.
WSJ: Is this high-profit-margin situation an unusual one for capitalism?
MR. GRANTHAM: The U.S. form of capitalism has lost its way. The social contract was previously in good shape. Corporations looked after their employees. They were more paternalistic. Great pension funds were starting up. The CEOs were increasing income alongside their workers. CEOs earned more than 40 times workers. Today, that number is 350 times, and the system has gone to hell. Keynes, Schumpeter—and Marx, not to mention—thought, by their nature, corporations and capitalism would overreach simply because they could. Corporations would use their advantages to get more power and more money. Their share of the pie would increase, and cause society to push back. Sooner or later there will be a pushback.
The two things he left out are technology and globalization. Quite frankly the social contract between corporations and labor in the U.S. has been broken for some time. Companies don't need most employees anymore, so they don't treat them well but as disposable parts. Some of the largest companies actually don't have so many employees or if they do only a handful are key people that aren't easily replaced or outsource-able overseas. Remember those lines in Death of a Salesman: "A man is not a piece of fruit. You can't eat the orange and throw the peel away." That is precisely what companies can do with tech and globalization. Almost everyone's an orange now, and I'm not sure how people push back locally when companies function globally. All of which is good for the stock market but rather bad for humanity--or at least developed nations.
Good column (and not pay-walled). The bright spots, such as they are, in his projections are that although he doesn't expect the market to beat inflation in the next several years, he's also not expecting a crash near term. Also, over the longer term (two decades) he expects stocks to beat inflation by 2.8%.
I agree with Lewis (and Grantham) that workers are being treated worse than in "days of yore". However, I think Grantham's view of pension funds in the past is a bit on the rosy side. Pensions were used to lock in employees (30 year requirement to benefit), used as an excuse for paying lower wages, used to lavish benefits on management, perennially underfunded, and often bankrupt (think Studebaker). ERISA protections didn't come along until 1974, and by 1980 you had 401(k)s appearing.
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I agree with Lewis (and Grantham) that workers are being treated worse than in "days of yore". However, I think Grantham's view of pension funds in the past is a bit on the rosy side. Pensions were used to lock in employees (30 year requirement to benefit), used as an excuse for paying lower wages, used to lavish benefits on management, perennially underfunded, and often bankrupt (think Studebaker). ERISA protections didn't come along until 1974, and by 1980 you had 401(k)s appearing.
NYTimes Magazine article 2005: The End of Pensions.