Aug. 31, 2010
Summer of recovery? Dead. How dead? Remember Genesis? The Seven Lean Years? Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if.
"The idea behind 'seven lean years' is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years." That's Jeremy Grantham talking; he's responsible for investing $100 billion in the next seven lean years. And like the biblical Joseph, whose life was on the line while interpreting dreams for the Egyptian pharaoh, Grantham can't afford mistakes.
Fed sees limited policy options
Unlike Greenspan years, central bank can no longer talk investors into changing sentiment, Bob O'Brien suggests.
In his recent newsletter, "Seven Lean Years Revisited," Grantham tells us why expecting a summer of recovery was unrealistic, why America must prepare for a long recovery. Grantham details 10 reasons: "The negatives that are likely to hamper the global developed economy." Sorry, but this recovery will take till 2016.
But should you believe Grantham? Yes. First: Like Joseph, Grantham's earlier forecasts were dead on. About two years before Wall Street's 2008 meltdown Grantham saw: "The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it's bubble time. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before."
Second: The Motley Fools' Matt Argersinger went back to the dot-com crash of 2000: Grantham "looked out 10 years and predicted the Dow Jones Industrial Average would underperform cash." Bull's-eye: The Dow peaked near 14,000 in late 2007; it's now around 10,000. Factor in inflation: Wall Street's lost 20% of your retirement since 2000. Yes, Wall Street's a big loser.
Third: What's ahead for the seven lean years? Wall Street will keep losing. Argersinger: "Grantham predicts below-average economic growth, anemic corporate-profit margins, and other severe obstacles for the stock market. Over the next seven years ... U.S. stocks as a group will deliver annualized real returns between 1.1% and 2.9%. That's less than you might get putting your money in a CD."
Warning: You'd be a fool to trust your money with Wall Street during the seven lean years till 2016. Another 20% will vanish.
Fourth: Why will Wall Street kill the recovery, keep driving us deeper into a ditch till 2016? Last year Grantham asked: "Why is it that several dozen people saw this crisis coming for years? It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi, even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben] Bernanke, none of them seemed to see it coming." The Pharaoh listened to Joseph. Our leaders are deaf.
Another Black Swan will lengthen a seven-lean-years recovery
Grantham says today's leaders "running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They're impatient, focused on the present."
However, planning for the future "requires more people with a historical perspective who are more thoughtful and more right-brained, but we end up with an army of left-brained immediate doers. So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it."
Get it? It is guaranteed that our Wall Street and Washington leaders will miss the next Black Swan catastrophe. No matter how big, how many warnings. Just like they did in 2008. They are guaranteed to fail. That's tragic. Not only will America's recovery take at least seven lean years but when another meltdown does occur our leaders will miss it again. And another massive meltdown on top of a long seven-lean-years recovery will likely drag out the recovery past 2020!
So here's my Reader's Digest version of Grantham's 10 handicaps that will "hamper the global developed economy, drag it out for seven lean years," forcing Americans into a painfully long, game-changing period of austerity and civil unrest. You can read his original at GMO.com:
1. Too much consumer debt; increased savings, spending drops
"We've stopped adding consumer debt, but the improvement is minimal. It would take at least seven years of steady reduction to reach a more normal level. Anything more rapid than that would make it nearly impossible for the economy to grow. More stimulus adds government debt, already a problem. But debt reduction in a fragile economy runs the risk of causing a severe economic decline. This dilemma may prove to be the central economic policy choice of our time. Not an easy choice. And no way that this process will be pleasant or quick."
2. Banks off-loaded trillions of toxic debt, increasing federal debt
"The most frightening aspect of the seven-lean-year scenario is that dangerously excessive financial system debt was moved across, with additions, to become dangerously excessive government debt, with levels of debt-to-GDP not seen outside wartime. The cure seems more like a stay of execution."
3. Stimulus failing, housing crashed, no appreciation, confidence lost
"The artificial lift to consumers' confidence from steadily rising house prices is long gone, unlikely to return soon, reducing our confidence in the nest eggs we thought we could count on for retirement. Further house-prices declines are more than a 50/50 bet. No more shot in the arm from construction. Stock prices are stagnant. These changed attitudes will last for years."
4. Banks undercapitalized, overleveraged; more trouble ahead
"Wall Street may have passed its point of maximum stress, but very bad things may lie ahead in Europe. Leverage and the chances of further write-downs leave banks undercapitalized, reluctant to lend. Unhealthy growth in America's GDP caused by previous rapid increases in the size of the financial sector has also disappeared, hopefully will stay gone."
5. State/local governments squeezed, tax revenues down 30%
"Runaway costs: average salaries and pensions went far above private sector in 15 years, now run into the brick wall of reduced taxes. Real estate taxes are down over 30%, unlikely to bounce back soon. The legal need to stay balanced means painful cost-cutting, putting pressure on an economy with few stimulus options left. A double dip would make it worse."
6. High unemployment; few tricks left to stimulate jobs
"Unemployment is high, suffering from the loss of kickers related to asset bubbles. The economy appears to have an oddly hard time producing enough jobs to get ahead of the natural yearly increases in the work force. Consumer confidence and corporate investing suffer."
7. America's trade imbalances are killing the dollar, our economy
"America must stop running large trade imbalances, they destabilize the economy. In a world growing nervous about the quality of sovereign debt, these debt levels have exploded. Adding new foreign debts adds risk and doubts to the system, threatening the dollar. Just as adding surpluses threatens the Chinese. The trick, though, is to reduce these imbalances so that the process does not reduce global growth. Rebalancing will not be quick, easy, or painless."
8. European governments crashing; incompetent management
"Europe suffers from incompetent management. Spain, Greece, Portugal, Ireland, and Italy allowed local competitiveness of manufactured goods to become 20% or more uncompetitive with Germany. The banking crisis was not the problem, so it'll never be easy to solve with a fixed currency. Unfortunately, Europe's problems are now part of America's seven lean years, guaranteeing slower than normal GDP growth and a long workout period."
9. Global loss of confidence in all currencies, including the dollar
"Rising levels of sovereign debt and problems facing the euro bloc and Japan are creating a loss of confidence in faith-based currencies. The world economy is a fragile system that will increasingly limit governments' choices in dealing with low growth and excessive credit."
10. Aging populations; rising Medicare, Social Security costs
"Possibly most important of all, widespread overcommitments to pensions and health benefits is a long-term problem overlapping with the seven-year workout, making the 'seven lean years' even tougher. Developed nations are aging, need more medical attention. Treatment costs are increasing, and are hard to limit or ration. No choice, hunker down, wait for a crisis."
Bottom line: America's facing seven lean years, a long, game-changing, painful recovery till 2016. But let's end on that positive note the Motley Fool's Argersinger promises: In spite of the dark forecast, there's a "silver lining, the saving grace Grantham calls it. The stock market might turn out to be a loser, but that won't be the case for 'high-quality' U.S. stocks. Grantham thinks elite stocks are poised to return as much as 10% a year or better."
Argersinger put it this way: "Grantham doesn't detail what he means, but I think it's safe to assume he's talking about large companies that have strong balance sheets, sustainable competitive advantages, stable or growing profit margins, and opportunities for growth," even in "seven lean years."
He picks seven stocks "that might make Grantham's cut." All are based on "the following criteria: Large-cap stock, at least $20 billion in market size; high profitability, an average operating margin of 15% or higher over the past five years; strong balance sheet, a debt-to-equity ratio of less than 50%; a dividend, not necessarily for yield but as a measure of financial strength." Solid picking criteria.
The seven are: Carnival (NYSE:CCL) , Johnson & Johnson (NYSE:JNJ) , Microsoft (NASDAQ:MSFT) , Southern Copper (NYSE:SCCO) , Thomson Reuters (NYSE:TRI) , Travelers (NYSE:TRV) and Walt Disney (NYSE
IS) .
The seven are a "nice start on a Grantham-style portfolio, one that should, if you believe Grantham, outperform big time" during the next "seven lean years," America's painful "New Age of Austerity and Civil Unrest," which will last till 2016, maybe longer.
Summer of recovery? Dead. How dead? Remember Genesis? The Seven Lean Years? Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if.
"The idea behind 'seven lean years' is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years." That's Jeremy Grantham talking; he's responsible for investing $100 billion in the next seven lean years. And like the biblical Joseph, whose life was on the line while interpreting dreams for the Egyptian pharaoh, Grantham can't afford mistakes.
Fed sees limited policy options
Unlike Greenspan years, central bank can no longer talk investors into changing sentiment, Bob O'Brien suggests.
In his recent newsletter, "Seven Lean Years Revisited," Grantham tells us why expecting a summer of recovery was unrealistic, why America must prepare for a long recovery. Grantham details 10 reasons: "The negatives that are likely to hamper the global developed economy." Sorry, but this recovery will take till 2016.
But should you believe Grantham? Yes. First: Like Joseph, Grantham's earlier forecasts were dead on. About two years before Wall Street's 2008 meltdown Grantham saw: "The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it's bubble time. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before."
Second: The Motley Fools' Matt Argersinger went back to the dot-com crash of 2000: Grantham "looked out 10 years and predicted the Dow Jones Industrial Average would underperform cash." Bull's-eye: The Dow peaked near 14,000 in late 2007; it's now around 10,000. Factor in inflation: Wall Street's lost 20% of your retirement since 2000. Yes, Wall Street's a big loser.
Third: What's ahead for the seven lean years? Wall Street will keep losing. Argersinger: "Grantham predicts below-average economic growth, anemic corporate-profit margins, and other severe obstacles for the stock market. Over the next seven years ... U.S. stocks as a group will deliver annualized real returns between 1.1% and 2.9%. That's less than you might get putting your money in a CD."
Warning: You'd be a fool to trust your money with Wall Street during the seven lean years till 2016. Another 20% will vanish.
Fourth: Why will Wall Street kill the recovery, keep driving us deeper into a ditch till 2016? Last year Grantham asked: "Why is it that several dozen people saw this crisis coming for years? It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi, even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben] Bernanke, none of them seemed to see it coming." The Pharaoh listened to Joseph. Our leaders are deaf.
Another Black Swan will lengthen a seven-lean-years recovery
Grantham says today's leaders "running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They're impatient, focused on the present."
However, planning for the future "requires more people with a historical perspective who are more thoughtful and more right-brained, but we end up with an army of left-brained immediate doers. So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it."
Get it? It is guaranteed that our Wall Street and Washington leaders will miss the next Black Swan catastrophe. No matter how big, how many warnings. Just like they did in 2008. They are guaranteed to fail. That's tragic. Not only will America's recovery take at least seven lean years but when another meltdown does occur our leaders will miss it again. And another massive meltdown on top of a long seven-lean-years recovery will likely drag out the recovery past 2020!
So here's my Reader's Digest version of Grantham's 10 handicaps that will "hamper the global developed economy, drag it out for seven lean years," forcing Americans into a painfully long, game-changing period of austerity and civil unrest. You can read his original at GMO.com:
1. Too much consumer debt; increased savings, spending drops
"We've stopped adding consumer debt, but the improvement is minimal. It would take at least seven years of steady reduction to reach a more normal level. Anything more rapid than that would make it nearly impossible for the economy to grow. More stimulus adds government debt, already a problem. But debt reduction in a fragile economy runs the risk of causing a severe economic decline. This dilemma may prove to be the central economic policy choice of our time. Not an easy choice. And no way that this process will be pleasant or quick."
2. Banks off-loaded trillions of toxic debt, increasing federal debt
"The most frightening aspect of the seven-lean-year scenario is that dangerously excessive financial system debt was moved across, with additions, to become dangerously excessive government debt, with levels of debt-to-GDP not seen outside wartime. The cure seems more like a stay of execution."
3. Stimulus failing, housing crashed, no appreciation, confidence lost
"The artificial lift to consumers' confidence from steadily rising house prices is long gone, unlikely to return soon, reducing our confidence in the nest eggs we thought we could count on for retirement. Further house-prices declines are more than a 50/50 bet. No more shot in the arm from construction. Stock prices are stagnant. These changed attitudes will last for years."
4. Banks undercapitalized, overleveraged; more trouble ahead
"Wall Street may have passed its point of maximum stress, but very bad things may lie ahead in Europe. Leverage and the chances of further write-downs leave banks undercapitalized, reluctant to lend. Unhealthy growth in America's GDP caused by previous rapid increases in the size of the financial sector has also disappeared, hopefully will stay gone."
5. State/local governments squeezed, tax revenues down 30%
"Runaway costs: average salaries and pensions went far above private sector in 15 years, now run into the brick wall of reduced taxes. Real estate taxes are down over 30%, unlikely to bounce back soon. The legal need to stay balanced means painful cost-cutting, putting pressure on an economy with few stimulus options left. A double dip would make it worse."
6. High unemployment; few tricks left to stimulate jobs
"Unemployment is high, suffering from the loss of kickers related to asset bubbles. The economy appears to have an oddly hard time producing enough jobs to get ahead of the natural yearly increases in the work force. Consumer confidence and corporate investing suffer."
7. America's trade imbalances are killing the dollar, our economy
"America must stop running large trade imbalances, they destabilize the economy. In a world growing nervous about the quality of sovereign debt, these debt levels have exploded. Adding new foreign debts adds risk and doubts to the system, threatening the dollar. Just as adding surpluses threatens the Chinese. The trick, though, is to reduce these imbalances so that the process does not reduce global growth. Rebalancing will not be quick, easy, or painless."
8. European governments crashing; incompetent management
"Europe suffers from incompetent management. Spain, Greece, Portugal, Ireland, and Italy allowed local competitiveness of manufactured goods to become 20% or more uncompetitive with Germany. The banking crisis was not the problem, so it'll never be easy to solve with a fixed currency. Unfortunately, Europe's problems are now part of America's seven lean years, guaranteeing slower than normal GDP growth and a long workout period."
9. Global loss of confidence in all currencies, including the dollar
"Rising levels of sovereign debt and problems facing the euro bloc and Japan are creating a loss of confidence in faith-based currencies. The world economy is a fragile system that will increasingly limit governments' choices in dealing with low growth and excessive credit."
10. Aging populations; rising Medicare, Social Security costs
"Possibly most important of all, widespread overcommitments to pensions and health benefits is a long-term problem overlapping with the seven-year workout, making the 'seven lean years' even tougher. Developed nations are aging, need more medical attention. Treatment costs are increasing, and are hard to limit or ration. No choice, hunker down, wait for a crisis."
Bottom line: America's facing seven lean years, a long, game-changing, painful recovery till 2016. But let's end on that positive note the Motley Fool's Argersinger promises: In spite of the dark forecast, there's a "silver lining, the saving grace Grantham calls it. The stock market might turn out to be a loser, but that won't be the case for 'high-quality' U.S. stocks. Grantham thinks elite stocks are poised to return as much as 10% a year or better."
Argersinger put it this way: "Grantham doesn't detail what he means, but I think it's safe to assume he's talking about large companies that have strong balance sheets, sustainable competitive advantages, stable or growing profit margins, and opportunities for growth," even in "seven lean years."
He picks seven stocks "that might make Grantham's cut." All are based on "the following criteria: Large-cap stock, at least $20 billion in market size; high profitability, an average operating margin of 15% or higher over the past five years; strong balance sheet, a debt-to-equity ratio of less than 50%; a dividend, not necessarily for yield but as a measure of financial strength." Solid picking criteria.
The seven are: Carnival (NYSE:CCL) , Johnson & Johnson (NYSE:JNJ) , Microsoft (NASDAQ:MSFT) , Southern Copper (NYSE:SCCO) , Thomson Reuters (NYSE:TRI) , Travelers (NYSE:TRV) and Walt Disney (NYSE
IS) .The seven are a "nice start on a Grantham-style portfolio, one that should, if you believe Grantham, outperform big time" during the next "seven lean years," America's painful "New Age of Austerity and Civil Unrest," which will last till 2016, maybe longer.
MAKE SURE AND VISIT Tobee's Blogs! 
Comment