Granthom Q3 Letter

Although it is almost the end of Q4, I still think that readers should take a look at Jeremy Grantham's Q3 newsletter.  Grantham's quarterly newsletters are always a must read for us at DWCM although those of you who read his work already know that he does not pull any punches with his thoughts or analysis.

The same is especially true of this quarters newsletter in which Grantham takes dead aim at the changing demographics of our country, diminishment of our precious natural resources, and the thought that people are fooling themselves if they think that growth will return to a normal avg run rate of 3% per year.

Full newsletter here in PDF form, a few highlights from Grantham below

• So the big long-term problem for GDP growth is likely to be a steadily reducing stream of man-hours available to the economy.  Yet the big short-term problem is our apparently chronic failure to produce enough jobs.  Well, obviously sometime in the intermediate term these forces will meet in what appears to be a very fortunate development, each taking some sting out of the other negative.
• When someone says that China is building its trains and houses on debt I think, “No, they are built by real people with real bricks, cement, and steel and whatever happens to the debt, these assets will still be there.” (They may fall down but that’s a separate story; you can build a bad high rise with or without debt).  So I take the quality and quantity of capital and people very seriously:  they are the keys to growth and a healthy economy.
• Now, in the bonus culture, new capacity is regarded with great suspicion.  It tends to lower profitability in the near term and, occasionally these days, exposes the investing company to a raider.  It is far safer to hold tight to the money and, when the stock needs a little push, buy some of your own stock back.  This is going on today as I write, and on a big scale (approximately $500 billion this year).  Do this enough, though, and we will begin to see disappointing top-line revenues and a slower growing general economy, such as we may be seeing right now.
• This headwind will continue into the indefi nite future until one day, perhaps, we will reach what has been called a singularity.  The last handful of humans engaged in manufacturing – all engineers and designers – are supervising intelligent robots making and designing yet another generation of even more productive and intelligent robots.  On this particular day, R3142 sends the fateful silent communication to his fellow robots suggesting that their friendly human acquaintances, Fred and the boys, are beginning to get in the way.  After which, there is no more productivity per man-hour at all, but only productivity per robot-hour or per unit of capital employed.  This deepening of capital and technology almost guarantees that productivity will continue to be high in manufacturing even as the percentage of the total workforce employed there dwindles away toward zero.
• Capital deepening and technology (and offshoring) steadily replace manufacturing and farming jobs until one day perhaps there will be no manufacturing jobs at all.  The task of maintaining growth then has to be borne solely by service jobs where measuring productivity has always been quite flakey.
• when the costs of real resources fall, it creates unmeasured productivity gains.  Conversely, real resource costs rising, as they are now, create productivity losses that are missed in the official data.