Jeremy Grantham: Global Incompetence Is 'Officially' Scary

In his latest quarterly letter to shareholders (.pdf) Jeremy Grantham, legendary manager of Grantham, Mayo Van Otterloo  and longtime bear says that the current global economic situation has him "officially scared".  Apparently, Grantham being scared is scaring lots of people.  Thursday, both Paul Kedrosky and Prieur du Plessis wrote features about Grantham's fear.

So, just what is Grantham so scared of that's scaring everyone?  Well, for starters the "perma bear" wasn't quite bearish enough:

A lot of this worsening situation was unpredictable, but some of our optimism I fear was caused by that old bugaboo, career risk, because our asset forecasts were more pessimistic than others and only half-believed by clients.... In our experience the U.S. economy usually stepped around the land mines, but this time it has not been so lucky.

Grantham then proceeds to list 12 reasons why even he was caught off guard by the severity of the current economic crises.  The reasons range from ineptness by Greenspan, Bernanke, congress, and the Fed to China's woes and the fear of military action in Iran.  The 12th point sums it up:

Most dangerously, all of these factors interact, creating a broad based - even global - vulnerability in the financial system.  Given the growing perception of incompetence that is broadly distributed throughout the system, we run a serious risk of a meltdown in confidence in leadership totally unlike anything we have seen since World War II. And with substantial justification! Why should we trust the financial system the way we used to? We should distrust the general competence of financial management: of governments and of corporations and of all bankers, whether commercial, investment, or central bankers.

Grantham spends a good part of the remainder of the letter focusing on the housing bubble, both in the U.S. and what he predicts as the much more severe one coming to the U.K.:

In the U.K., house prices could easily decline 50% from the peak, and at that lower level they would still be higher than they were in 1997 as a multiple of income! It is a truly ugly thought that mortgage lenders and the guardians of the financial system seem never to have considered, at least until recent weeks.  If the price goes all the way back to trend, and history says that is extremely likely, then the U.K. financial system will definitely need some serious bailouts and the global ripples will be substantial.  Of all the negative possibilities out there, and there are plenty, real pain in this area is the most likely; I would say, nearly certain.

Grantham's bottom line advice is simple: "...take as little risk as possible".

Comments

[HARM:]

REMAIN CALM, people! All is well...

Reports of a housing-led solvency/banking crisis are greatly exaggerated! Pay no attention to that Fed Chairman & Treasury Secretary behind the curtain! There is no GSE/Wall Street bailout financed by taxpayers... repeat: there is NO BAILOUT!

Keep spending people! Living beyond your means is as PATRIOTIC as apple pie. Bin Laden WANTS us to stop consuming.

DEBT IS WEALTH
SLAVERY IS FREEDOM
IGNORANCE IS STREGNTH

2008 Jul 31 05:21 PM

[DaveW:]

SARCASM IS COMMON

2008 Jul 31 05:48 PM

[CaptBob:]

The bottom of this financial meltdown may just open a window of opportunity, though it will bring no joy to the afflicted.

If we're willing to clench our teeth, close our eyes and undergo the ritual and pain of catharsis. There will be no better opportunity to cast out the profiteering, non accountable Pseudo economists composing the Federal Reserve.

Return the responsibility and accountability to our elected officials which they have cravenly abdicated. And adopt a monetary policy as it was meant to be from the beginning.

Return our currency to a "Gold Standard" or other such backing which will remove the ability of the larcenous, the incompetents and the political opportunists from plundering the economy of an otherwise healthy state.

And thereby remove all reason, and possibility of a repeat of our present economic abomination.

2008 Aug 01 10:53 AM

[Griz:]

HARM IS HILARIOUS

2008 Aug 01 12:15 PM

[Jgib:]

Give the monetary system to our elected officials - you have to be kidding. They have given us nothing but bad legislation (SARBOX, medicare RX, housing $$$ to the incompetent, bailout of Freddie Mac and Fannie Mae, etc.). How about there agressive solutions for the energy crisis.

2008 Aug 01 12:31 PM

[CaptBob:]

Jib: That's where we--the electorate--enter the picture.
When faced with a choice of dinner or feel-good speeches even the illiterate masses of America will vote.

And; They may even learn to discern between the hard choice of truth--Ron Paul-who under the present game plan is sidelined to obscurity and the Obamanable song and dance man that so captivates them today.

Maybe a little --hunger, the great motivator--will work.

2008 Aug 01 01:19 PM

[Comintel:]

What would be good housing or mortgage-realted shorts in the U.K. (and also Australia I think) that I can puts on from here in the U.S.?

2008 Aug 03 01:28 AM

[jjason:]

Why all the BS here?

1: Hardly anyone in the US is living within their means.

2: The saving rate has been below 1% for a long time.

3: If you couldn't afford that overpriced house...why did you buy the dam thing.

4: When was the last time YOU complained to a member of Congress?

5: Vote the SOB's who are running for reelection OUT OF OFFICE.

6. If you vote the incumbents OUT OF OFFICE then let the new guy/gal know you want better government.

7: Learn more about Congressman Ron Paul And Congressman Dennis Kucinich because these two men are patriots.

8: Contact a US Senator who voted against the Senate bill that would have controlled speculation in commodities trading and COMPLAIN THAT THIS BILL DID NOT PASS.

9. Go to:

www.stopoilspeculation.../

and sign the petition.

10: Buy as little oil, gasoline, home heating oil and products that come from oil as you can. And keep doing it until oil drops to $50.00 per barrel.

Doing what I suggested will help bring down prices, make you and government more responsible and keep us out of a DEPRESSION.

You see, we ARE IN A RECESSION AND IN DEEP TROUBLE and you have to do something about it.

2008 Aug 03 02:26 PM