Given his timing, you might be inclined to say that GMO co-founder and portfolio specialist Jeremy Grantham seems to be channeling Ebenezer Scrooge in his latest quarterly letter to investors.
Actually, the investment guru is following up on his comments of earlier this year, outlined in “10 Quick Topics to Ruin Your Summer.” And what he really wants is for investors to grasp real economic trends affecting the U.S. economy.
Grantham admits that nobody wants to hear bad news. However, we need to “be a little more aware of how dangerous our wishful thinking can be in investing,” he explains.
“Wishful thinking and denial of unpleasant facts are simply not survival characteristics,” the portfolio manager wrote in the his letter to GMO investors, posted Wednesday.
So, would-be survivalists, take a deep breath and read on for Grantham’s take on today’s economic reality.
(For those at or near to a holiday party, a glass of spiked egg nog or other libation might make his medicine go down a bit easier.)
1. U.S. Wages Are Lousy
Grantham starts his discussion of facts and figures with “one of [his] favorites.”
“For the 50 years I have been in America, Businessweek and The Wall Street Journal have been telling us how incompetent at business the French are and how persistently we have been kicking their bottoms… and as far as I can tell, we have generally accepted this thesis.”
His first slide, though, shows that France’s median hourly wage has risen 180% in 45 years. Meanwhile, Japan is up 140%, and “even the often sluggish Brits are up 60%,” he notes.
The “killer” is the U.S. median wage. “Dead flat for 45 years!” explained Grantham.
2. Job Creation in the U.S. Ain’t Great
If U.S. wages are weak, we are still the place to be when it comes to job creation, right?
One chart Grantham shares shows that the U.S. unemployment rate for 25- to 54-year-olds is below 5% vs. 9% in the E.U.
However, he cautions, when adjusted for the nonparticipation rate, the percentage of all 25- to 54-year-olds in the U.S. who are not actually working (i.e., those discouraged, uninterested and in jail) is 21%, above 20.5% in the E.U., and our “long-suggested job-creating skills are looking a little thin,” Grantham explains.
3. Participation Has Dropped Off
The problem, according to the GMO portfolio specialist, can be better understood in his third slide.
This shows that the U.S. was a leader in the percentage of women working, for instance.
From 1972 to 1997, the U.S. work force participation rate rose from 70% to 80%.
But while from 1984 on, the U.S. spent 20 years ahead of most other countries in participation rates, something “appears to have gone wrong” after 1997, he says.
Other developed countries kept increasing their participation rates, but that of the U.S. declined “from first to last in fairly rapid order,” Grantham said. “What a far cry this reality is from the view generally accepted by our business world.”
4. Health Care in the U.S. Is …?
Many in the U.S. believe we have the best health care system in the world, Grantham points out. “And why shouldn’t we, given the money we put in … over twice the average cost paid by the E.U.”
Looking at what we get back, however, reveals that we get two years less life than the median, he points out.
“And watch out for when the Turks, Poles and Czechs cut back on smoking,” Grantham adds, noting that this could mean we will “find our way to the bottom of the list.”
5. Some Groups Are Suffering More Than Others
If you really want to worry about the collective state of our health, look at Grantham’s next slide.
It highlights data compiled by Angus Deaton, who won the 2015 Nobel Memorial Prize in Economic Science, and shows the death rate for U.S. whites between the ages of 45 and 54.
Since 1990, this rate has shown “a quite remarkable decline for other developed countries, about a one-third reduction, as you can see, including for U.S. Hispanics. But for U.S. whites there is a slight increase!” Grantham stated.
The general increase is related to increases in deaths tied to alcoholism, drug use and suicide.
“Had the rate for U.S. whites declined in line with the others,” he explained, “there would have been about 50,000 fewer deaths a year!”
Grantham suggests a connection between slide 1, which shows no increase in the U.S. median wage for over 40 years, and slide 5, which shows the uptick in unnecessary deaths among U.S. non-Hispanic whites aged 45 to 54.
“This is precisely the age group that was led to expect better for themselves and much better for their children. But those aspirations have not been generously fulfilled,” he said.
6. And What About Taxes?
The data presented in slide 6 looks at how much money is going to government, which might imply more spending on health care and other services, for instance, or a diversion of resources away from the private sector and other sources of economic growth.
However, Grantham notes, the U.S. share of GDP going to the government via taxes is “about the least in the developed world and … has barely twitched for 50 years.”
(“I admit it, I consider myself American or British depending on whether the context is favorable or not,” he stated.)
7. But Isn’t U.S. Society Fair?
The GMO portfolio specialist looks at the Gini coefficient, a measure of income inequality, in his next slide. “Low is good,” he explained.
But only Turkey and Mexico “outflank the U.S. as more unequal amongst the richer countries,” Grantham adds.
He is “a bit surprised” to see how high the U.S. already was in 1980.
8. U.S. Democracy Reigns As King Of …
The idea that the U.S. has a democracy in which “people really count” is fundamental to our culture, Grantham points out.
However, when looking at the probability of a bill passing, the influence of the general public is, “in a nutshell,” not much, Grantham argues.
“The fiancial elite, on the other hand, can double the chance of a bill passing or, much more disturbingly, can completely block passage,” he explained. “Clearly these facts are totally incompatible with the concept of participatory democracy and equally entirely at odds with the much more favorable and optimistic beliefs we share about our democracy.”
While we may want “to believe good news” and that we “have a superior system,” it “ain’t necessarily so,” Grantham states.
9. Our Educational System Beats ….
While the U.S. certainly has some of the top universities in the world, slide 9 shows what the general educational picture is for most students: mediocre, according to Grantham.
He draws his conclusion from research that demonstrates how the U.S. has been falling behind in math and science.
And, when it comes to educational deficiencies in the United States, there’s more bad news to examine.
10. Key School Stats Are Dismal
“Less than mediocre” is how Grantham characterizes the data in slide 10, which focuses on the percentage of 3- and 4-year-olds enrolled in school, aka pre-primary or pre-K education.
“This is an area of emphasis where the returns on investment are said to be particularly high – six for one – although I would not like to guarantee such returns myself,” he explained. “However, our relatively low ranking at the start of the process is not heartwarming.”
11. And the Environment Is Hurting, Too
U.S. production of carbon dioxide is the largest in the world on a per-capita basis, Grantham says, putting us just ahead of Australia.
“The two of us also worry the least, except for one Middle Eastern oil producer,” he explained.
Furthermore, the higher your fossil fuel intensity, the more “ingenious your fossil fuel propaganda is to create doubt and the more we are encouraged to think beautiful optimistic thoughts: clean coal and clean oil,” Grantham states.
As more people recognize climate change, the richer countries seem to be convincing themselves that “the damage is not that serious,” he adds. “Poorer countries, meanwhile, do not have that luxury, and about 20% more are actively concerned (about 80% vs. 60%) than are the richer countries.”
12. We Just Give Money Away, Don’t We?
Most Americans, Grantham says, believe the U.S. government is “generous” in its foreign aid.
“Yet, it just ain’t so, and by a remarkable degree,” he said, as outlined in slide 12.
In fact, Sweden leads the way with 1.4% of GDP. The U.K. is at 0.8%, ahead of Japan and Germany.
“Dead last is the U.S. at 0.2% of GDP, which it has averaged forever,” the GMO portfolio manager said. “This is the item with the biggest and most permanent gap between reality and perception.”
To him, the issues we face today are too important to run away from. In fact, the environmental issue, for instance, is “so important that it may affect the long-term viability of our global society and perhaps our species.”
Thus, it’s time for us to “become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news,” Grantham states.
And that’s his 2016 New Year’s Resolution for GMO and other investors.
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