Legendary investor Jeremy Grantham, co-founder of investment firm Grantham, Mayo, Van Otterloo & Co., manages about $97 billion and has a long track record of outperforming the market. And he has turned decidedly bearish as of late.
The rub isn’t that Grantham is gloomy about the stock market. He has had a number of bearish shareholder letters as of late — including a prescient May 2011 letter where he warned that “the environment has simply become too risky to justify prudent investors hanging around, hoping to get lucky.” Summer 2011 proved that statement to be spot-on. This, after a call in 2007 where he said the housing bubble was about to burst.
No, the real story is that Grantham is getting bearish on the very philosophy of the stock market, and of a free-market system of business that puts profits above all else.
Think this is a sensationalist reading? Well take a look at his self-proclaimed “longest quarterly letter ever” and see for yourself via these quotes.
- “The general opinion is that this is not capitalism’s finest hour.”
- “To leave it to capitalism to get us out of this fix by maximizing its short-term profits is dangerously naïve and misses the point …”
- “… it is quickly apparent that capitalism in general has no sense of ethics or conscience.”
- “However, Marx and Engels certainly got the part right about globalization and the supranational company increasing the power of capital at the expense of labor.”
Doesn’t exactly sound like a Wall Street insider, does it?
Granted, some of those quotes don’t look as glaring taken in context. But the crux of his argument is that, fundamentally, the American system of business chews up as much wealth as it creates. It’s inequitable, and eventually we start to eat our own in the quest for endless growth.
Viewed through the lens of the recent financial crisis and Occupy Wall Street movement that is so obsessed with the inequality between the wealthiest 1% and the rest of America, one easily could be scared into thinking that Grantham is part of an upper class that is slowly ceding power and willing to embrace a greater form of “redistrubition” for their wealth.
Not so fast. Because equally good reading — and equally shocking — comes from the other side of the hyperbole spectrum. This time, from liberal economists defending the “benefits” of sweatshops and the almost slave labor conditions of companies like Apple (NASDAQ:AAPL) supplier Foxconn.
Benjamin Powell, who wrote the 2007 book Making Poor Nations Rich and reportedly is writing a new book, No Sweat: How Sweatshops Improve Lives and Economic Growth, told The Atlantic, “When workers voluntarily take a job they demonstrate that they believe the job is the best alternative available to them — even when that job is unsafe and the pay is very low compared to wages in the United States.”
In short, workers choose what we deem deplorable jobs because they are better than the alternative — and by and large are thankful for the employment.
Economist Nichols Kristof echoes this. He regularly blogs for the New York Times about his travels across Africa, and the reports are often stark and disturbing. But never lost on Kristof is the relative nature of poverty and opportunity. Take this startling column entitled “Where Sweatshops are a Dream,” about a garbage dump in Cambodia, where a sweatshop would be welcomed the way an American city would welcome the likes of a Silicon Valley startup.
Kristof writes that one woman “hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous.”
Yes, that’s right. This woman’s hope for the next generation is that a sweatshop will provide upward mobility.
Much-maligned liberal economist Paul Krugman wrote nearly the same column as Kristoff about 10 years earlier focusing on the Philippines, with a title “In Praise of Cheap Labor.”
So who is right?
It is immensely damning that a successful Wall Street veteran would warn of globalism offering “capitalists more rope to hang themselves with … rope … bought from briskly competing capitalists, eager till the end for a good deal.” Grantham should be heeded, since the refusal of men like him to trade in that hangman’s rope could be what saves America from another economic collapse.
But the relative nature of economics and opportunity cannot be overlooked. Would Grantham begrudge a Foxconn job to those Cambodians and Filipnos who live in squalor just because he wouldn’t want to work on the assembly lines himself? And if so, how else do the poorest of the poor start the long and arduous climb out of the muck and mire of garbage dumps into something better?
Surely there are ways to make the playing field more equitable for everyone in this global economy, and to fairly allocate the wealth to those who have earned it without ignoring those who need it most. But it would be incredibly naïve to claim capitalism alone is the root cause.
My personal takeaway: The moral philosophy of the actors is a heck of a lot more important than the economic philosophy of the actors. Corrupt and selfish socialists can be equally as damaging to the system as capitalists.
That means these conversations are certainly worth having. Grantham’s letter hopefully at least prompted some to think about their business practices and economic views — and self-awareness is key to responsible growth.
Besides, at the end of the day, America is the wealthiest of the wealthy. On a global scale, the wealthiest 1% makes $34,000 per person in a household. That means half of the world’s richest 1% live in America.
If Grantham’s intentions were to remind Americans how fortunate we are to be at the top of the global economic food chain and encourage people to think critically about how best to achieve growth, good for him.
If this is just a pity party or an effort to make those who are well-off feel ashamed … well, let’s hope future letters from the GMO founder are shorter. Much shorter.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.