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Dick Cheney’s banker sees
world bubble
Jeremy Grantham believes everything — art, infrastructure, land,
forestry, junk bonds, mundane blue chips — is going through an
exponential phase and will eventually burst dramatically
By William Pesek
Bloomberg.com
05/03/07 "Wall
Street Journal" -- -- You’d expect someone whom
the famously dour Dick Cheney entrusts with millions of his
dollars might have a gloomy view of the world. Jeremy Grantham
does indeed.
“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,” he
writes in Grantham, Mayo, Van Otterloo & Co.’s latest
quarterly letter titled “The First Truly Global Bubble”.
Grantham, 68, is chairman of the Boston-based company that,
according to financial disclosure reports, in 2005 managed as
much as $6.1 million (Rs2,501 crore) for US Vice-President
Cheney. And if his own recent actions are any guide, he’s quite
the multitasker.
The money manager is a critic of the US energy policies for
which Cheney bears considerable responsibility. In February,
Grantham donated $23.6 million to Imperial College London to
establish an institute on climate change.
Perhaps these multitasking skills helped Grantham make one of
the gutsiest market calls in recent memory: That pretty much
every asset class, everywhere, is in the midst of a bubble.
It would be comforting if we could dismiss such negativity.
After all, isn’t the Dow Jones Industrial Average climbing to
all time highs at a time when Japan and Europe are growing,
China, India and much of the rest of Asia boom and all’s well in
the global financial system?
Sure, and that’s just what worries Grantham. He points to the US
in the late 1990s and Japan in the late 1980s—periods when
investors thought asset rallies would continue indefinitely.
“Most bubbles, like Internet stocks and Japanese land, go
through an exponential phase before breaking, usually short in
time, but dramatic in extent,” Grantham argues, and he has a
point
Bubbles generally require two dynamics: the perception of
near-perfect economic conditions and an abundance of cheap
credit. The Bank of Japan left its overnight lending rate at
0.5% last week, giving traders a green light to put on more
“yen-carry trades.”
Borrowing cheaply in yen and moving those funds into
higher-returning assets overseas has been a one-way bet and
markets have little reason to think that’ll change. China’s
unprecedented buildup of currency reserves—$1 trillion and
counting—also may constitute a bubble of sorts.
The amount of liquidity zooming around the globe has Grantham
wondering if risk is really as negligible as many investors seem
to think. “Sustained strong fundamentals and sustained easy
credit go one better: they allow for continued reinforcement,”
Grantham argues.
Looked at from that perspective, perhaps China’s wacky stock
rally isn’t so disconnected from the world after all. Modern
history offers few better examples of a Ponzi scheme than
Chinese shares. The CSI 300 Index, which tracks yuan-denominated
A shares listed on the Shanghai and Shenzhen stock exchanges,
gained 75% already this year and has tripled in the past 12
months.
In that time, China’s fundamentals changed little. It’s still
growing faster than 10%; officials in Beijing still can’t figure
out how to slow things down; a lack of transparency still makes
it hard to know what’s going on in corporate boardrooms; and
Asia’s No. 2 economy still faces risks of overheating,
pollution, social unrest and trade wars.
All that’s changed is the amount of attention paid to Chinese
stocks, creating a gold rush. It’s akin to the media attention
lavished on dot-com day traders in the late 1990s. Newcomers
armed with get-rich-quick dreams, not economic realities, are
propelling shares higher.
A similar dynamic may be playing out across the global economy.
Everyone, as Nouriel Roubini, chairman of Roubini Global
Economics in New York, has been warning, is reading about how
great things are and throwing caution to the wind.
It’s more titillating to read about hedge fund managers making
over $1 billion a year than about global imbalances. What makes
today’s global financial boom different is that it really is,
well, different. Past bubbles came amid lofty claims of new
eras. In the 1980s, the new era featured a Japanese business
model many said couldn’t go wrong. In the 1990s, the US was
awash with similar hubris.
“This time, everyone, everywhere is reinforcing one another,”
Grantham argues. “Wherever you travel, you hear it confirmed
that ‘they don’t make any more land,’ and that ‘with these
growth rates and low interest rates, equity markets can keep
rising,’ and ‘private equity will continue to drive the
markets.’ To say the least, there has never been anything like
the uniformity of this reinforcement.”
Markets’ success in withstanding September’s $6.6 billion
implosion of Amaranth Advisors LLC and more recent turmoil among
subprime mortgage lenders prompted talk of another new era. This
latest one seems centered on China producing infinite amounts of
cheap labour, US deficits being sustainable, major economies
growing in sync and deep, diversified markets being able to
multitask whatever comes their way.
The trouble, Grantham says, is that the bursting
of this bubble “will be across all countries and all assets,
with the probable exception of high-grade bonds. Risk premiums
in particular will widen. Since no similar global event has
occurred before, the stresses to the system are likely to be
unexpected.”
Good luck multitasking that.
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