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Jeremy Grantham: The Fed Is Killing The Recovery

Tyler Durden's picture




 

Authored by Stephen Gandel, originally posted at Fortune.com,

If you hate the Federal Reserve, you have a new hero.

A few weeks ago, Jeremy Grantham, the co-founder of money management firm GMO, called newly appointed Federal Reserve chairman Janet Yellen "ignorant" in the New York Times. He also said the reason for the slow recovery was not the severe financial crisis, continued high unemployment, or the many standoffs in Washington. Instead, he blamed the Fed for ruining the recovery it was supposed to stimulate. To someone who believes in the laws of economics, it's hard to overstate how odd that claim is. It's positively bonkers.

Low interest rates stimulate the economy. The Fed has done everything in its power to keep interest rates down, lower and longer than anyone can remember. That should have helped the economy. And yet the recovery has been just meh. So, either Grantham is bonkers, or he is onto something. Fortune recently caught up with him to find out.

Fortune: You believe the Fed's policies, particularly quantitative easing, have slowed the recovery. What's your proof?

Grantham: It's quite likely that the recovery has been slowed down because of the Fed's actions. Of course, we're dealing with anecdotal evidence here because there is no control. But go back to the 1980s and the U.S. had an aggregate debt level of about 1.3 times GDP. Then we had a massive spike over the next two decades to about 3.3 times debt. And GDP over that time period has been slowed. There isn't any room in that data for the belief that more debt creates growth.

In the economic crisis after World War I, there was no attempt at intervention or bailouts, and the economy came roaring back. In the S&L crisis, we liquidated the bad banks and their bad real estate bets. Property prices fell, capitalist juices started to flow, and the economy came roaring back. This time around, we did not liquidate the guys who made the bad bets.

Can you really blame the Fed for the bailouts? That was an act of Congress.

I don't like to get into the details. The Bernanke put -- the market belief that if anything goes bad the Fed will come to the rescue -- has had a profound impact on people and how they act.

Okay, but that's still not proof that quantitative easing slowed the recovery.

There's no proof on the other side, that the economy is any stronger from quantitative easing. There's some indication that the crash would have been worse and the downturn would have been sharper had the Fed not stepped in, but by now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.

It's economic doctrine that lower interest rates boost the economy. Are you saying that's wrong?

Economic doctrine says the market is efficient. My view of the economy is not really principle-based. Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke's policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It's anecdotal evidence, but we have never had such a limited recovery.

But the Fed does seem to have boosted stocks. Even if it did nothing else, doesn't a better market help the economy?

Yes, I agree that the Fed can manipulate stock prices. That's perhaps the only thing they can do. But why would you want to get an advantage from the wealth effect when you know you are going to have to give it all back when the Fed reverses course. At the same time, the Fed encourages steady increasing leverage and more asset bubbles. It's clear to most investing professionals that they can benefit from an asymmetric bet here. The Fed gives them very cheap leverage on the upside, and then bails them out on the downside. And you should have more confidence of that now. The only ones who have really benefited from QE are hedge fund managers.

Okay, but then I guess that means you think stocks are going higher? I thought I had read your prediction that the market would disappoint investors.

We do think the market is going to go higher because the Fed hasn't ended its game, and it won't stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market's mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.

So are you putting your client's money into the market?

No. You asked me where the market is headed from here. But to invest our clients' money on the basis of speculation being driven by the Fed's misguided policies doesn't seem like the best thing to do with our clients' money.

We invest our clients' money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That's how we will pay for this. It's going to be very painful for investors.

 

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Tue, 03/25/2014 - 15:12 | 4591268 Arrowflinger
Arrowflinger's picture

The Bernanke put hurt Mama.

Tue, 03/25/2014 - 15:16 | 4591280 DoChenRollingBearing
DoChenRollingBearing's picture

I see other interviews of Jeremy Grantham from time to time in Barrons and elsewhere).  Very impressive.  I would listen to the man.

Tue, 03/25/2014 - 15:17 | 4591286 Manthong
Manthong's picture

“we have never had such a limited recovery."

.. and we have never had such a bad and misdirected government.

Tue, 03/25/2014 - 15:19 | 4591291 DoChenRollingBearing
DoChenRollingBearing's picture

I am kind of surprised that the Tylers have not put up Jim Quinn´s latest:

http://www.theburningplatform.com/2014/03/24/the-fourteen-year-recession/

 

Yowwwwww........

Tue, 03/25/2014 - 15:26 | 4591311 ebworthen
ebworthen's picture

Late yesterday, ~8:00 p.m. EST:  http://www.zerohedge.com/news/2014-03-24/fourteen-year-recession

Those Tylers don't miss much ;-)

Top 'o the morning too 'ya :-)

"The government controlled public education system has flourished beyond all expectations of your owners. We’ve become a nation of techno-narcissistic, math challenged, reality TV distracted, welfare entitled, materialistic, gluttonous, indebted consumers of Chinese slave labor produced crap."

Good stuff in that article; I had seen the headline but not read it yet, so thanks.

Tue, 03/25/2014 - 16:15 | 4591527 DoChenRollingBearing
DoChenRollingBearing's picture

Hot weather has me sleepy down here, underperforming, sorry to bring old news.  Best to you all!

Tue, 03/25/2014 - 15:27 | 4591326 McMolotov
McMolotov's picture

But the Fed does seem to have boosted stocks. Even if it did nothing else, doesn't a better market help the economy?

How can anyone seriously ask this question? If a "better market" automatically translated to a "better economy," we wouldn't be setting a fucking record for the number of people on foodstamps. A "better market" helps the market and those most closely connected to it.

Tue, 03/25/2014 - 21:17 | 4592492 A Nanny Moose
A Nanny Moose's picture

Onlythose questions which are given by the teleprompters, are asked. Critical thinking in the face of empirical evidence is not a strong suit these days.

Tue, 03/25/2014 - 15:28 | 4591328 Serfs Up
Serfs Up's picture

...to which I would add...and we've never had oil over $100 a barrel for three years...

Grantham and the Fed both need to brush up on the role of high oil prices (that is, lower net energy from oil) acting in the same capacity as higher interest rates.  

The only difference is, the latter is a human invention requiring no effort and the former means there's less work being done at a higher cost.

 

Tue, 03/25/2014 - 15:16 | 4591277 ebworthen
ebworthen's picture

Nice to have another voice stating the obvious for the thick headed numbskulls who can't see it (Steve Liesman).

This simple analogy tells you everything - the FED is a heroin dealer.

Tue, 03/25/2014 - 15:36 | 4591364 daveO
daveO's picture

He could have stopped at 3.3 aggregate debt to GDP. The FED's goal is quite clear. To strip every last dollar (of economic freedom) from Non-Bankers. This will only end in a collapse of the debt/currency. If they 'Taper', there'll eventually be no way to service the debt (bankers die). If they don't 'Taper', they siphon more from the already overburdened debt slaves via inflation. This will ultimately lead to a loss of confidence in the currency. 

Tue, 03/25/2014 - 16:08 | 4591499 yogibear
yogibear's picture

" If they don't 'Taper', they siphon more from the already overburdened debt slaves via inflation."

" This will ultimately lead to a loss of confidence in the currency. "

To be expected. 

Go long guillotine manufacturers.  


Tue, 03/25/2014 - 15:16 | 4591279 Kaiser Sousa
Kaiser Sousa's picture

what recovery?

Tue, 03/25/2014 - 15:48 | 4591425 101 years and c...
101 years and counting's picture

porsche sales?

Tue, 03/25/2014 - 16:12 | 4591511 yogibear
yogibear's picture

Up and so are Maserati sales. Seeing more Maserati's than Cadillacs. these days. 

Tue, 03/25/2014 - 15:16 | 4591281 AmericasCicero
AmericasCicero's picture

I don't understand how reading 4-5 select Austrian economics books explains all this shit yet here are people 4 times my age still acting confused.

Tue, 03/25/2014 - 15:30 | 4591320 hobopants
hobopants's picture

Its not a question of the capability of understanding it, its a question of the will to understand it. Inconvenient truths are ignored truths until they punch you directly in the face.

Tue, 03/25/2014 - 15:38 | 4591372 daveO
daveO's picture

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Tue, 03/25/2014 - 21:19 | 4592494 A Nanny Moose
A Nanny Moose's picture

'You cannot reason people out of a position that they did not reason themselves into.'

Tue, 03/25/2014 - 15:26 | 4591323 NotApplicable
NotApplicable's picture

I think the key word is "read."

Tue, 03/25/2014 - 15:19 | 4591292 ToNYC
ToNYC's picture

Another bullet in the chamber,

Same game.

How you like me now?

Tue, 03/25/2014 - 15:21 | 4591301 Babaloo
Babaloo's picture

His is the same logic the Japanese employed years ago.  Their savers were complaining about very low rates and the Japanese monetary authorities implemented higher rates, which promptly threw Japan into another recession.

Higher rates do not serve to stimulate the economy.  And just because the recovery has been slow, doesn't mean higher rates will speed up the recovery.  His logic is flawed and we have evidence (Japan) to prove it.  I'm surprised he doesn't remember.

Tue, 03/25/2014 - 15:28 | 4591331 NotApplicable
NotApplicable's picture

You're missing the point. It isn't high or low rates per se that help the market, but rather STABLE rates. In a normal world, rising or falling rates are a signal. In Bizarro World they are merely noise.

In other words, rates are an effect, not a cause.

Tue, 03/25/2014 - 15:44 | 4591397 daveO
daveO's picture

The cause is 'too cheap' debt. We're at nearly zero rates(and QE), thru FED suppression, because they have no choice if they want all the debtors to service their debt. It is an act of desperation. Higher rates are a function of the free market pricing debt properly. In a free market bankers would go down. We don't live in a free market.

Tue, 03/25/2014 - 16:16 | 4591532 yogibear
yogibear's picture

Right now the currency war is heating up. Who fails first. China looks to be having some problems.

Tue, 03/25/2014 - 16:31 | 4591596 RaceToTheBottom
RaceToTheBottom's picture

The dollar is viewed as the last to fail, but all Fiats are on the same plane and the plane is crashing. 

The difference between the first and the last is about as important as row 1 VS row 65.  The plane is crashing at 500 miles per hour....

Tue, 03/25/2014 - 15:50 | 4591431 daveO
daveO's picture

Higher rates stimulate savings and Capital Investment(Long Term growth). Lower rates stimulate debt growth(Short Term growth). It's like taking amphetamine's to work longer w/o sleep. Japan's debt load is even higher than the US's. With enough debt, the currency will collapse. If the US had racked up the debt first, Japan would never have gotten as far as they have w/o a 'reset' (which is not allowed by the banking overloards).  

Tue, 03/25/2014 - 18:39 | 4592027 Oldwood
Oldwood's picture

Low interest rates to stimulate capital expenditures is actually deflationary, just like falling prices for commodities. You can stimulate spending only so far as people actually have a need to spend, and even then you are only pulling future spending into the now. As a business, I do not care how cheap interest is because my primary concern is paying the loan back, followed closely by the desire for additional profits. If capital expenditures do not generate profits they are not particularly attractive, but if they do not even generate enough revenues to pay back the loan, then forget it. I see little opportunity to do either right now. Falling prices for commodities play the same for me. If I need it lower prices might induce me to buy, but if I don't need it, then what matter is it how cheap it is? You can lead a horse to water, but you can't make them want to drink. In this case I think it is closer to waterboarding.

Wed, 03/26/2014 - 06:35 | 4593090 damicol
damicol's picture

Moron,  What matters is tha  real true market rate, whether 1 % or 30%  it should be decided by the market, and distortion up or down causes malinvestment and distortion that  rebounds eventually.

No central bank should set rates, All rates should be set by those who have the capital to lend with no backstop and they assume all risk.

If rates rise  by the market is slows economic activity to  allow for the risk increasing, if rates fall it is because opportunity grows,

 Fix rates higher  then it distorts  the economy from opportunity to rent seeking set too low and it distorts the econmy to   risk taking  by insolvent and worthless entities .

 

Something that apparently    90 % of people simply do not understand  just like the  moronic   dementia raddled old cow yellen.

 

 The distortion by ZIRP is precisely to benefit  the players  in the market and when rates rise the players will have switched sides again and  they will profit from excess rates.

As a lender I would  use  as yardstick for rates to charge the 10 year average  first time home buyers salary net of taxes  rebased to todays income and add a margin to that and set repayment schedules to follow that metric.

And i would use that for any type of loan , commercial  or domestic, auto or  student and then assess the risk as to the likllihood of those salaries maintaining the rebased 10 year average and adjust the margin accordingly..

Now the rates would follow the real affordability and  not only that would also take into account wage inflation, general inflation and all other bubbles and distortions in the market.

 

 

 

Tue, 03/25/2014 - 15:24 | 4591316 PontifexMaximus
PontifexMaximus's picture

As long as the FED is in the driver's seat, forget about logics, they are the new logic.

Tue, 03/25/2014 - 15:26 | 4591324 madbraz
madbraz's picture

Not sure if Grantham is doing his math right regarding the market not being 2 standard deviations above mean.  It's higher than 2 standard deviations (actually almost at 3 std deviations!) above the mean on 2yr, 3yr, 5yr and 10yr intervals.  To reach 2 std deviations on 1 yr periods, it only has to climb to 1924 (on the SP500).  Unless he assumes that today's prices ARE the mean - which would take another 2 years of continuous climb (much like the prior 18 months, which have been historic and only comparable to the late 1990s and 1920s. 

 

If you use the Nasdaq 100, the Russell 2000, the Transports, consumer discretionary, biotech, etc, then it is at 3 standard deviations or well north of 2 standard deviations from the mean on all periods in excess of 1 year.  It is clearly in a bubble already.

 

Only the FED not to "see" mega bubble all over this.

Tue, 03/25/2014 - 15:35 | 4591358 taraxias
taraxias's picture

Well done. Massive post.

Tue, 03/25/2014 - 22:50 | 4592717 Midnight Rider
Midnight Rider's picture

Very good points. If we go up another 25% from here...we are in for one major SHTF event. Not we we aren't going to get one already.

Tue, 03/25/2014 - 15:29 | 4591336 buzzsaw99
buzzsaw99's picture

stated fed theories are for idiot-consumption only.

higher rates wreck bank balance sheets.

lower rates help executive stock options

lower rates favor debtors, which we are

 

egad man, try to keep up.

Tue, 03/25/2014 - 15:29 | 4591339 q99x2
q99x2's picture

Bernanke came in and the green shoots ran out the window. 

Tue, 03/25/2014 - 15:31 | 4591343 SharkBit
SharkBit's picture

Compliments to Jeremy Grantham but the guy from Fortune, Stephen Gandel, is such an embarrassing IDIOT! 

You believe the Fed's policies, particularly quantitative easing, have slowed the recovery. What's your proof? Where is your proof that QE has helped?  Can you really blame the Fed for the bailouts? That was an act of Congress. Yes.  Perhaps Congress was wrong.  You think?

Okay, but that's still not proof that quantitative easing slowed the recovery. Get over it.  You are obviously a paid muppet.

It's economic doctrine that lower interest rates boost the economy. Are you saying that's wrong? Economic Doctrine.  Dick.  Lower Interest Rates in the current environment are nothing short of gift to the rich to speculate with other people's money.  Do some research.  Idiot.

But the Fed does seem to have boosted stocks. Even if it did nothing else, doesn't a better market help the economy? What a stupid question.  Yeah if you have excess capital and a pal at JPM to know when to pull your chips off the table.

Okay, but then I guess that means you think stocks are going higher? I thought I had read your prediction that the market would disappoint investors. Translate, Ignore what I just said.  Everyone back in the pool. 

So are you putting your client's money into the market? Are you listening or are you just that stupid.

Tue, 03/25/2014 - 18:04 | 4591913 yellowsub
yellowsub's picture

He has to play to the audience, remember who reads Fortune and it is the same that benefited from the FEDs...

Tue, 03/25/2014 - 15:33 | 4591350 RaceToTheBottom
RaceToTheBottom's picture

The cleansing will require WS bodies hanging from lampposts.  It is a harsh taskmaster. 

Tue, 03/25/2014 - 15:35 | 4591360 besnook
besnook's picture

he shouldn't discount the possibility that asset values may drop but will be masked by the lack of value in currencies.

Tue, 03/25/2014 - 15:38 | 4591373 _ConanTheLibert...
_ConanTheLibertarian_'s picture

There is no recovery because we are in The Fourth Turning. It wil roughly take another 15 years before a recovery starts.

Tue, 03/25/2014 - 15:43 | 4591394 kurt
kurt's picture

How come nobody talks about the The Turd Turning?

Tue, 03/25/2014 - 15:43 | 4591393 SubjectivObject
SubjectivObject's picture

Slowed the Recovery??!

How'z'bout Transferred The Wealth?  How hard is that to see, .... to say?

Why do these invesment pundits even posit that a Fed is needed?

Doing their part playing their part as controlled opposition.

Tue, 03/25/2014 - 15:46 | 4591416 wonderatitall
wonderatitall's picture

just a silly regional mope,nothing to see hear. a counter revolutionary of our sun god , king obama

Tue, 03/25/2014 - 15:47 | 4591421 Flakmeister
Flakmeister's picture

More like being unable to generate enough economic activity out of a barrel of oil to justify it's cost....

Tue, 03/25/2014 - 15:55 | 4591450 Inthemix96
Inthemix96's picture

Recovery?

Fuck off and talk sense son, this in no recovery, same as it is no recession.

This is an out and out, in your fucking face Robbery.

Fuck me blind, these idiots, think we are ALL idiots.

You will swing for this JG, we aint all mugs.

Tue, 03/25/2014 - 16:28 | 4591590 gcjohns1971
gcjohns1971's picture

"Instead, he blamed the Fed for ruining the recovery it was supposed to stimulate. To someone who believes in the laws of economics, it's hard to overstate how odd that claim is. It's positively bonkers."

Fortune is apparently full of idiots who do not know that for every 'stimulatee' whose activities may have been encouraged there is a 'stimulator' whose activities have been discouraged.   The problem is that the 'Stimulators' have been anyone who gains by productivity in the real economy and the 'stimulatees' have been everyone who gains by borrowing, gaming, gambling, and arbtrage.  Only one of those groups produce an economy and the Feds policies are backing the wrong one.

The problem with Fed policy, in other words, is that they are sending the race horses to the meat packing plant to keep the gamblers at the track well-fed.

It begs the question of what there is for the gamblers to gamble on.

Tue, 03/25/2014 - 16:47 | 4591656 khakuda
khakuda's picture

Well stated.  The Fed seems to think that wealth and jobs are created by borrowing, debt and spending.  Yet any immigrant can tell you that the path to wealth is working, saving as much as possible and investing.

Tue, 03/25/2014 - 16:31 | 4591597 moneybots
moneybots's picture

"In the economic crisis after World War I, there was no attempt at intervention or bailouts, and the economy came roaring back."

 

Exactly what Denninger has been saying.

 

Bernanke studied the wrong depression.

Tue, 03/25/2014 - 17:05 | 4591699 WSP
WSP's picture

Don't fall for any of this misdirection. The federal reserve KNOWS EXACTLY WHAT IT IS DOING. I am convinced that all of the false dissent at the fed and articles like this are nothing more than misdirection---who really believes the Federal Reserve is that incompetent:  they are not---THEY ARE AUTHORITARIAN CRIMINALS.  One need only study their evil to understand that.

NO, the criminals at the Federal Reserve are deliberately destroying what is left of America so that they can bring in their progressive authoritarian technocratic dictatorship (I know, it is already here but it is going to get a lot worse once thye finish burning the constitution).  These thugs believe we are their slaves and were born to serve them.  They will continue debasing the currency and directing fiat currency to their criminal friends until America is completely destroyed.  When they are finished they will flush down the toilet of history whatever pieces of the constitution they haven't burned or wiped their ass with.

I don't know if it is cognitive dissonance, "hope", or just plain ignorance for people to believe stories like this.  I can understand why the  useful idiots and other propaganda tools of the criminal bankster's put out these propaganda pieces, but I don't understand why so many people are gullible enought to believe that the underlying reason is incompetence rather than evil malice. 

 

 

Tue, 03/25/2014 - 17:04 | 4591709 eaglerock
eaglerock's picture

Isn't the Fed tied to low interest rates because high rates would increase the amount of interest the Federal Government has to pay on its $17 trillion debt?

Tue, 03/25/2014 - 17:04 | 4591710 moneybots
moneybots's picture

"Grantham: It's quite likely that the recovery has been slowed down because of the Fed's actions. Of course, we're dealing with anecdotal evidence here because there is no control."

 

Yes there is- the 1921 recession is the control.  No intervention.  It is the perfect comparison to FED/government intervention.  A sharp, deep drop and a sharp, strong rebound.  The market was allowed to clear, so there was nothing to hold it back when it rebounded.

Nothing occurs in a vacuum.   Pulling demand forward, suppresses demand in the future.  A record credit bubble allowed a lot of demand to be pulled forward.  However, when people are then in debt up to their eyeballs, rock bottom rates won't induce them to borrow more money, when they are already drowning in debt.

The government is borrowing in their place, but that means higher taxes will result, which will also suppress forward demand.

 

We are worse off by not having the crash we should have had in 2001, following the 1990's boom.  We are even more worse off by not having the crash we then should have had in 2008.  The debt bubble is even larger now.

Tue, 03/25/2014 - 17:46 | 4591867 Pee Wee
Pee Wee's picture

So if I give all my counterfeit purchasing power to the fraud-fiat cartel I will have more money?!

Where do I sign.

Ya can't print integrity, Janet.

Tue, 03/25/2014 - 18:03 | 4591912 Surging Chaos
Surging Chaos's picture

"In the S&L crisis, we liquidated the bad banks and their bad real estate bets. Property prices fell, capitalist juices started to flow, and the economy came roaring back."

Correct me if I'm wrong, but didn't the government bail out the S&Ls at the taxpayers' expense? It was like a mini-TARP.

Tue, 03/25/2014 - 18:46 | 4592044 RaceToTheBottom
RaceToTheBottom's picture

Before, I believe there was some down-side for the Banksters.  This time around, the "down-side" was huge bonuses and promotions and money.

Tue, 03/25/2014 - 19:07 | 4592089 Sam Spade
Sam Spade's picture

Over a thousand bankers were prosecuted by the Justice Department and sent to prison during the S&L debacle.  The bad S&L's were allowed to fail.  The assets and bad loans were transferred to a new entity, the Resolution Trust Corporation, and the assets were eventually sold off to the highest bidders.  Back then the system worked the way it is supposed to work. The opposite of how things work today, obviously.

Tue, 03/25/2014 - 22:45 | 4592708 AdvancingTime
AdvancingTime's picture

Grantham is pointing out that the Fed policies are driving the wrong kind of growth. Much of the demand we see today is driven by artificially low interest rates and a mirage in the markets they distort. By this I mean that the distortion and illusion that the economy is healthy tends to cause people to make poor economic choices.

It is becoming apparent to many that the financial system has become dysfunctional.  People are forced to loan their savings to governments and banks with negative interest after adjusting for inflation at a time that when there is scant demand for loans even at low interest rates.

We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. More on this in the article below.

http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...

Do NOT follow this link or you will be banned from the site!