It’s Becoming Increasingly Obvious That You’re Going To Need To Get (More) Comfortable Slaughtering ChickensBy Matt Levine
A few weeks ago Jeremy Grantham, in Part 1 of his quarterly letter, told you everything you need to know about current markets. Specifically (1) get rid of stocks, bonds, and just capitalism generally while we’re at it, (2) get yourself a farm, and (3) keep a pretty close eye on soil erosion. Good news: some of you have clearly been listening. For example Perry Vieth, a former quant money manager who now buys farmland at Ceres Partners LLC. And as Bloomberg reports, he is not going to let a dystopian future of soil erosion rain on his 16% returns:
When Vieth wants land, he goes shopping, as he does with Zick and Blum under a partly cloudy southern Michigan sky in May. Armed with aerial and soil maps, they look for farms with predictable rainfall, mineral-rich land and good drainage. They avoid land that slopes too much, which could lead to soil erosion.
So A+ for Vieth. The rest of you are going to get another chance to get in Grantham’s good graces, since he’s out with Part 2 of his letter today and – well, it’s relatively cheerful, for him, even saying that GMO “are now very modest buyers for the first time since mid 2009.” Buyers of equities! Though of course he’s got nothing but praise for those like Vieth who know where the real money is: “For those with a long horizon, I am sure well-managed forestry and farmland will outperform the average of all global assets.”
Well, we did say relatively cheerful. He’s still not keen on a few little things like:
Politicians. Ever the agriculturalist, Grantham has this to say about the debt ceiling debate: “Come to think of it, the choice was between technical default and looking like a Banana Republic and technical blackmail and looking like a Banana Republic! Just different bananas perhaps?”
Entitlements. See above actually:
Predictably, the developed world ages, the percentage increase in new workers declines, pensions and health beneﬁts bloom, and balanced budgets clearly become mathematically impossible without either substantial reneging on commitments or tax increases or both. Any other pretense is beyond wishful thinking or weak math skills. It is either childish or gross and cynical politics: that is to say, even worse politics than usual.
Income inequality and corporate profits. In a deleveraging world, Grantham is not so keen on a consumer whose average real wages have been flat for 40 years:
Today the artiﬁcial sugar-coating of increasing debt has been removed and we must live with the reality that an average hour’s work has not received a material increase for 40 years …. Without increased debt and without gains in hourly wages, how can there be sustained broad gains in consumption? Only Chanel suits, Hermes scarves, BMWs, and their ilk have very strong sales, and these top-end items are just too small a fraction to carry the day. If we want to dig out of our current morass, don’t we have to change this equation and isn’t the most direct way of doing this to divide the pie more evenly? That would mean lower income and sales taxes for the bottom 75% of earners and higher taxes for the top 10%! …
There never was – and perhaps, with luck, never will be again – such a terrible comparison between the economic well-being of corporations and their ofﬁ cers and the economic ill-being of their ordinary employees.
Judging from Bloomberg’s article, there are a lot more finance types than you’d expect who are following Grantham’s strategy of underweight luxury goods / overweight dirt. Take Singapore hedge fund manager Stephen Diggle, who remembers after Lehman:
“Everyone said, ‘Buy gold.’ But at the end of the day, you can’t eat it. If everything else goes and I just have these farms, it makes me moderately wealthy.”
Danger: Children At Play [GMO Quarterly Letter, pdf]