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CNBC Transcript: Jeremy Grantham

CNBC Transcript: Jeremy Grantham

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Published by CNBC
(Source: CNBC)

Unofficial transcript of Maria Bartiromo's interview with Jeremy Grantham, Chief Investment Strategist of GHO, a global investment management firm. Portions of the conversation appeared on CNBC on Thursday, November 11, 2010.
(Source: CNBC)

Unofficial transcript of Maria Bartiromo's interview with Jeremy Grantham, Chief Investment Strategist of GHO, a global investment management firm. Portions of the conversation appeared on CNBC on Thursday, November 11, 2010.

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Published by: CNBC on Nov 11, 2010
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 TRANSCRIPT: JEREMY GRANTHAM INTERVIEWED BY CNBC’SMARIA BARTIROMOPortions of this interview with Jeremy Grantham, Chief Investment Strategist of GHO, a global investmentmanagement firm, appeared on CNBC on Thursday, November11, 2010.MARIA BARTIROMO:
Great to have you on the program. Thanks somuch for joining us.
Very nice to be here.
Time and time again, your writings and yourpredictions have been right on in terms of investing and where we arein this market. From the tech bubble to beyond. Can you talk to usabout where we are today in the stock market and what trends yousee developing?
What I worry about most is the Fed's activity and—QE2 is just the latest demonstration of this. The Fed has spent mostof the last 15, 20 years— manipulating the stock market wheneverthey feel the economy needs a bit of a kick. I think they know verywell that what they do has no direct effect on the economy.The only weapon they have is the so-called wealth effect. If you candrive the market up 50 percent, people feel richer. They feel a littlemore confident, and the academics reckon they spent about threepercent of that. So, the market went up 80 percent last year. Theyshould be spending 2.4 percent extra of— of the entire value of thestock market, which is about two percent of GDP. And that's a realkicker.You don't see it because of the enormous counter drag from thehousing market— and— and its complete bust. But, it would havebeen worse with— without this. The problem is, they know very wellhow to stimulate the market. But, for whatever reason, they step
away as the market gathers steam, and— and resign any responsibilityfor moderating— a bull market that may get out of control as we sawin '98 and '99 with Alan Greenspan, as we saw in the housing market.And— I fear that the market will continue to rise. It will becontinuously speculative. After all, when you can borrow at a rate thatis negative after adjustment for inflation, it's not surprising that youwould borrow a lot.
So, what are the implications of— of this constanteasing and stimulation? You know, it— it seems the numbers are somind boggling: $600 billion here.
They— they (CHUCKLE) are mind-boggling.
You know? (CHUCKLE) But, give us the—
The consequences are you get boom and bust. You—stimulate in '91. You let it get out of control. You have this colossaltech bubble in '99. Sixty-five times earnings for the— for the growthstocks. Then you have an epic bust. Then, of course, they're panicstruck. They race back into battle with immense stimulus withnegative real rates for three years.And you get another— rise of risk taking and everything risky—prospered in '03, '04, '05, '06, '07 until we had what I called the firsttruly global bubble. It was pretty well everywhere in everything. Itwas in real estate. Almost everywhere. It was in stocks absolutelyeverywhere. And— and it was in the bond market to someconsiderable degree.And that, of course, broke. They all break. That's the one thing theycan't control. You can drive a market higher and eventually — of itssheer overpricing, it will eventually pop. And, typically, it seems topop at the most inconvenient time. So, we're going to drive this oneup, and this time there isn't much ammunition. In 2000, the Fed hada good balance sheet. The government had a good balance sheet.In '08, it was still semi respectable, and— and now it's not. It's notvery respectable at all. So, what are they going to use as ammunitionif they cause another bubble and it breaks, let's say, in a couple of years? Then we might have some real Japanese-type experiences.
Where are the solutions then, if not this? What do youthink ought to be done?
I think the Fed is not designed— to have effective toolsto deal with the economy. It should settle for just controlling themoney supply. And— if it insists, it can worry about inflation. Theway you address a weak economy, particularly very substantial excessunemployment is through fiscal policy. You must either bribe man—manufacturers, corporations to hire people who have beenunemployed, which they did in Germany. A lot of economists thinkthat's perfectly effective.Or you must go in there and hire people yourself as a government.Now, I— I believe in crowding out. So, I— I would never do it unlessthere was clearly quite a few million extra unemployed. I wouldn't goafter too many skilled labor because there's never— enough of them togo around. And that does cause crowding out. I would go after the—what I called lightly-skilled workers.The kind of people who were building the extra million-dollar— sorry—extra million houses in— in '05, '06 and '07. And find— and find jobsfor them. We have an infrastructure that is decades behind schedule.We could insulate every house in the Northeast. These are high-returnprojects, great— for society in general. And to— to allow people to sitthere unemployed. Their skills are deteriorating. Their family moralegoes to hell. And— it's a deadweight on society. And you have toremember when— when the government hires someone, he doesn'tpay the full price like a corporation does.He pays about half price because he pays a lot. He, the government—it, the government, pays a lot for someone sitting down unemployed.All the— all the many ways— that unemployed get— get helped plus—the government carries the atrophying of the skills. Society loses that,the longer they're unemployed.
So, what should the federal government be doingthen? I mean, the housing industry, for example, missing in action.What is it going to take to get housing moving again? What is it gonnatake to get businesses hiring again? If it's not the job of the FederalReserve, what policy should we be seeing coming out of thegovernment?

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