Sign in
Become a MarketWatch member today
Paul B. Farrell
Aug. 31, 2010, 12:01 a.m. EDT · Recommend (3) · Post:
View all Paul B. Farrell "º
"¹ Previous Column
Righteous Right leads us straight to WWIII
First Take "º
Intel hopes wireless deal works this time around
By Paul B. Farrell, MarketWatch
ARROYO GRANDE, Calif. (MarketWatch) -- Summer of recovery? Dead. How dead? Remember Genesis? The Seven Lean Years? Add seven years to the handoff from Bush to Obama in early 2009 and you get no recovery till 2016. Get it? No recovery till the end of Obama's second term, assuming he's reelected -- a big if.
"The idea behind 'seven lean years' is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years." That's Jeremy Grantham talking; he's responsible for investing $100 billion in the next seven lean years. And like the biblical Joseph, whose life was on the line while interpreting dreams for the Egyptian pharaoh, Grantham can't afford mistakes.
Unlike Greenspan years, central bank can no longer talk investors into changing sentiment, Bob O'Brien suggests.
In his recent newsletter, "Seven Lean Years Revisited," Grantham tells us why expecting a summer of recovery was unrealistic, why America must prepare for a long recovery. Grantham details 10 reasons: "The negatives that are likely to hamper the global developed economy." Sorry, but this recovery will take till 2016.
But should you believe Grantham? Yes. First: Like Joseph, Grantham's earlier forecasts were dead on. About two years before Wall Street's 2008 meltdown Grantham saw: "The First Truly Global Bubble: 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. ... The bursting of the bubble will be across all countries and all assets ... no similar global event has occurred before."
Second: The Motley Fools' Matt Argersinger went back to the dot-com crash of 2000: Grantham "looked out 10 years and predicted the S&P 500 would underperform cash." Bull's-eye: The S&P 500 peaked at 11,722; it's now around 10,000. Factor in inflation: Wall Street's lost 20% of your retirement since 2000. Yes, Wall Street's a big loser.
Third: What's ahead for the seven lean years? Wall Street will keep losing. Argersinger: "Grantham predicts below-average economic growth, anemic corporate-profit margins, and other severe obstacles for the stock market. Over the next seven years ... U.S. stocks as a group will deliver annualized real returns between 1.1% and 2.9%. That's less than you might get putting your money in a CD."
Warning: You'd be a fool to trust your money with Wall Street during the seven lean years till 2016. Another 20% will vanish.
Fourth: Why will Wall Street kill the recovery, keep driving us deeper into a ditch till 2016? Last year Grantham asked: "Why is it that several dozen people saw this crisis coming for years? It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi, even Treasury Secretary [Henry] Paulson and Fed Chairman [Ben] Bernanke, none of them seemed to see it coming." The Pharaoh listened to Joseph. Our leaders are deaf.
Grantham says today's leaders "running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They're impatient, focused on the present."
However, planning for the future "requires more people with a historical perspective who are more thoughtful and more right-brained, but we end up with an army of left-brained immediate doers. So it's more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it."
Get it? It is guaranteed that our Wall Street and Washington leaders will miss the next Black Swan catastrophe. No matter how big, how many warnings. Just like they did in 2008. They are guaranteed to fail. That's tragic. Not only will America's recovery take at least seven lean years but when another meltdown does occur our leaders will miss it again. And another massive meltdown on top of a long seven-lean-years recovery will likely drag out the recovery past 2020!
So here's my Reader's Digest version of Grantham's 10 handicaps that will "hamper the global developed economy, drag it out for seven lean years," forcing Americans into a painfully long, game-changing period of austerity and civil unrest. You can read his original at GMO.com:
"We've stopped adding consumer debt, but the improvement is minimal. It would take at least seven years of steady reduction to reach a more normal level. Anything more rapid than that would make it nearly impossible for the economy to grow. More stimulus adds government debt, already a problem. But debt reduction in a fragile economy runs the risk of causing a severe economic decline. This dilemma may prove to be the central economic policy choice of our time. Not an easy choice. And no way that this process will be pleasant or quick."
"The most frightening aspect of the seven-lean-year scenario is that dangerously excessive financial system debt was moved across, with additions, to become dangerously excessive government debt, with levels of debt-to-GDP not seen outside wartime. The cure seems more like a stay of execution."
Paul Farrell writes the column on behavioral economics. He's the author of nine books on personal finance, economics and psychology, including "The Millionaire Code," "The Winning Portfolio," "The Lazy Person's Guide to Investing." Farrell was an investment banker with Morgan Stanley; executive vice president of the Financial News Network; executive vice president of Mercury Entertainment Corp; and associate editor of the Los Angeles Herald Examiner. He has a Juris Doctor and a Doctorate in Psychology.
With its core business showing some signs of slower growth, Intel has to make its latest acquisitions work this time around.
12:20 p.m. Aug. 30, 2010 | Comments: 4
- jerwest | 11:39 p.m. Aug. 30, 2010
"Seven lean years: No recovery till 2016 http://on.mktw.net/9xCFc6" 11:21 p.m. EDT, Aug. 30, 2010 from MKTWFarrell
"Righteous Right leads us straight to WWIII http://on.mktw.net/dba4aO" 11:03 p.m. EDT, Aug. 23, 2010 from MKTWFarrell
"It's going to get worse -- a whole lot worse http://on.mktw.net/c2dub2" 11:16 p.m. EDT, Aug. 16, 2010 from MKTWFarrell
Writing on the Wall
Glenn Beck and me
On the Markets
Insiders' reaction to August's decline
Vital Signs
Why you should care about palliative care
ROI
Don't get fooled by Ben Bernanke
Tech Tales
Why 3Par would rather find a home with Dell
The Economist's Corner
Economy needs more confidence, less angst
Read Full Article »