X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Grantham's words of wisdom: Part III - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Grantham's words of wisdom: Part III
Apr 29, 2013

This is the third and final part of our three-series article on Jeremy Grantham's thoughts as revealed on the Charlie Rose show. The write-up would focus on Jeremy Grantham's views with regard to elevated debt levels in America making an attempt to answer two questions: Have elevated debt levels in the US helped to promote real economic growth in the US? Is monetary stimulus the only solution to promote US economic growth?

Have elevated debt levels in the US helped to promote real economic growth in the US? Grantham goes back to as early as 1982. Ronald Reagan was the US President then, and the debt to GDP ratio in the US was 1.25 times. Over the course of the next 30 years, the debt to GDP ratio nearly tripled to 3.5 times. However, contrary to expectations, the US growth rate dropped from around 3% in the 1980s to an average of less than 2% in the last ten years.

Thus, Grantham believes that it is a myth that growth in GDP can be achieved by pumping more money into the system through cheap debt. By keeping interest rates artificially low, money is being transferred from the retirees to people who run hedge funds and the banking system in general. The required amount of capital expenditure to boost the US economy is not happening and the money supply is unnecessarily chasing financial assets and propping up their prices artificially.

Is monetary stimulus the only solution to promote US economic growth? Grantham dismisses the fact that the debt levels should be brought down by hook or by crook in a hurry. He believes that there should be a twenty years plan to get out of the 'rat hole'. Debt at the end of the day is a 'paper' while the 'real world' comprises of the quality and the quantity of people and the quality and quantity of capital spending. Money supply should chase productive assets and he goes on to add that the common assumption that there is very little scope for capital spending on the Government account in a developed country like the US is devoid of any merit. Projects like installation of solar panels, insulation of every cold area and redoing the grid system would not only be productive but also have a high societal return.

Grantham concludes the conversation with Charlie Rose on a humorous note by saying that usual economic assumptions that markets take care of themselves and that people are rational and that their behaviour is guided by common sense have failed to hold true in the real world and therein lies the difference between sophisticated economic theories and functioning of the real world.

We agree with Jeremy Grantham's answers to both the questions as illustrated above. Thus, we continue to remain circumspect with the recent surge in US stock markets and false hopes of economic revival connected with it.

However, as pointed out in Part II of this series, there is always a possibility that while an economy may look dismal, a portfolio of carefully picked stocks based on their fundamentals can still do very well.

Grantham's words of wisdom - Previous article | All Articles

Equitymaster requests your view! Post a comment on "Grantham's words of wisdom: Part III". Click here!

  

More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

LIC Should Not Rescue IL&FS (Vivek Kaul's Diary)

Sep 25, 2018

The interests of the policyholders of LIC should override everything else.

A Safe Stock with More Than 50% Upside (The 5 Minute Wrapup)

Sep 25, 2018

Recent volatility and panic in Indian stock markets has bought this stock down to a reasonable level.

7 Macro Factors Hurting Indian Stocks... and Two Actions to Sail Through It (The 5 Minute Wrapup)

Sep 24, 2018

What should you do now - take advantage of the ongoing correction and buy stocks now OR wait for an even deeper correction?

More Views on News

Most Popular

My First Pharma Stock Recommendation!(The 5 Minute Wrapup)

Sep 21, 2018

This company has not only created a niche in the pharma space, it has done so profitably.

Want Bigger Returns Than You Thought Possible? This is Where You Should Look(Profit Hunter)

Sep 12, 2018

Richa has discovered the single most profitable opportunity in the market - read on to discover more...

Investors Are Redeeming From Equity Mutual Funds Now. Should You?(Outside View)

Sep 12, 2018

PersonalFN elucidates if you should redeem from equity mutual fund now, and the approach to follow before you decide to sell mutual funds.

Outperformance of Strong Established Brands in the Indian Stock market(Chart Of The Day)

Sep 14, 2018

Strong Well established Indian Brands have comfortably outperformed the index in the decade post the global financial crisis.

How IL&FS Rating Downgrade Will Impact Your Mutual Funds...(Outside View)

Sep 17, 2018

PersonalFN explains the impact of IL&FS rating downgrade on mutual funds.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 25, 2018 01:03 PM

MARKET STATS