Famous investor Jeremy Grantham, the co-founder and chief investment strategist of GMO LLC, said in his third quarter letter to investors that the U.S. economy is heading towards the most depressing economic times you’ll ever see. GMO is a global investment management firm headquartered in Boston. It employs over 500 people worldwide, and provides a wide range of investment products, including equity and fixed income strategies. As of September 30 this year, the firm had $104 billion of assets under management.
He said that the U.S. GDP growth rate will remain below 1 percent for the next 40 years. Though the Federal Reserve assumes that growth will recover to its old rates of over 3 percent, that is not going to happen. Investors take every word of Grantham very seriously because he is the man who predicted the Japanese stock bubble in 1989, U.S. stock bubble in 2000, and the latest 2007 mortgage crisis.
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Grantham believes the productivity in the manufacturing sector will remain very high. But that won’t add up to total economic productivity as shares of manufacturing in the total GDP is declining. Manufacturing now contributes to only 9 percent of the U.S. GDP, down from 24 percent in the year 1900 and 15 percent in 1990. On the contrary, productivity in services sector will continue to decline.
As cheap resources diminish, the pace of price rise could accelerate. If the costs of resources continue to increase at 9 percent a year, our economy will reach a point where entire growth in the economy will be used up to obtain enough resources to run the economic system. In that case, the economy may turn begin reverse within just 11 years.
Grantham says the rapidly changing climate would cause more damage to crops and more floods. He says the damage won’t be severe until 2030, but it will increase between 2030 and 2050. A lot will depend on how the world responds to the climate change.
He warned investors that they shouldn’t believe in the Fed’s policies that are based on the idea of 3 percent growth rate. In his own words, “Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!”
Here are the tables from his third quarter letter.