“Career Risk and Bubbles Breaking: That's All That Matters”
Jeremy Grantham
Co-founder and Chief Investment Officer, Grantham Mayo Van Otterloo (GMO)
Eleventh Annual Lynford Lecture
Introductory Remarks by Jeffrey Lynford
December 2, 2008
President Hultin, fellow trustees, professors, students, and honored guests:
How will the Panic of 2008 be portrayed by future economic historians? Clearly two words: Greed and Fear, will be included in their descriptions.
This afternoon our featured speaker, Jeremy Grantham, will share with us some of his professional insights and the lessons he has drawn from his 40 years of worldwide experience with financial markets and investments.
Before he does, I would like to explain some of the events that have brought us here today. Annually, under the direction of Professors Gregory and David Chudnovsky, IMAS presents a prominent speaker who possesses an ability to present complex information and important ideas in a clear and concise manner.
For example, the string theorist, Professor Edward Witten, the genetic scientist, Dr. J. Craig Venter, and the economist and Nobel laureate Professor Robert Mundell each have appeared here. Professor Witten suggested how our universe may ultimately be constructed, Dr. Venter indicated how unlocking the secrets of our DNA could potentially improve human evolution, and Professor Mundell explained the origin and utility of the European Monetary Unit (or Euro). Each presented ideas with important significance for humankind in the future.
Today, Jeremy Grantham will talk to us about very current events. In order to understand and hopefully find solutions to our present "meltdown," we must fully comprehend what have been the root causes of this crisis. By a show of hands, how many of you are enrolled currently in any of Poly/NYU financial and risk engineering courses? Are any of you students of our own Distinguished Professors Charles Tapiero or Nassim Taleb? I am sure that if you are enrolled in their courses you have been discussing the risk and the role of various creative financial instruments, arcane insurance and re-insurance constructs, and the provocatively inventive, but risk insensitive, financiers who have led us to this economic precipice.
In my humble opinion, the aforementioned culprits could include: assorted esoteric derivatives and asset backed debt issuances, governmental and corporate credit enhancers such as Fannie/Freddie Mac and mono-line insurance companies, hedge funds, lax rating agencies and regulators, and saving the best for last, the opaque credit default swap industry. Interestingly, at June 30th of this year there were $531 trillion of these default swap contracts outstanding, with a notional value of $62 trillion, which is approximately equal to the world's total annual GDP!
With this background as our context, this afternoon we are privileged to have with us Jeremy Grantham, whose lecture is entitled "Career Risk and Bubbles Breaking: The Only Things that Matter."
Mr. Grantham is a co-founder of Grantham Mayo Van Otterloo, today called GMO, which manages in excess of $100 billion of investments for primarily institutional investors. GMO is a value-oriented global investment firm with offices in Boston, London, San Francisco, Singapore, Sydney and Zurich.
Mr. Grantham was educated as an economist, holds an undergraduate degree from the University of Sheffield in the United Kingdom, an MBA from the Harvard Business School, and is credited with forming one of the world's first index funds in the 1970's. His research has indicated that financial bubbles, whether in commodities, stocks, or bonds, demonstrate an inevitable "reversion to the mean."
In addition to investments and finance, Jeremy and Hannelore Grantham are very concerned about world environmental and climate issues. They have founded the Grantham Foundation for the Protection of the Environment which supports the annual Grantham Prize for Excellence in Reporting on the Environment and have made substantial commitments to both the London School of Economics and Imperial College to enable each university to build on its expertise in climate change research.
Mr. Grantham describes himself as a "thrifty Yorkshireman," but many think of him as an "investment iconoclast." This word, originally derived from the Greek "breaker of idols," today denotes "one who attacks or ridicules traditional or venerated beliefs, institutions or ideas regarded by him as erroneous or based on superstition."
He is known for dispensing his wisdom without fear or favor. For example, he recently wrote one of my personal favorites: "Great American Executives are not picked for patience. Indeed, if they could even spell the word they would be fired! "
In 2007 he was quoted as presciently forecasting, "In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist." Unfortunately, the Panic of '08 has taken less than five years to arrive and appears to be one of biblical proportions.
Now, without further delay, I introduce Mr. Jeremy Grantham.