GMO’s Grantham Goes Buffett on Taxes, Trump, & Inequality

Gutting pensions and other working class benefits pushed Trump to victory, says GMO co-founder Jeremy Grantham.

Ira Sohn Investment Research Conference

Jeremy Grantham, co-founder of GMO, speaks during the Ira Sohn Investmen Research Conference in New York, U.S., on Wednesday, May 26, 2010. The event is was sponsored by The Ira Sohn Research Conference Foundation which is “dedicated to the treatment and cure of pediatric cancer and other childhood diseases.” Photographer: Daniel Acker/Bloomberg *** Local Caption *** Jeremy Grantham

Daniel Acker/Bloomberg

Value manager Grantham, Mayo, Van Otterloo credited Donald Trump’s win to income inequality and the gutting of social contracts such as the defined benefit plan, according to its latest client letter.

Over the past 10 years, co-founder Jeremy Grantham has come to believe that corporations are choosing short-term profits over the financial health of their employees. “Nowhere was this better demonstrated than in their dispensing with the jewel in the crown of the old social contract, the defined benefit plan,” Grantham wrote to clients. Many of them, it’s worth noting, are defined benefit plans. “This was done on the stated grounds of unaffordability” even as corporate profits hit highs. Workers had been surprisingly inured to the increasing power of big corporations until, he continued, the election in which they chose Trump over Hillary Clinton.

The pushback against the rich and powerful has been “unexpectedly wimpy.” Workers have put up with tax cuts for the wealthy, Grantham argued, even as they’ve gotten no support after job cuts from corporate outsourcing and technology advancements. Grantham backed up his assertions with data showing that the share of GDP going to labor hit historic lows in 2014 and the share of all income attributed to the top 0.1 percent of the population in the U.S. rose beyond previous records around 2008-’09, and has since somewhat dropped off.

Yet in the end, Grantham lauds the benefits of capitalism and calls for increased taxes on the very rich as well as increased spending for worker training and education to keep it humming by narrowing the spread between the rich and the poor. Like a true capitalist and money management executive, Grantham says income equality is positively correlated with a healthy economy and healthy political system.

Grantham’s letters are widely followed by institutional and fellow value investors. Grantham – the 78-year old co-founder of GMO – is a die-hard contrarian who correctly called financial bubbles forming in the mid-2000s and late 1990s. However, being early on such calls caused him to endure withering criticism as he reduced risk in his portfolios as stocks continued to climb – only to vindicated in both 2008 and 2000 when markets crashed.

Grantham, who is also chief strategist of GMO, is once again paying for his views. The firm believes U.S. stocks are highly overvalued, a position that has left many of the firm’s investments clocking sub-par performance compared to peers.

Partially as a result, the firm’s assets have dropped from $124 billion in June 2014 to $88 billion today. It laid off staff – including managers and analysts – in June, and has just hired a new CEO, Scott Hayward. Howard joins from Quantitative Management Associates, and will start in February.