Inflation Top of Mind for Grantham

Pat Dorsey: Shifting gears a little bit, I'd be curious to know what problems or questions are occupying the most of you and your staff's time. Where are you allocating human capital?

Jeremy Grantham: That's easy. Inflation. Inflation-protected portfolios. Under what conditions do the odds of inflation go up, what are the precursors, what are the signs that we're slipping into it. It's difficult; it's not as obvious as the bears would say. It's not guaranteed that we'll have hyper-inflation or massive inflation or even moderate inflation. Technically it is possible, if we play our cards right, to avoid inflation. When you look at the players who are in charge and you say, "Well, they messed up on the housing bubble. They messed up on seeing the sub-prime troubles," and everything else. And that's true.

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But they are very different skill sets. Maybe they can handle inflation much better than they could handle the other problems. Maybe Bernanke, who couldn't see the three-sigma housing bubble - inexplicable - nevertheless may be able to handle inflation, which is his specialty.

We'd better hope that he treads very carefully through the minefield. There are a lot of mines, and even normal human error will probably produce some inflation.

Pat: Do you have any tentative conclusions as to signs people should be looking for that these inflation pressures may be taking hold in a more structural fashion?

Jeremy: Not that I'm confident enough about. We have a kind of brains trust in asset allocation, 14 of us with very different backgrounds, and a couple of good historians. We chew over this and chew over it. I'm hoping that we'll have a couple of insights come down the pipeline. It does quite often happen eventually. You just look at it and kick it and turn it over and check the data a different way. And sometimes you can get more confidence. But it is just a very broad range of possible outcomes.

Our leaders did a pretty good job leaping from one mine to the next one, instead of stepping through the minefield. And if we start to do that, then of course the long bonds are dead meat.

Pat: Deader meat.

Jeremy: Deader meat. There isn't much safety margin in them anyway. So even seeing the world as probabilistic, and even being a relative bull that we will muddle through on the inflation front, I'm still short the long bonds. And if the bears are halfway right, I'm going to make a lot of money.

Pat: With that knotty question, I think we'll have to wrap up and get you to your next session. Thanks very much for spending the time with us.

Jeremy: It was enjoyable. Thanks.

Pat: It was a real pleasure. Thank you so much.

Jeremy: Same here. Bye-bye.

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