Cheney's Fund Manager Attacks ... Cheney

Mutual Fund Morning
By Brett Arends
Mutual Funds Columnist
2/5/2007 7:57 AM EST

The oil-based energy policies usually associated with Vice President Dick Cheney have just come under scathing attack. There's nothing remarkable about that, of course -- except the person doing the attacking. Step forward, Jeremy Grantham -- Cheney's own investment manager. "What were we thinking?' Grantham demands in a four-page assault on U.S. energy policy mailed last week to all his clients, including the vice president. Titled "While America Slept, 1982-2006: A Rant on Oil Dependency, Global Warming, and a Love of Feel-Good Data," Grantham's philippic adds up to an extraordinary critique of U.S. energy policy over the past two decades. What Cheney makes of it can only be imagined. "Successive U.S. administrations have taken little interest in either oil substitution or climate change," he writes, "and the current one has even seemed to have a vested interest in the idea that the science of climate change is uncertain." Yet "there is now nearly universal scientific agreement that fossil fuel use is causing a rise in global temperatures," he writes. "The U.S. is the only country in which environmental data is steadily attacked in a well-funded campaign of disinformation (funded mainly by one large oil company)." That's Exxon Mobil (XOM) . As for Massachusetts Institute of Technology professor Richard Lindzen, who appears everywhere to question global warming, Grantham mocks him as "the solitary plausible academic [the skeptics] can dig up, out of hundreds working in the field." And for those nonscientists who are still undecided about the issue, Grantham reminds them of an old logical principle known as Pascal's Paradox. It may be better known as the "what if we're wrong?" argument. If we act to stop global warming and we're wrong, well, we could waste some money. If we don't act, and we're wrong ... you get the picture. As for the alleged economic costs of going "green," Grantham says that industrialized countries with better fuel efficiency have, on average, enjoyed faster economic growth over the past 50 years than the U.S. Grantham says that other industrialized countries have far better energy productivity than the U.S. The GDP produced per unit of energy in Italy is 50% higher. Fifty percent. Japan: 60%. And China "already has auto fuel efficiency standards well ahead of the U.S.!" he adds. You've probably heard about China's slow economic growth. Grantham adds that past U.S. steps in this area, like sulfur dioxide caps adopted by the late President Gerald Ford, have done far more and cost far less than predicted. "Ingenuity sprung out of the woodwork when it was correctly motivated," he writes. There is also a political and economic cost to our oil dependency, Grantham notes. Yet America could have eliminated its oil dependency on the Middle East years ago with just a "reasonable set of increased efficiencies." All it would take is 10% fewer vehicles, each driving 10% fewer miles and getting 50% more miles per gallon. Under that "sensible but still only moderately aggressive policy," he writes, "not one single barrel would have been needed from the Middle East." Not one. I repeat: This is not some rainbow coalition. This is not even Al Gore. Grantham is the chairman of Boston-based fund management company Grantham, Mayo, Van Otterloo. He is British-born but has lived here since the early 1960s. Grantham is, like most fund managers, prudent, conservative and inclined to favor the free market and smaller government. He has even said he supported Bush-Cheney in 2000. That doesn't make him particularly political. He also manages a portion of the Heinz-Kerry fortune, as well as those of many other wealthy types. But he's certainly a man Cheney respects highly. According to the vice president's last personal financial disclosure form, filed with the Federal Election Commission, Cheney has somewhere between $1.6 million and $6 million of his family's money invested in four of Grantham's funds. These aren't even index funds. These are discretionary funds, where you trust the manager to look at the landscape, analyze all the data, and make the best investments. Cheney must have a lot of faith in Grantham's judgement and analytical skills. When I met Grantham last autumn he, quite rightly, refused to confirm that the vice president was a client. But you can see the evidence in Cheney's own personal financial disclosure. There is an investment angle to Grantham's argument. He says he is "certain" that "oil substitution, energy conservation, and related environment issues will be the biggest investment issue of at last the next several decades." He adds: "It is clear there is no single solution so investment opportunities will be spread very broadly, especially in energy conservation." He believes we will need more nuclear power. But he calls corn-based ethanol "more or less a hoax" when it comes to reducing greenhouse gas emissions. "U.S. corn-based ethanol, as opposed to efficient, Brazilian sugar-based ethanol, is merely another U.S. farmer-protection program, made very expensive both directly and indirectly by inflating real agricultural prices." Tell that to the presidential candidates currently stumping the Iowa caucus. (Incidentally, three MIT scientists told me the same thing about corn ethanol more than a year ago when I interviewed them on the subject. After my article appeared in the Boston Herald, I received a snotty letter denying there was any such thing as "an Iowa corn growers' racket." It was from the "chairman of the Iowa Corn Growers' Association.") Grantham's full letter can be seen on his company Web site [www.gmo.com] , though you will need to register. It appears as the second half of the investment missive "Goldilocks Rules." Grantham blames three decades of political cowardice for America's backward energy policy. As he dryly notes, "U.S. drivers -- the world's richest and some of the best behaved -- would, it was said, never accept increased taxes, where Italian drivers would! Even tax-neutral policies, such as taxing high mileage cars at purchase and subsidizing efficient cars, were never seriously considered." The result: the fuel efficiency of U.S. cars has actually gone backward since 1982. The irony is that this isn't, or shouldn't be, a partisan issue. Grantham singles out the Ford administration for his strongest praise on environmental matters. Everyone since, of both parties, has been a failure, he concludes. "The past 26 years have been such a wasted opportunity," Grantham writes. "This country had previously shown leadership in this field. President Ford got us off to a running start in energy efficiency... With a succession of President Fords, we would have ended up as an environmental leader and a great model." I would love to know what President Ford's former chief of staff thinks of that. His name? Richard B. Cheney.

Brett Arends