(9 am. – promoted by ek hornbeck)
Surely end-times are upon us when an economist and major investment fund manager accurately perceives and characterizes reality independent of his wish to make oodles of lucre based on a mark-to-fantasy “model” of reality. To be fair, Wiki characterizes Jeremy Grantham thusly:
Grantham’s investment philosophy can be summarized by his commonly used phrase “reversion to the mean.” Essentially, he believes that all asset classes and markets will revert to mean historical levels from highs and lows. His firm seeks to understand historical changes in markets and predict results for seven years into the future. When there is deviation from historical means (averages), the firm may take an investment position based on a return to the mean. The firm allocates assets based on internal predictions of market direction.
In his own words, Grantham is an anti-bubble investor:
“For the record, I wrote an article for Fortune published in September of 2007 that referred to three “near certainties”: profit margins would come down, the housing market would break, and the risk-premium all over the world would widen, each with severe consequences. You can perhaps only have that degree of confidence if you have been to the history books as much as we have and looked at every bubble and every bust. We have found that there are no exceptions. We are up to 34 completed bubbles. Every single one of them has broken all the way back to the trend that existed prior to the bubble forming, which is a very tough standard. So it’s simply illogical to give up the really high probabilities involved at the asset class level. All the data errors that frighten us all at the individual stock level are washed away at these great aggregations. It’s simply more reliable, higher-quality data.”
Grantham’s latest newsletter (pdf) is absolutely chock-a-block with dire warnings about the Mother of All Bubbles (hydrocarbon-based human population growth) and what can only be referred to as extreme, anti-orthodox, economic heresy.
Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.
We all need to adjust our behavior to this new environment. It would help if we did it quickly.
Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
We all need to develop serious resource plans, particularly energy policies. There is little time to waste.
In essence, Grantham argues that due to a one-time, finite bubble of hydrocarbon exploitation, humans have hit carrying capacity of the Earth, that resource shortages and struggles are now a permanent feature of life, problems exacerbated by environmental toxication, e.g., global warming by greenhouse gases.
In what will surely earn him a dinghy ride out onto the lake with a large rock tied to his belly by harrumphing economists, Grantham explicitly calls bullshit on the religion of growth and the Lord of More: No compound growth is sustainable. None. Never. Impossible on a finite planet. You’d have to be innumerate, delusional, a liar, or all of the above to believe otherwise, and yet “growth” remains the dominant, if not exclusive, “clap if you believe in fairies” religion among our beard-scratching geniuses.
I think even Paul Krugman might cry.