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Jeremy Grantham must-read, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever”

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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.

That’s the conclusion of an important analysis by uber-hedge fund manager Jeremy Grantham, a self-described “die hard contrarian.” He is one of the few leading financial figures who gets both peak oil and global warming I’m going to repost his entire analysis below, which comprises the entire quarterly newsletter from the former Chairman and now Chief Investment Strategist of GMO Capital, which has more than $100 billion in assets under management. This is a key piece of supporting analysis for the claim that the global economy is a Ponzi scheme.In Grantham’s blunt 2Q 2010 letter (see “Grantham: Everything You Need to Know About Global Warming in 5 Minutes”), he wrote “Global warming will be the most important investment issue for the foreseeable future.” Then in his January 2011 newsletter he wrote about “Things that Really Matter in 2011 and Beyond”: “Global warming causing destabilized weather patterns, adding to agricultural price pressures.”Now he takes the analysis to the next step.NOTE: I am not endorsing any of his investment suggestions — but I didn’t want to cut anything out of this must-read piece.

Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever

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Jeremy GranthamSummary of the SummaryThe 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.

Summary

  • 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 scientifi c 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 fi nite 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 fi nite 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.

[JR: Well, it may get less bad, but not “surely.” This year is pretty extreme already and 2012 could be as bad or worse than 2010, according to Hansen here.]

  • 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.