Jeremy Grantham Identifies 10 ‘Potential Threats To Our Well-Being’

Jeremy Grantham, the British-born investment strategist and founder/former chairman of Grantham, Mayo, Van Otterloo & Co. (oversees $117 billion in client assets as of June 30, 2015), just released his latest investment letter on the GMO website. Writing about the second quarter of 2015, Grantham, whose individual clients have included current Secretary of State John Kerry and former Vice President Dick Cheney, focused on ten “potential threats to our well-being” (echoing a Morningstar piece I blogged about on July 14). These threats are (in his own words):

1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%
2. The age of plentiful, cheap resources is gone forever
3. Oil
4. Climate problems
5. Global food shortages
6. Income inequality
7. Trying to understand deficiencies in democracy and capitalism
8. Deficiencies in the Fed
9. Investment bubbles in a world that is, this time, interestingly different
10. Limitations of homo sapiens

Grantham talked about each threat in detail. I’ll be focusing on those items I think would interest Survival And Prosperity readers.

Regarding pressure on U.S./developed world GDP growth, Grantham wrote:

Factors potentially slowing long-term growth:
a) Slowing growth rate of the working population
b) Aging of the working population
c) Resource constraints, especially the lack of cheap $20/barrel oil
d) Rising income inequality
e) Disappointing and sub-average capital spending, notably in the U.S.
f) Loss of low-hanging fruit: Facebook is not the new steam engine
g) Steadily increasing climate difficulties
h) Partially dysfunctional government, particularly in economic matters that fail to maximize growth opportunities, especially in the E.U. and the U.S…

On “plentiful, cheap resources” being gone:

All in all I am still very confident, unfortunately, that the old regime of irregularly falling commodity prices is gone forever…

On oil:

Oil has been king and still is. For a while longer… Now, as we are running out of oil that is cheap to recover, the economic system is becoming stressed and growth is slowing…

Grantham added:

The good news is that with slower global growth and more emphasis on energy efficiency and a probability of some carbon tax increases, global oil demand may settle down to around 1% a year for the next 10 to 15 years. At that level of increase in demand, even modest continued increases in recovery rates will keep us in oil even if no new oil is found for the next 15 years.

Beyond 15 years, the resource and environmental news gets better because cheaper electric vehicles and changes in environmental policy will enable steady decreases in oil demand…

On global food shortages, Grantham referred to some recent research. He wrote:

I was completely gruntled by a report last month from the Global Sustainability Institute of Anglia Ruskin University in the U.K. This unit is backed by Lloyds of London, the U.K. Foreign Office, the Institute of Actuaries, and the Development Banks of both Africa and Asia – a grouping with a very serious interest in the topic of food scarcity and societal disruptions to say the least. The team of scientists used system dynamic modeling, which uses feedbacks and delays, to run the business-as-usual world forward 25 years. Without any new and improved responses from us, the results are dismaying: Prices of wheat, corn, soybeans, and rice were all predicted to be at least four times the levels of 2000. (They are currently about double.) The team concluded, “The results show that based on plausible climate trends and a total failure to change course, the global food supply system would face catastrophic losses and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses as food production falls permanently short of consumption.” And you thought my argument on food problems of the last three years was way over the top!

Grantham is still not impressed with the Federal Reserve. He predicted:

And what of the current Fed regime – the Greenspan-Bernanke-Yellen Regime – that promotes higher asset prices and lower borrowing costs, which facilitate stock buybacks amongst other speculative forces? Well, this regime, too, will change. Regression of regime, if ou will. Painfully, politicians, the public, businessmen, and possibly even some economists will recognize the current regime as a failed experiment.

And on the “limitations of homo sapiens”? Grantham observed:

Not only does our species have a strong predisposition to be optimistic (or bullish) – it is probably a useful survival characteristic – but we are particularly good at listening to agreeable data and avoiding unpleasant data that does not jibe with our beliefs or philosophies. Facts, whether backed by 97% of scientists as is the case with man-made climate change, or 99.9% as is the case with evolution, do not count for nearly as much as we used to believe. For that matter, we do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses.

The take-away from all of the above?

• Grantham forecasts U.S./developed world GDP growth to slow to 1.5 percent
• Investment opportunities may exist in commodities, agriculture, and other things food-related
• The outcome of the Fed’s current monetary policies will be painful
• Human nature- in particular, our unbridled optimism and focus on short-term gratification- will continue to result in asset bubbles and longer-term problems outside of the financial markets/economy/larger financial system

You can read Grantham’s latest investment newsletter on the GMO site here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)

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