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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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How Food Prices May React To The Drought

Driving back-and-forth between Chicago and southeast Wisconsin quite a bit these days, I’ve witnessed what the ongoing drought is doing to the local crops.

And one thing I’ve been wondering about is, how will food prices react to all this?

Ron Nixon wrote on The New York Times website this morning:

The worst drought in the United States in nearly a half-century is expected to drive up the price of milk, beef and pork next year, the government said Wednesday, as consumers bear some of the brunt of the sweltering heat that is driving up the cost of feed corn.

Poultry prices are expected to rise more immediately, the government said in a report. It estimated that consumer price indexes for chicken and turkey would rise 3.5 percent to 4.5 percent later this year…

Figures released Wednesday by the department [U.S. Department of Agriculture] showed the largest percentage increase next year in its price indexes is expected for beef, a rise of 4 percent to 5 percent. Dairy products will increase 3.5 percent to 4.5 percent and eggs by 3 percent to 4 percent. Pork is expected to rise 2.5 percent to 3.5 percent.

The data is the first government estimate of how much prices could rise next year because of the drought that has gripped most of the country this summer, producing a lower-than-expected yield in corn, soybeans and several other commodity crops.

According to the piece, meat prices may fall in the short-term as cattle farmers cull/sell their herds due to limited grass for grazing and high feed corn prices. Nixon added however:

But the prices of beef, pork, chicken, eggs, and dairy are expected to rise significantly later in the year, most likely around November, agriculture economists say.

So, Americans may be looking at poultry prices up first, beef prices down in the short-term. Then pork, dairy, eggs, and eventually beef prices rising most likely around November.

Yet, others suspect higher prices at the supermarket may be delayed somewhat. Lucia Mutikani wrote on the Reuters website Monday:

Economists said it will take at least six months for the impact to carry through to the supermarket.

“The effects become lagged because food processors have already locked in their commitments with the old crop. They will not be felt so much in 2012 as in the first half of 2013,” said Howard Simons, an analyst at Bianco Research in Chicago…

The U.S. Agriculture Department will survey fields next month and offer new estimates on the corn and soybean crop yield for this year. They will also provide new estimates for 2013.

Yep. That homestead with a couple of farm animals is looking mighty attractive right now.

Sources:

Nixon, Ron. “U.S. Sees Food Prices Rising Due to Severe Drought.” The New York Times. 25 July 2012. (http://www.nytimes.com/2012/07/26/business/food-prices-to-rise-in-wake-of-severe-drought.html). 25 July 2012.

Mutikani, Lucia. “Analysis: Drought to cause food price spike but not inflation.” Reuters. 23 July 2012. (http://www.reuters.com/article/2012/07/23/us-usa-economy-drought-idUSBRE86M1A220120723). 25 July 2012.

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Wednesday, July 25th, 2012 Agriculture, Commodities, Farming, Food, Weather No Comments

UN Agency Reports Food Prices Rose Slightly In April

The Food and Agriculture Organization (FAO) of the United Nations is reporting that an index of 55 food commodities increased slightly last month. From their website this morning:

Food prices remained virtually steady in April after falling in March following eight months of successive increases, FAO announced today.

However, while the FAO Food Price Index averaged 232 points in April, little changed from March, it was still 36 percent above April 2010 and only two percent below its peak in February 2011.

A fall in sugar prices and a decline in rice helped stabilize the index, but international prices of nearly all other food commodities remained firm.

“A sliding dollar and increased oil prices are contributing to high food commodity prices, particularly grains,” said David Hallam Director of FAO’s Trade and Market Division. “With demand continuing strong, prospects for a return to more normal prices hinge largely on how much production will increase in 2011 and how much grain reserves are replenished in the new season.”

The FAO Food Price Index was 231 points in March. It reached an all-time high in February, when the index hit 237.2 points.

Bloomberg’s Rudy Ruitenberg broke down the UN agency’s latest report this morning and noted:

Corn has almost doubled in the past 12 months on speculation that more planting in the U.S., the world’s largest grower, won’t be sufficient to rebuild global stocks. Wheat surged 57 percent over the same period and soybeans gained 39 percent as flooding ruined crops in Canada and Australia and drought reduced harvests in Russia and Europe.

Of the grains, corn “is the most worrisome,” [FAO senior economist Abdolreza] Abbassian said in a statement. “We would need above-average, if not record, yields in the U.S.,” however, “plantings so far have been delayed considerably due to cool and wet conditions on the ground,” he said.

The FAO’s gauge of grain prices, which account for 27 percent of the overall index, jumped to its highest level since June 2008, advancing to 265.1 points in April from 251.2 the previous month.

According to the agency, much more food will be required down the road to feed the world’s growing population. Ruitenberg added:

Food output will have to climb by 70 percent from 2010 to 2050 as the world population swells to 9 billion and rising incomes boost meat and dairy consumption, the FAO forecasts.

Here’s hoping for some bumper crops this year- and in the foreseeable future.

Sources:

“Global food prices hold steady.” Food and Agriculture Organization of the United Nations. 5 May 2011. (http://www.fao.org/news/story/en/item/73931/icode/). 5 May 2011.

Ruitenberg, Rudy. “World Food Prices Rise to Near-Record High as Inflation Speeds Up, UN Says.” Bloomberg. 5 May 2011. (http://www.bloomberg.com/news/2011-05-05/food-prices-approach-record-high-as-grain-prices-fuel-inflation-worldwide.html). 5 May 2011.

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Thursday, May 5th, 2011 Agriculture, Commodities, Food, Population No Comments
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