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Portfolio > Economy & Markets

Grantham: ‘7 Lean Years’ Now Permanent

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Market pessimists can usually find what they’re looking for in hedge fund manager Jeremy Grantham’s quarterly investment letters, but for the gloom-and-doom junkies who need “more” to get their fix, Grantham delivers in his just-published installment:

The “seven lean years,” which he famously cited in a 2009 forecast echoing the Biblical account of ancient Egypt’s economic downturn, have been downgraded to the “permanent lean years” in language Grantham admits is “not as memorable but probably more accurate.”

The Grantham, Mayo, Van Otterloo & Co. hedge fund manager, known for correctly forecasting several market bubbles, reaffirmed a recent forecast — treated, he says, as “unreasonably bearish,” that U.S. GDP will average about 1.5% annual growth over the next 30 years.

The dour Grantham considers this growth rate “not that bad,” to hourly wage earners whose wages have been “dead flat” since 1970, but he calculates the broader economic loss: The remarkably steady 3.3% rate of U.S. growth from 1880 to 1980 multiplied income 26 times over that century; the 2.8% average growth from 1980 to 2000 would have compounded income 16 times (over a period of a century); but the 1.4% rate experienced over the past 13 years could multiply income by just 4 over a century.

The hedge-fund herald of doom says that we must “readjust our mental targets unless we want to enter an era of perpetual disappointments,” noting that “false optimism leads to very poor investment decisions.” Colorfully, he adds: “We can imagine, for example, in 30 years some ‘son of Yellen’ as it were, introducing QE 27 in a vain attempt to squeeze blood out of stones.”

While investors often mine Grantham’s usually lengthy investment letters for actionable insights, his February letter offers mainly this reaffirmation of his slow-growth macro view, together with a large dose of apocalyptic environmentalism.

His main actionable insight, also a reiteration of previous stands, stems from what is the lion’s share of his letter concerning a grab-bag of eco-angst about fossil fuels, fracking and resource scarcity (though he waxes lyrical about Tesla Motors).

Grantham’s tip, as it were, is that “metals, phosphate and grains will move much higher over future decades.”

His reason is his by now familiar Malthusian fears of declining availability of important natural resources, and this despite his “unusually optimistic point (for me) that a combination of declining fertility and eventual declining population combined with unexpectedly strong progress in renewable energy might just save our modern civilization from a slow and, no doubt, irregular descent into dystopia.”

The “might just” part should be emphasized because he is especially worried that the small relative quantity and geographic concentration of phosphorus might lead to “the Great Fertilizer War of 2037.”

With more or less three-fourths of phosphorus mines under Moroccan control, Grantham worries that “all hell would break loose” if eventual depletion together with the profound instability of the North African country’s neighbors limits access to an element “necessary for the growth of all living things.” He laments that only Scandinavians seem to be seriously worried about this.

The speed-read on the rest is that “copper…may become a semiprecious metal,” though he acknowledges past errors, and explains the inherent difficulty in, forecasting short-term prices for resources. He considers it time to shift our thinking from debate about “peak oil supply” to one of “peak oil demand,” lauding advances in alternative energy.

Yet he continues to worry about “how fast we are roasting our planet,” and considers the link between fracking and Midwestern earthquakes “far more certain than anything I ever see in the stock market or the economy.”

Check out From Doom to Boom (and Back): Grantham Sees Stocks Soaring up to 30%, for Now on ThinkAdvisor.


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