In his opening keynote address last month at Morningstar’s annual investment conference, Jeremy Grantham began by saying he now has an “ideal job” in which he has many colleagues at GMO to handle the quotidian duties of being an investment guru. In GMO’s second-quarter letter to investors, released Wednesday, he reiterates the good feelings about his job, which he writes makes him “free to obsess about anything that seems both relevant and interesting.”
So what’s his obsession now? He lists “10 topics that really matter,” along with recent research elucidating some of those topics. He also addresses his penchant for doomsaying, saying those 10 topics “can all be viewed as problems: potential threats to our well-being.”
Why engage in such a “lopsidedly negative” practice? “Surely it is more important to obsess about threats,” he writes, “which we often prefer to ignore. Good news, in contrast, will usually look after itself.”
In the Morningstar speech, he lamented that corporate managers are more interested in their stock options than building better businesses, which he said leads to those managers conducting stock buybacks rather than building new plants. He also railed about the outsize role of the Federal Reserve not just in the U.S. but worldwide — “the Fed rules the developed world” — and fretted about “financial elites” overly influencing U.S. legislation.
In his letter, he revisits some of those topics, including the deficiencies of the Fed and of democracy and capitalism, and adds new threats. Here are his ten Quick Topics to Ruin Your Summer:
1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5 percent U.S. growth, not the old 3 percent.
Grantham lists seven trends working against the “old 3 percent” growth forecast, among them the aging and slow growth rate of the working population, rising income inequality, sub-average capital spending (in June he called the rate of capex spending “dismal” and a “drag” on growth) and “partially dysfunctional government,” especially in the U.S. and E.U.
The Commerce Deptartment announces its first estimate of 2015’s second-quarter GDP on July 30, with the consensus forecast of 2.7 percent growth in Q2, following Q1’s 0.2 percent decline. But in his letter Grantham has no time for “mainstream economists” whose “highly theoretical models” would lead them to “disregard all or most of these factors as theoretically unsatisfactory.”
(UPDATE: The Commerce Dept. reported July 30 that GDP increased at an annual rate of 2.3 percent in the first quarter; its revised estimate of first quarter GDP swung from a negative 0.2 percent to a positive 0.6 percent in its final Q1 estimate. The “second” estimate for the second quarter will be released on August 27, 2015.)
2. The age of plentiful, cheap resources is gone forever.
Grantham cites GMO’s own research on prices and supply and demand for commodities, highlighted by shifting demand in China for a number of resources, notably coal, to conclude that “what seems extremely unlikely, assuming we have no global depression, is a return to the declining price trend” of commodities “of the 100-year period ending in 2000.”
See also: Why AXA is bullish on emerging markets
Speaking of energy and commodities, Grantham says that oil has been “king and still is. For a while longer.” While oil has “driven our civilization to where it is today” now we are “running out of oil that is cheap to recover,” so our “economic system is becoming stressed and growth is slowing” as it becomes more expensive to produce oil.
There is a silver lining, however, to the oil story. Fifteen years from now, Grantham says, “cheaper electric vehicles and changes in environmental policy will enable steady decreases in oil demand.”
4. Climate problems
Grantham is very worried about climate change, citing an unusual lineup of authorities on the topic, incuding Pope Francis, Angela Merkel and a long list of scientific studies — along with the facts that “last year was the hottest year ever recorded, and this year…has gotten off to a dreadful start.”
He praises Merkel, “a chemist by University training,” for “arm twisting” the G7 nations into committing to “decarbonizing their economies completely by 2100,” but says that promise and other actions taken by groups and individual nations only constitute “a respectable improvement” which is nevertheless “still very insufficient for the long term.”
The research he cites concludes that climate change is happening far faster than predicted even five or 10 years ago, that some changes are irreversible and that it will make occurences like hurricanes and drought “worse than they would have been in a lower-temperature world.” Taken together, these changes may well lead to disruptions in the economies of many nations, and even destabilize certain countries, especially in the Mideast.
5. Global food shortages
Population growth worldwide and the growth of the middle class in emerging countries like China, with a concurrent growth in meat consumption in those countries, will put “steady pressure on our grain and soy producing capabilities” just as farming productivity gains are declining, and “show every sign of continuing to slow.” He cites a British university’s forecast of a world 25 years from now where prices of grain quadruple from 2000 levels and where, absent any significant change, “the global food supply system would face catastrophic losses and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses.”
6. Income inequality
Grantham cites more research — from, separately, Thomas Piketty, Robert Gordon and Dan Ariely, that “extreme and growing” income inequality in the U.S. is “holding back growth.” Most Americans have little understanding of the scope of income inequality, though they also (regardless of party affiliation) believed such inequality to be patently unfair. Grantham writes that Ariely’s research on income inequality provides “good material with which to ponder the question as to how our current misbegotten, adversarial political system has drifted so far away from what the ordinary voters actually think would be fair.”