Grantham: World in Midst of Huge Commodities "Paradigm Shift"

GMO’s Jeremy Grantham says that the world is in the midst of a “paradigm shift”, one that involves a skyrocketing population and dwindling resources. And, if we don’t act soon, the shift will leave us in serious trouble.

“Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline!” Grantham says in his latest quarterly letter. “Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place.  If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter’s advice to develop a thoughtful energy policy and give up our carefree and careless ways with resources.  The quicker we do this, the lower the cost will be.” (Grantham’s paper can be accessed through GMO’s web site.)

Grantham lays out his case in a lengthy paper (19 pages). Here are some of the key points:

    • The exponential increase in world population has “eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water”;
    • Until 2002, the  previous 100 or so years had seen commodity prices (using an equally-weighted index of 33 commodities) decline by an average of 1.2% per year, as “the undeniable law of diminishing returns was overcome by technological progress”;

  • Now, the explosive growth of emerging economies like China and India have reversed that trend;
  • The human penchant to be overoptimistic has kept governments and citizens from addressing the paradigm shift that is leading to resource shortages;
  • Price pressure and shortages of resources are now a permanent feature of our lives, which will “increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries”.

Grantham says all of this means that there are “excellent long-term investment opportunities in resources and resource efficiency”. But in the short term, they “are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.” And, he says, it also means that “the U.S. and every other country need a longer-term resource plan, especially for energy, and we need it now!”

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