The Mother Of All Price Signals Is Upon Us, Says Investor Jeremy Grantham

Technological advances have brought us cheaper and cheaper resources for the last 100 years, says Jeremy Grantham, one of the world's leading investment thinkers. But in the last 10 years, prices have retraced all of that benefit, and we are starting to run out of everything -- oil, water, fertilizer. Grantham says we are all in for a big readjustment in our lifestyles.

Jeremy Grantham is one of the world's most successful investors. His firm, GMO in Boston, manages assets of all kinds -- $107 billion worth -- in markets all over the world. So he's not a loose cannon operating out of Idaho. He is one of the few people that sold the market before the 2000 tech bubble, and made a point of telling the world why he did. This report is 19 pages long, and represents a tremendous amount of serious research. Jeremy Grantham is an excellent thinker and writer, so it's worth the time. It's sobering stuff that makes sense.

But here are a few of his 13 summary points.

4. The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.

5. Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.

8. But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.

12. From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

[W]hen our finite resources are on their downward slope, the hydrocarbon-fed population will be left far above its sustainable level; that is, far beyond the Earth's carrying capacity. How we deal with this unsustainable surge in demand and not just "peak oil," but "peak everything," is going to be the greatest challenge facing our species. But whether we rise to the occasion or not, there will be some great fortunes made along the way in finite resources and resource efficiency, and it would be sensible to participate. The shortages will create tremendous investment opportunities in resources, and in resource efficiency.

Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels.

There isn't time or space to go through the whole report, which took the research people a very long time to assemble, but here are few of the graphs, with summary comments.

For 100 years, we were lucky to get decreasing costs on resources through technological advances. Prices of commodities bottomed in 2002, falling especially fast in the last 15 years, and Grantham contends:

The primary cause of this change is not just the accelerated size and growth of China, but also its astonishingly high percentage of capital spending, which is over 50% of GDP, a level never before reached by any economy in history, and by a wide margin.

Oil production has peaked. It peaked in the U.S. in 1971, and looks like it's topping out around the world.

He makes a detailed presentation on oil, and another on crop yields. Not easy to read but it's logical and thorough.

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Yes, Grantham has come to a pessimistic conclusion on resources -- technology and productivity have stopped bailing us out, and the world has to reorganize all of its use of resources.

But if you're expecting to increase your standard of living over the next 30 or 40 years, or even just preserve it, you should give this report a look.

And after all, this is an investment report, so here's part of his investment conclusion (page 17):

As resource prices rise, the entire system loses in overall well-being, but the world is not without winners. Good land, in short supply, will rise in price, to the benefit of land owners. Technological progress in agriculture will add to the value of land holdings. Fertilizer resources - potash and potassium - will become particularly precious. Hydrocarbon reserves will, of course, also increase in value. In general, owners or controllers of all limited resources, certainly including water, will benefit. But everyone else will be worse off, and a constrained-resource world will increase in affluence per capita more slowly than it would have otherwise, and more slowly than in the past.