A while back I linked to an analysis from Tullett Prebon, a leading brokerage firm, discussing peak oil and limits to growth – not the sort of issues you really expected capital market investors to be focusing on, as I noted at the time.
Now, here’s another example – this time, from Jeremy Grantham, chief investment strategist at GMO ($107 billion under management). Grantham’s latest letter to investors (full pdf here), which was also covered in Merryn Somerset Webb’s column in the weekend FT, has this to say:
Rapid growth is not ours by divine right; it is not even mathematically possible. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution.
He goes on to cover peak oil, the food spike, the effect of climate change and all the other core scarcity themes that are familiar to readers of GD. But significantly, he also emphasises the prospects of another short term collapse in commodity prices, just as they collapsed from their 2008 as the financial crisis kicked in. This time, he argues, the downside risk stems from the possibility that
“China’s structural imbalances will cause at least one wheel to come off their economy within the next 12 months. This is painful when traveling at warp speed – 10% a year in GDP growth …
… The significance here is that given China’s overwhelming influence on so many commodities, especially in terms of the percentage China represents of new growth in global demand, any general economic stutter in China can mean very big declines in some of their prices.
You can assess on your own the probabilities of a stumble in the next year or so. At the least, I would put it at 1 in 4, while some of my colleagues think the odds are much higher. If China stumbles or if the weather is better than expected [and crop yields are therefore higher in the immediate term], a probability I would put at, say, 80%, then commodity prices will decline a lot. But if both events occur together, it will very probably break the commodity markets en masse. Not unlike the financial collapse.
But, he continues, such a collapse would not in any way alter the long term underlying trend towards resource scarcity (and so, if you’re an investor, a commodities crash would represent a once in a lifetime buying opportunity). This argument makes total sense to me. Back in July 2008, just after oil prices had started to decline from their peak, but before their really big fall, I wrote a post arguing that while the long-term drivers on oil prices were strongly inflationary, it would be a volatile, stop-start, boom-crash sort of process (see also this). Whether the impetus for the next crash is China or some other global shock, the fundamentals will remain in place.
Grantham’s conclusion is exactly the same as mine: poor countries are most vulnerable to this new age of scarcity, and issues of fair shares become absolutely fundamental in a world of limits:
At the bottom of the list, poor countries with few resources and little efficiency, which already use up to 50% of their income on the commodity “necessities”, will suffer. The irony that they suffered the most having used up the least will probably not make their misery less. Limited resources create a win-lose proposition quite unlike the win-win we are accustomed to in global trade. Theoretically, we all gain through global trade as China grows. But with limited resources, the faster they grow and the richer they get (and, particularly, the more meat rather than grain that they eat), the more commodity prices rise and the greater the squeeze on the poorer countries and the relatively poor in every country. It’s a gloomy topic. Suffice it to say that if we mean to avoid increased starvation and international instability, we will need global ingenuity and generosity on a scale hitherto unheard of.
