What if we were running out of natural resources?
What if global population growth was exacerbating this shortfall?
As rhetorical questions, these thought starters offer some serious food for thought for investors, but at least one closely-followed investment manager is suggesting they are no longer intellectual exercises, but our new reality.
GMO co-founder and US market guru Jeremy Grantham was bearish on the US investment markets in 2000, predicting a lean decade ahead for stocks. Unfortunately for those who had their money in the US market during that time, and whose returns tracked the market, he was right. When Jeremy Grantham speaks, people listen.
In his most recent quarterly missive, Grantham outlines a pretty pessimistic scenario – depleting natural resources, increasing use of fertilisers, a growing population – and on the flip side declining crop yields, resource availability and climate instability.
In 19 detail-heavy pages, the case is methodically made for a new paradigm. Among the many points made, a few key elements stood out for me.
An Amazing 200 Years
The last couple of centuries have been an amazing time in human history. As Grantham points out, prior to the industrial revolution, human existence was largely one of subsistence – we caught, farmed or built what we needed, but rarely more.
The advances in technology that came with the industrial revolution changed that – and largely on the back of oil. That one enabling technology, Grantham reminds us, allowed 'an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress'.
Compound Growth Cannot Be Endless
It is often said that compound interest is the 8th wonder of the world. Anyone fortunate enough to have held Berkshire Hathaway shares since 1965 would be quick to agree, and those prescient (or lucky) enough to have kept their Commonwealth Bank (ASX: CBA) shares since the 1991 IPO can bear testament to the statement.
That said, even Buffett devotees will agree that trees don't grow to the sky. There is only so long that compound growth can continue at pace, and that applies doubly to 'outsized' growth driven by technological change.
Our Resources are Running Out
Grantham makes a point that has the potential – if correct – to be a true game-changer. Rather than paraphrase him, I'll quote from his summary:
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.
To be clear, this isn't just an argument about effectively non-renewable fossil fuels, but also about our ability to supply enough (renewable) farmed food.
In support of this assertion, he provides three key facts:
1. The world's population has grown from 800 million to 7 billion people in just over two hundred years
2. Even with the use of fertilisers, crop yields are growing at only 1.2% per year, and population growth is about 1% per year – leaving very little margin for error, compounded by increased 'grain intensive' diets as people become more affluent.
3. 'Regular conventional oil' production currently exceeds new discoveries – and has done so for the best part of 30 years
The Invisible Hand
I'm sure you can imagine scenarios where these obstacles can be overcome. I certainly can. Electric or solar-powered transport, scientific breakthroughs on food production and new oil discoveries would be high on my list.
Grantham's point, however, goes to the heart of economic theory – supply and demand. Far from the above supply problems being insurmountable, he makes the point that growing demand for a static or slowly growing supply of any good will result in higher prices.
At higher prices, more expensive fertilisers, exploration and extraction costs become an economically viable option. Alternative fuel sources such as solar and yes, nuclear, become cost-competitive with coal and oil.
The fact remains that each of these 'alternatives' comes with higher investment – and therefore higher prices.
Australians – Optimistic and Overconfident
Grantham also reserves some special commentary for Australians. Talking about the development of the human species, he notes:
We also became an optimistic and overconfident species, which early on were characteristics that may have helped us to survive and today are reaffirmed consistently by the new breed of research behaviorists. And some branches of our culture today are more optimistic and overconfident than others. At the top of my list would be the U.S. and Australia.
I don't mind being described as optimistic. Guilty as charged, and happily so. Overconfident is a different matter – and perhaps our over-valued housing market is a case in point.
What Now?
No-one can see the future, but we can make some educated guesses.
Jeremy Grantham has the track record to suggest we should listen closely to what he says. He has presented a persuasive case for a stark future, replete with excess demand and significantly higher prices.
Much like the climate change argument, there are asymmetrical outcomes in a debate over resource scarcity. There is little downside if Grantham is wrong. But also like the climate debate, investors – as well as governments – may want to consider their preparedness for a future that proves him right.
Of the companies mentioned in this article, Scott Phillips owns shares in Berkshire Hathaway. The Motley Fool's disclosure policy is priceless.
