The Strategist

10 Potential Threats to the World's Welfare

07/31/2015 - 15:41

Jeremy Grantham is a British investor, co-founder and chief investment strategist at Grantham Mayo van Otterloo, a Boston asset management firm.

In his latest quarterly letter to clients, he compiled a list of 10 factors, which, as he writes, "are problems: potential threats to our well-being."

It's quite common for Grantham, who recently warned that the Fed is going to inflate a new bubble, as previously.

In the words of Grantham, mostly, his list is negative. Nevertheless, the legendary investor defends his choice, noting that good news usually "happen by themselves."

Here are 10 factors that Grantham indicates:

1. The decline in GDP growth in the US and the balance in the developed world: expect growth of 1.5% in the US, instead of 3%.

Factors that are associated with slower growth: a slowdown in the growth of the working population, the aging of the working population, lack of resources, the growth of income inequality, the constant deterioration of the climatic situation and others.

Most economists who mainly rely on theoretical models, have expressed concern over the fact that in recent times, they are increasingly watching sorrowful performance data and GDP growth, and that they may consider these figures theoretically unsatisfactory in the future.

2. The time of plenty and cheap resources is gone.

Quite expected decline, as a result of the fact that power capacities have been increased, came after historically high growth in raw material prices. The rise in prices in the period from 2000 to 2008 was the largest in history, even higher than the period after the Second World War. However, in this case, the subsequent reaction to the growth slowdown is exacerbated by China's economic growth.

Take, for example, coal consumption in China, which has grown from 4% of total world consumption in 1970 to 8% in 1988 and to 50% in 2013. However, in 2014, China's consumption has decreased.

According to Grantham, commodity prices will vary in different directions: some products will rise in price, meanwhile other - fall.

However, it seems unlikely that we will return to the trend of general decline in commodity prices. As for agriculture, despite the fact that grain prices have fallen by almost 40% compared to 2011 highs, they are still almost 70% higher than in the 2000s.

In addition, bad weather will take place in certain regions (for example, drought in California). However Grantham believes that the downward trend in commodity prices is gone forever.

3. Oil.

Oil is still a queen among the commodities. It led to the development of our civilization and created a surplus in our economic system, what allowed to carry out research and strengthen economic growth.

At this point, the world is running out of oil, production of which is cheap, and the economic system is experiencing difficulties as the economy slows.

At the same time, the economy will take a lot of oil during the transition to renewable sources.

As noted in the letter, the cost of oil increases, as the production of unconventional oil grows, and at some point, we will come to the fact that production costs would exceed the amount of energy that will be produced by this oil.

This can lead to an increase in oil prices, which will help to reduce economic growth. However, Grantham is confident that a change of policy in the field of ecology and cheap electric cars will reduce demand for oil.

As a result, the letter says, the oil will no longer be necessary: the world will simply use other energy sources.

4. Climatic problems.

The climate and policies in the field of ecology in these days are changing at a tremendous speed, the letter says

Many countries, including developing countries such as Ethiopia and Brazil, are seeking to reduce emissions of carbon dioxide into the atmosphere.

However, despite all efforts, there are some factors that cause concern among scientists.

The pace of climate change accelerates, the duration of the lives of many animals is reduced, therefore, as the letter says, humanity has caused great damage to the ecological system, and this error is difficult to correct.

This creates the impression that many of the changes are irreversible: the melting of glaciers and, as a consequence, even large amounts of greenhouse gases, and this could eventually lead to the extinction of even more species of animals and plants.

The impact that climate change has on the weather causes fear too. Droughts, storms, hurricanes - all of this is the result of climate change.

The lack of fresh water is of particular concern, especially in Africa and the Middle East: the lack of resources leads to a destabilization of society.

5. The global food shortages.

World population continues to grow, and with it, middle class in developing countries is growing too, especially in China. This leads to an increase in consumption of meat.

Both of these trends are putting pressure on the production of grain and soybeans on the background of the fact that productivity growth over the past decade reduced.

At the time, water resources are also limited, and the weather conditions in recent years also are unstable (droughts, floods are becoming more frequent).

Floods also destroy the soil. Insect and weeds are becoming increasingly resistant to chemicals.

6. Income inequality.

Income inequality has many times been discussed over the past few years. Many analysts have pointed out that the US has the highest level of inequality in the society in the field of income inequality, as well as in the distribution of wealth in the developed world.

In addition, the US has also formed a society with a very low social mobility, especially true with regard to the poorest. Even 40 years ago, the situation was quite different.

7. Attempts to understand the shortcomings of democracy and capitalism.

The key idea is that the economic elites and organized groups, representing the interests of business, have a fairly high level of influence on US government policy, while the ordinary masses and the middle class do not have such an effect.

8. Disadvantages of the Fed.

The basic idea is that the Fed's job is counterproductive and poorly performed.

9. Investment bubbles in the world, which differ significantly from those that were in the past.

In his letter, Grantham recalls the bubble in the property market not only in the US but also in Spain and Ireland. At the same time, he notes that the situation in the real estate market in Australia at the moment also looks a lot like a bubble, but it is qualitatively different from the bubble in the US and the UK.

10. Limitations of homo sapiens

Among other things, Grantham fears that the economy cannot grow as fast as required by the situation, and the management of the economy is quite inefficient, world leaders have sooner or later to admit it. The world does not have enough food and other resources, and the world is controlled by imperfect animals - homo sapiens.

In conclusion, Grantham says that all this is not so bad. Grantham has high hopes for new, useful technology, many of which will be developed in the field of alternative energy and agriculture.

"Have a nice summer!" - he concludes his letter.


< >

Thursday, November 30th 2023 - 11:05 EU offers Turkey to resume high-level dialogue

Tuesday, November 28th 2023 - 09:24 OPEC names positive aspects of clean energy