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Illustration: Kishore Das

Perspective

Ten things to watch out for
GMO’s Jeremy Grantham talks about what is on his mind as he assesses the current investment climate

Jeremy Grantham

I have always had a much more interesting job than average in the investment business, with an enviably large chunk of my time to examine what I chose to. But, still, there was quite a bit of boring maintenance work needed to support the brainstorming or pure reflective time. Such time is, in my opinion, the backbone of a creative organisation and it should be highly protected, but in real life you have to fight for it and you should, for we all know how quickly maintenance work can eat into our thinking time.

Well, the good news for me is that I now have an ideal job in which almost no maintenance work is required, and I have no routine day-to-day responsibilities. I am consequently free to obsess about anything that seems both relevant and interesting, which for the time being has come down to 10 topics that really matter, at least in my opinion.

They can all be viewed as problems: potential threats to our well-being. I admit this is lopsidedly negative, but surely it is more important to obsess about threats, which we often prefer to ignore. Good news, in contrast, will usually look after itself. Trying to keep abreast of all of these topics would be at least a full-time job for the average reader, as it is for me, for some are changing very rapidly indeed. So for this summer’s quarterly, I have decided to very briefly summarise all 10 topics; to cover some interesting new research on several of them; to review one or two older but potentially important research projects that slipped through in the past with much less attention than seems appropriate; to discuss one or two pennies that have recently dropped for me; and, finally, to highlight a few new pieces of interesting data on several of these topics. So, here we go…

1. Pressure on GDP growth in the US and the balance of the developed world: Count on 1.5% U.S. growth, not the old 3%. Factors potentially slowing long-term growth include, aging and slowing growth rate of the working population and rising income inequality.

2. The age of plentiful, cheap resources is gone forever: From now on it seems likely that prices will be more mixed, with some rising as others continue to fall. What seems extremely unlikely, assuming we have no global depression, is a return to the declining price trend of the 100-year period ending in 2000.

3. Oil: As we are running out of oil that is cheap to recover, the economic system is becoming stressed and growth is slowing.

4. Climate problems: Visible changes in the climate have also been accelerating, with many more records than normal of droughts, floods, and, most particularly, heat.

5. Global food shortages: The world’s population continues to grow, and the increasing middle class of the emerging countries, especially China, is rapidly increasing its meat consumption. Both trends put steady pressure on our grain and soy producing capabilities at a time when productivity gains have been irregularly slowing for several decades and show every sign of continuing to slow. Both overland and underground water supplies are stressed.

6. Income inequality: Academic economists such as Robert Gordon have begun to make the case that extreme and growing inequality is holding growth back in the U.S. If the broad middle class makes little or no progress for 40 years in real wages earned in an hour — as the official U.S. statistics show — then it would not be surprising if: a) debt became a problem from time to time as the median earner attempted to make modest improvements in lifestyle; and b) that consumption and growth rates were persistently a little disappointing, as indeed they have been.

 7. Trying to understand deficiencies in democracy and capitalism: I realise that those of us capitalists who would like to be proud of our capitalist system are not going to get back the glory days of the 1960s when there was over 4% productivity growth per year and roughly the same substantial growth in all incomes, from CEOs to floor sweepers. But we should complain, I think, when the capitalist machine starts to malfunction. And it is.

 8. Deficiencies in the Fed: A counter-productive job description, badly executed.

9. Investment bubbles in a world that is, this time, interestingly different: Two significant items seem to be different this time. First, profit margins in the U.S. seem to have stopped means reverting in the old, normal way, and second, some real estate markets have bubbled up and then stayed there at high prices. Both seem surprising events, even against what I would call “the laws of nature,” or at least the usual laws of capitalism.  

10. Limitations of homo sapiens: We do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses.

This is an excerpt from GMO’s 2Q 2015 report. You can read the full version here. Copyright © 2015 by GMO LLC

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