May 2, 2011

Is Jeremy Grantham right about Peak Everything?

Jeremy Grantham, co-founder of money manager GMO with $106 billion under management, has developed an interest in resource limitations as obstacles to economic growth. See his article on GMO's web site .

Grantham's analysis is almost entirely about Peak Oil, and I'd say it's spot on: The US will face reduced growth during a transition away from oil, and many poorer countries will be in deep trouble.

The idea that we face Peak Everything is unrealistic on it's face: most of our other resources, like sun, wind, uranium/thorium, iron (5% of Earth's crust), aluminum (8.1% of Earth's crust), silicon, carbon, (etc, etc) are effectively unlimited, and will be substituted for the small minority of non-fossil fuel commodities that truly face limits, like copper. It's not hard to find good ores for these things, and the energy needed is small. The harder part is building the facilities.

Oil and copper are important, and it will take quite a bit of work to wean ourselves from oil in particular, but it can and will be done.

He talks about the move away from the trend line being too large to be random - well, that kind of technical chart analysis is silly. We know the fundamentals of what happened...China happened. Just because China dramatically raised the price of iron ore, cement, gold and silver doesn't mean that iron ore or cement supplies face any kind of limit.

It's an old fashioned short term boom and bust commodities cycle: prices rise sharply because current production capacity is exceeded. The boom has little to do with long-term trends for things like iron and aluminum, and it will go bust when China can no longer sustain 50% of it's economy going into capital investment. They're close now, with a lot of underutilized real estate sitting around waiting for buyers/tenants that aren't coming any time soon. Japan did the same thing.

China is a lot more important than any other country, as far as I can tell - it's bigger than anyone besides India, and building much more. China is consuming more right now in the way of iron, cement, etc than it ever will in the future, in order to catch up. This will end abruptly, and it's hard to imagine how that can be a quiet event.

In January of 2008 his fund's assets were $157B.

In October of 2008 Grantham was vindicated by the 2008 crash, and his fund's assets had shrunk to $120B. That's entirely understandable. But despite the bottoming and recovery of capital markets since then, his fund's assets shrank again, to $106B. He seems to be losing his touch...

1 comment:

Paul N said...

From the size of his funds, looks like he has certainly reached "peak funds".

Otherwise I tend to agree - we are likely to have peak oil, if are not there now, but most other commodities (except perhaps food) we can keep growing - if there is demand for them.

It's just a question of whether peak oil will limit demand for everything else, but I don;t think there are too many impending physical supply limits -except land of course - that peaked some time ago.