Jeremy Grantham's 2Q 2009 letter: Boring Fair Price!; Running Out of Resources

Waiting for Markets to be Silly Again

A year is certainly a long time in markets, and so is a quarter. A year ago, equities globally – and everything else for that matter – were very overpriced, particularly if they were risky. A quarter ago, in mid March, prices everywhere were cheap. Now they have all – or almost all – converged for a few unusual moments at fair value. A year ago, it was very easy to know what to be: a risk avoider. It was not so easy reinvesting when terrified, but most of us knew that we should have been doing more. But today? It’s difficult to be inspired at fair value.

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What we specialize in at GMO, not surprisingly perhaps, is doing the easy job: we wait for extreme situations and predict that they will become normal once again. When markets sell at normal prices, life for us becomes much harder, perhaps 10 times harder. Predicting movements away from rational prices in an irrational world should not be easy, and indeed it is not. Our one and only effort at predicting a bubble – in emerging markets – is likely to stay just that. Only U.S. quality feels (and measures) to us like a real outlier. As for the rest, if you feel yourself becoming overconfident about anything, take a cold shower and start again. Just be patient. In our strange markets, you usually don’t have to wait too long for something really bizarre to show up.

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Behind these two issues, however, lurks another longer-term and more important factor affecting future growth, and that is the increasing limitations on resources: we are simply running out of everything at a dangerous rate. We apparently have trouble processing numeric issues of this kind, and this missing faculty will cause considerable grief. We do not understand the implications of exponential or compound growth rates: the main implication being that they are impossible to sustain.

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It should be obvious from simple arithmetic that population growth is on a direct collision course with increasingly scarce resources.

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This transition away from carbon-based fuels could have been relatively painless on paper, but in real life our species has such a modest ability to deal with distant outcomes or to defer gratification that a bad ending is probably inevitable. We need, it seems, the shock of a Pearl Harbor to really gear up and make sacrifices.

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Well, dear readers, happy thoughts and wishful thinking do not make it so; 30 precious years have passed, and there is now no safety margin. We must prepare ourselves for waves of higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions. In fact, I believe we are already several years into this painful transition but are still mostly invested in denying it. Everything within the investment business will be affected as well as everything outside of the business.

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Reading and Listening List [from end of Grantham’s letter]

Hardin, Garrett. Living within Limits: Ecology, Economics, and Population Taboos, Oxford University Press, 1993.

Bartlett, Albert A. The Most Important Video You’ll Ever See, Arithmetic, Population, and Energy. 2009 .

Martenson, Chris. The Crash Course. 2009 .