Grantham’s “Things that Really Matter in 2011 and Beyond”: “Global warming causing destabilized weather patterns, adding to agricultural price pressures”

Back in July I wrote about uber-hedge fund manager Jeremy Grantham, a self-described “die hard contrarian,” telling it like it is in his blunt 2Q 2010 letter (see “Grantham: Everything You Need to Know About Global Warming in 5 Minutes“).

He wrote back then, “Global warming will be the most important investment issue for the foreseeable future.”  He went through the basics of climate science and then wrote:

Do we believe the whole elite of science is in a conspiracy?  At some point in the development of a scientific truth, contrarians risk becoming flat earthers.

He noted that “the obfuscators of global warming actually use the same “experts” as the tobacco industry did” and wondered, “Have they no grandchildren?”

Grantham has earned his contrarian cred the legit way.  He is former Chairman and now Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), which has “more than US $107 billion in assets under management as of December 2009. Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.”

In his January 2011 newsletter, “Pavlov’s Bulls,” he has a discussion of climate and commodity prices (emphasis in original):

Commodities, Weather, and Markets

Climate and weather are hard to separate. My recommendation is to ignore everything that is not off the charts and in the book of new records. The hottest days ever recorded were all over the place last year, with 2010 equaling 2005 as the warmest year globally on record. Russian heat and Pakistani fl oods, both records, were clearly related in the eyes of climatologists. Perhaps most remarkable, though, is what has been happening in Australia: after seven years of fierce drought, an area the size of Germany and France is several feet under water. This is so out of the range of experience that it has been described as “a flood of biblical proportions.” More to the investment point: Russian heat affects wheat prices and Australian floods interfere with both mining and crops. Weather-induced disappointment in crop yield seems to be becoming commonplace. This pattern of weather extremes is exactly what is predicted by the scientific establishment. Snow on Capitol Hill, although cannon fodder for some truly dopey and ill-informed Congressmen, is also perfectly compatible. Weather instability will always be the most immediately obvious side effect of global warming.

For more on this, see my series “food insecurity” (and Russian President Medvedev: “What is happening now in our central regions is evidence of this global climate change, because we have never in our history faced such weather conditions in the past” and Terrific ABC News story: “Raging Waters In Australia and Brazil Product of Global Warming”).

Grantham, who launched the Grantham Institutes for Climate Change and the Grantham Research Institute on Climate Change and the Environment, seems to be one of the few big investors who really gets climate change.  What is especially interesting about this new newsletter is his discussion of resource limitations:

Resource Limitation Note

For my money, resource problems exacerbated by weather instability will be our biggest and most complicated investment problem for years to come. How should we prepare for it? First, we should all transfer more of our intellectual resources to the problem. Yes, we have already recommended forestry, agricultural land, and “stuff in the ground.” It would be nice to back this up with more detail. To this end, we are starting to look more closely at commodity cycles, both historically and currently. We will report back from time to time.

By the way, the good news is that our long-term bubble study, started in 1998, has become a monster. Formerly a study of the handfuls of famous, accepted investment bubbles, we are now well into a statistically rigorous review of primary, secondary, and possibly even tertiary bubbles, and now count a stunning 320 completed bubbles. For now, we do not intend to make our complete review generally available, but we will review some interesting “average” bubble behavior in a few months.

So, we do know some useful stuff about commodities. The complicating point is that in the recent few years, commodities seem to be making a paradigm shift. If this is so, it will be the most important paradigm shift to date. The bad news is that paradigm shifts cannot, by definition, be described well using history. It is all about judgment. Now there’s a real problem.

In short, we are entering those infamously uncharted waters, thanks to global warming, peak oil and food insecurity, among other things.  To make that point explicitly, Grantham ends:

Things that Really Matter in 2011 and Beyond (in one person’s view) for Investments and Real Life

  • Resources running out, putting strong but intermittent pressure on commodity prices
  • Global warming causing destabilized weather patterns, adding to agricultural price pressures
  • Declining American educational standards relative to competitors
  • Extraordinary income disparities and a lack of progress of American hourly wages
  • Everything else.

Grantham gets it.  Too bad his fellow contrarians (and much of the media) don’t.

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21 Responses to Grantham’s “Things that Really Matter in 2011 and Beyond”: “Global warming causing destabilized weather patterns, adding to agricultural price pressures”

  1. Johan says:

    Not only does he get it but he also expresses it very well and very bluntly. I wasn’t expecting this from the hedge fund crowd.

  2. Cinnamon Girl says:

    For several years now, trading the softs futures has been a relative piece of cake. Cheap money, climate bias toward the disruptive, grains, sugar, and veg oils slanted toward bio-fuels, bumpily recovering economies with corresponding currency flows, steady China consumption march. Get long, stay long, mind the seasonals and the “too overdone” air pockets, and hang on for the ride. It’s kind of amazing to watch what should be good traders fail to recognize the climate trend, but then they are more attuned to computer screens and the crowd than to growing conditions and the cycle of life. It’s a bit funny that the typical trader mentality is to deny climate change and fight the trend instead (some like astrology but can’t abide biology). I.e., they aren’t as smart as they think they are. Too bad. So sad. Love Dad.

  3. Mulga Mumblebrain says:

    He gets it, but then again so does everybody with an IQ over room temperature (Celsius) and not in the throes of ideologically induced denialomania. However, in my opinion, he is also a symptom of the problem. Having the life and death choices that human societies must make made by a tiny coterie of hyper-rich capitalists is not the way to save ourselves. For every sane, rational, informed plutocrat who actually cares about the human future, you’ll have one, at the very, very, least, who is only interested in profit maximisation, come what may. Letting market capitalism and its plutocratic overlords determine our fate is a certain recipe for disaster. As Mr Grantham’s secret study allegedly shows, market capitalism is the greatest mechanism ever devised for blowing up asset bubbles. These little, discrete, instances of ‘creative destruction’ at work, create huge fortunes for the elite who can manipulate the supposedly impartial, all-knowing ‘markets’ to their advantage, but, in the process destroy the lives of millions. Just like the GFC, unresolved because the financial grifters own politics, and already recurring in new bubbles as Bernanke’s trillions seek the highest possible return for the banksters, even if it means inflating food prices and starving millions in the process. We must absolutely remove the piratical profiteers from their position of global eminence, end their purchase of politicians and find leaders who are, at the very least, not morally insane and who care for the human race, not piles of money.

  4. Bob Lang says:

    To get an idea of the magnitude of the bubble we have created, and also to illustrate that 2008/09 was merely a shot across the bow, take a look at the following 100-year-plus chart of the Dow (semi-log scale).

    We have clearly entered the implosion part of the “mother of all bubbles”:

  5. Cugel says:

    I don’t think it’s trader mentality which tries to deny reality in defence of the status quo, but owner mentality – owners are doing very well as things are. So we see people like the Koch brothers apparently believing they can prevent the trajectory of global technological society by diktat, through control of a US political party. They don’t currently determine policy, but they effectively have a veto over it, which is all they need to preserve the status quo.

    Grantham’s long-term bubble study sounds interesting. Bubbles are a fine laboratory for the study of human nature. One thing they confirm is that people generally ain’t too bright. Jeremy Grantham is, I think, an exception to that, as he clearly gets it.

  6. Cugel says:

    Mulga Mumblebrain : I have no issue with your post, except that I doubt the report will mention such airy concepts as “creative destruction”. More likely it’ll be a user’s guide to fleecing mugs, with no moral in the tale. I’ll be looking out for it myself :)

  7. Our economy relies on growth.
    Our jar is about full, and there is no other jar.
    It’s the end of the world as we know it… whether it’s in 10 or 30 or 50 years.
    Question is… what sort of world will be born from peak everything + climate chaos?

  8. Prokaryotes says:

    Re Things that matter …

    New assessment of black carbon and tropospheric ozone’s role in climate change

    Black carbon (BC) and tropospheric ozone (O3) are harmful air pollutants that also contribute to climate change. The emission of both will continue to negatively impact both human health and climate.

    While our scientific understanding of how black carbon and tropospheric ozone affect climate and public health has significantly improved in recent years, the threat posed by these pollutants has catalysed a demand for knowledge and concrete action from governments, civil society, United Nations (UN) agencies and other stakeholders.

    The United Nations Environment Programme (UNEP) was requested to urgently provide science-based advice on actions to reduce the impact of these pollutants and the Integrated Assessment of Black Carbon and Tropospheric Ozone is the result. Its main findings are:

    A small number of emissions reduction measures targeting black carbon and tropospheric ozone could immediately begin to protect climate, public health, water and food security, and ecosystems. These measures target fossil fuel extraction, residential cooking and heating, diesel vehicles, waste management, agriculture and small industries. Full implementation is achievable with existing technology but would require significant and strategic investment as well as institutional arrangements.
    The identified measures complement, but do not replace, anticipated carbon dioxide reduction measures. Major carbon dioxide reduction strategies mainly target the energy and large industrial sectors and therefore would not necessarily result in significant reductions in emissions of the black carbon or ozone precursors; methane and carbon monoxide. Significant reductions of black carbon and O3, require a specific strategy, as emissions come from a large number of small sources.
    Full implementation of these measures would reduce future global warming by 0.5oC (within a likely range of 0.2-0.7oC). If the measures are implemented by 2030, this could halve the potential increase in global temperature which is projected for 2050. The rate of regional temperature increase would also be reduced.
    Both near-term and long-term strategies are essential. Reductions in near-term warming can be achieved by control of black carbon and O3 whereas CO2 emission reductions, beginning now, are required to limit long-term climate change. Implementing both reduction strategies is needed to improve the chances of keeping the Earth’s global mean temperature increase to within UNFCCC’s 2oC target.
    The implementation of the identified measures would have substantial benefits in the Arctic, the Himalayas, and other glaciated and snow-covered regions.
    These measures are all in use in different regions around the world. Much wider implementation is required to achieve the full benefits identified in this assessment.

  9. catman306 says:

    The problem seems to me to be the first word in:

    Limited Liability Corporation

    Why the blazes should ANYONE’S liability be limited? Especially in a political climate that stresses “personal responsibility”? Is this a double standard that favors the owners but destroys the commons and the futures of those less wealthy? (Like the residents of the Gulf Coast)

    The next capitalism upgrade should require everyone to put their assets on the line. ALL their assets. No-limits to liability might put a necessary damper on our civilization’s build, destroy, exploit mentality. The homeless, the poor, and the not-so-poor middle class do it every day. Many survive. So can corporation owners.

    I doubt if the world can survive without a capitalism upgrade.

  10. Prokaryotes says:

    Climate change will force 40% shift in asset allocation

    Institutional investors need to shift 40% of their portfolios into climate-sensitive sectors, including infrastructure and agriculture, to safeguard returns against the impact of global warming, according to consultant Mercer.

  11. Solar Jim says:

    In terms of asset allocation, climate science shows that the entire global fossil “fuel” allocation, both supply and demand, is a liability. Therefore, prepare for either controlled or uncontrolled global bankruptcy. Perceptions are tricky things.

    Kind of like your portfolio becoming one of explosives. Come to think of it, it is. How many explosions per mile do you get? Hey buddy, can you spare a paradigm? Companies involved in pumping water should do well, for fighting fires, bailing out and watering the parched.

  12. David B. Benson says:

    Food will really matter.

  13. Mulga Mumblebrain says:

    ‘Asset allocation’ in the face of what is occurring and will worsen rapidly, is akin to ‘allocating’ the correct position for those essential ‘assets’ the deck-chairs, on the poop deck of the Titanic. Only one asset has any value now, and that is our children’s future-the rest is dross, much of it poisonous dross.

  14. Lewis C says:

    It is a black joke that a clear-sighted high ranking hedge-fund manager should be speaking so bluntly, to the extent of discussing the destabilization of the climate, as well as its convergence with peak oil in raising global food scarcity.

    By contrast there are few posters even here on CP who’ve been using the term climate destabilization; I’ve yet to hear it used on MSM, and Holdren, as Obama’s appointee, has only been able to get as far as ‘climate disruption.’

    Yet destabilization is the accurate description of what is happening to climate as the planet warms. That overall warming of course shows up in the ratio of new high-to-low temperature records, but those record events are but one aspect of a raft of concerns in the rising amplitude of the swings between different climate states. Since these increasingly wild swings can be reflections of sensitivity to immeasurably small diversions in initial conditions (the butterfly’s wing) our capacity to forecast extreme events accurately is declining despite recognition of the greater ambient heat and water vapour as contributors.

    As a case in point, TS Carlos, a ‘500-year’ storm that recently formed over Darwin (out of nothing very special according to Aussy meteorologists), proceeded to burst “like a hand-grenade” and sit over the city, dumping an unprecedented rate and volume of rainfall. The warning period, conventionally several days for a major event, was reduced to 24 hours.

    Predictably, that reduction of warning time not only cuts preparedness and so raises losses and casualties, it also raises the social shock of such events, making them more attractive to MSM coverage – particularly when it’s white people at risk. News of such events worldwide is increasingly seeping through the MSM filters onto ordinary peoples’ TVs and papers, for all threadbare denial-myths are still pushed – (such as the great one about how the Nino siblings live in a magic box that completely insulates them from the recorded warming of the Pacific Ocean, which happens to be their playground).

    In addition to rising info via MSM, each time people experience extreme weather events personally, or discuss the dire experiences of others among their social circle, those myths get a bit thinner and the question rises nearer to being asked:
    “So are all these extreme weather hits really just fluke events, or could the scientists actually know what they’re talking about ?”

    The rising frequency and intensity of extreme events is plainly the greatest strength of the activist’s call for people to demand commensurate action – for their rise is demonstrating to the middle ground of the debate in society the veracity of the scientist’s warnings.

    Perhaps the greatest vulnerability of activists’ credibility is that the message we try to amplify is entirely at odds with peoples’ lifetime conditioning that nothing calamitous could happen and that we’ll all get richer, live longer, enjoy eternal economic growth, etc. That contrast makes the label ‘extremist’ quite simple for the fossil shills to apply, particularly via the tribal prejudices of left and right ‘ideologies’.

    All of which raises some conclusions.

    Given that the middle ground of society is the primary target audience of climate activism, and that efforts to confront denialism wholesale have not only failed to date to diminish their influence, but also that goal is actually a secondary concern,
    it behoves us to review our presentation of both the messenger, the message, and the opposition.

    In this context, I’d suggest that blunt speaking about the ongoing destabilization of climate needs to be advanced rather than cut back – but we can greatly deflect the charge of extremism by modulating our language to achieve very specific ends. The middle ground generally doesn’t like to hear ordinary people being traduced (what fraction either are GOP voters or have friends who are ?) meaning that invective and rude names for the foot-soldiers of denial are likely to be ineffective in winning recruits, if not counter productive. What is required is a non-judgmental title for them which at best focuses attention directly on the major growing weakness of their stance – the fact that as destabilization becomes ever more obvious, their only defence is that rising extreme weather events are all just flukes.

    Thus referring to them as ‘Flukers’ would have the advantage of not be derogatory but merely descriptive of their position. It would also bring the seminal question of the increasingly unstable climate to the fore every time the title gets used.

    The paid servants of denial warrant an equally explicit description of their conduct as a widely used title. But again its moderation of tone should help to deflect the charge of activists’ ‘extremism,’ while its meaning should at best attract interest both in the middle ground listener and, potentially, even among ‘flukers’. (Note: how many Tea-Party supporters would be appalled to realize the extent to which their protests are being steered by paid servants of major corporations and foreign interests, including the Saudi’s with their 40% holding in Fox News ?)

    Referring to the paid servants of denial as ‘Fossil Shills’ would be an accurate description but also a relatively mild one to avoid offending middle ground sensibilities. Its widespread use would regularly call into question the alignment of their denial with the profits of their employers.

    I’m sorry in a way to have to suggest moderating the language we use – I know the frustrations that need venting – but, trying to bite the ankles of the enemy is plainly a waste of time – we need to be going for the jugular, and that’s the middle ground of society asking the question of whether rising extreme events are really all just flukes, and just who profits from the denialist message.

    I sum, any leeway in conversations for voicing ‘radical’ perspectives should not be frittered away merely on vilifying the opposition but devoted to describing calmly the dynamics of the climate threat we face, including when appropriate the 35 years of warming ‘in the pipeline,’ and the accelerating interactive feedback loops.

    If anyone can put up better titles than ‘flukers’ & ‘fossil shills’ with a supporting rationale, or can identify shortcomings in the discussion above, I’d be grateful if they’d post them, for the need to greatly raise our game really seems to be getting a bit urgent . . .



  15. Villabolo says:

    @3 Mulga Mumblebrain:

    “We must absolutely remove the piratical profiteers from their position of global eminence…”

    A hint:

  16. Mulga Mumblebrain says:

    Villabolo #14, an excellent tale. I always thought that the Type A personality did not itself suffer greater stress levels and consequent morbidity, but inflicted it on all those around them. It’s reminiscent of the work on empowerment and how lethal it is to be down the pecking order and have bullying overlords ordering you about. Insubordination is our only defence. I’ve always been quite attracted to it as a lifestyle, not being in any manner ambitious to climb any ladders of success or organizational status. I’m a great admirer of Prince Peter K. as well.It looks like those lucky baboons dropped out and became honorary bonobos. I can imagine many far worse fates. As for our alphas, really omegas, perhaps we could persuade them to enlist for the first extra-terrestrial expedition to find new worlds to conquer, then, when they are in suspended animation, set the controls for deep, deep, space and add an extra nought or two to the length of their slumber.

  17. Sou says:

    The Mercer report is also referenced here:

    “Five years from now, it is very possible that we will acknowledge that the new Mercer climate change report was a line in the sand for the way mainstream investors think about investment risk. It states that the risk to investment portfolios from climate change is so significant that traditional portfolio management strategies are not well placed to deal with it.

    In a sector known for its conservatism and herd mentality, to flag that all portfolios should be restructured, not by means of re-weighting traditional asset classes such as equity and debt, but by the degree of climate change risk, is a powerful statement. If embraced by the market, the resulting 40 per cent capital flows will lead to some very rapid investment revaluations that will be quite disruptive.

    To put it in context, a 5 per cent change in strategic asset allocation for a fund would be a big event. For the industry at large to contemplate 40 per cent is mind-blowing. According to management consulting firm McKinsey, large institutional investors, such as pension and mutual funds, control about $65 trillion in financial assets. To conclude that 40 per cent of this amount may be in assets that add systemic risk is extraordinary.

    More here:

    Sign up might be required (free)

  18. Mark says:

    When monied interests are at risk, they can always see the Truth more clearly

  19. Lewis C says:

    “Institutional investors need to shift 40% of their portfolios into climate-sensitive sectors, including infrastructure and agriculture, to safeguard returns against the impact of global warming, according to consultant Mercer.”

    As a farmer I find this rather puzzling.

    Not only did our bridge get carried away by an unprecedented torrent – which was a vital bit of infrastructure that had to be replaced immediately, from scratch –
    but last year was the third in a row where prolonged rains began in late June before the hay crop was ready – Previously farms up here in the Cambrian mountains could expect to lose perhaps one hay crop in a generation – losing three in a row is not tenable.

    With farming and infrastructure being in the front line of climate impacts, pouring investment into them without first achieving
    a/. a binding stringent global climate treaty, and
    b/. a global treaty governing the deployment of appropriate carbon recovery and albido enhancement measures to mitigate planetary temperature, decelerate the feedbacks and eventually cleanse the atmosphere,
    – looks a decidedly risky prospect.

    Can anyone clarify the rationale for proposing such a transfer of funds ?



  20. iceman says:

    Johan@1, GMO is in the asset allocation business, not hedge fund management. Inherently less speculative and more level-headed.
    Mulga @13, I think asset allocation is defensible if it helps shift more capital to parts of the economy that will serve prevention or mitigation needs.

    A future (post-peak-oil) addition to Grantham’s list of 320 will be the “methane bubble,” a speculative frenzy born of the benighted hope that we will be able to use clathrate hydrates as fuel instead of adding them to the greenhouse. Harking back to the South Sea Bubble, this will be the East Siberian Arctic Shelf bubble.

  21. JonS says:

    From the Director of the Australian National Climate Change and Adaptation Research Facility:

    Director’s message
    Professor Jean Palutikof, NCCARF Director

    COP-16: Three questions
    It doesn’t seem very long since I wrote in the Newsletter about the disappointing lack of progress at the UNFCCC 15th Conference of the Parties (COP-15) in Copenhagen. Now I find myself putting pen to paper about COP-16, which has just completed its business in Cancún. The tragedy is that the message is just the same – little of substance was achieved.

    Instead, we are left with the message that the process is still on track, and that the Parties (or Governments) will be meeting in a year’s time in Durban for COP-17. To quote one blog ‘It’s incremental progress, but progress nonetheless’ (Robert Stavins, Harvard University).

    Is ‘incremental’ progress sufficient, given the projected rate of climate change?
    No. The modest progress made at COP-16 is set out in two documents together called the Cancún Agreements. These reaffirm the need to hold temperature increase below 2 degC. At the same time, they fail to deliver emissions reductions which would meet this target. Only one delegation refused to sign up to the Agreements. This was the delegation from Bolivia – their leader said: “We’re talking about a [combined] reduction in emissions of 13-16%, and what this means is an increase of more than 4 degC…Responsibly, we cannot go along with this – this would mean we went along with a situation that my president has termed ‘ecocide and genocide’”.
    And this statement is correct.

    The Cancún Agreements formalise the pledges made under the Copenhagen Accord but, even if delivered in full, would only reduce emissions by around 15%, when we know that what needs to be achieved to maintain the temperature increase below 2 degC is a global 50% reduction by 2050, much more for developed countries, much less for developing countries.

    Can the UNFCCC process deliver what is needed?
    I fear the answer to the second question is also no.

    Not only is the UNFCCC process failing to deliver the actions needed to deal with climate change, it is lulling us into afalse sense of security that everything is OK because the governments are in charge and dealing with the problem, when in fact they are failing to do so. A gulf has opened between what the scientists know must be done to avoid dangerous climate change, and what the governments are able to deliver through the UNFCCC process.

    The governments would have us believe that this gulf doesn’t exist, and that they will, in time, deliver what is needed. But we don’t have time anymore.

    This year delivered some record extremes – remember the Russian heatwaves and the Indus floods? It is as if we’ve come to expect these events, and maybe that’s the way we’re headed – towards a gradual acceptance of the inevitability of climate change and its impacts, and an acceptance of the need to deal with those impacts on a case by case basis. Which is fine for those people and species that can adapt to the new order, but not so good for those that cannot.

    Is it time to call time on the UNFCCC?
    I’m not going to try to answer this question, nor is it appropriate at this time. Certainly, we need to face up to the fact that we’re singularly failing to deal with climate change.

    There is an urgent need for debate on this third question – if we can be realistic about where we’re at, maybe we can start to see a way forward that will deliver what is needed.’