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 scientiï¬c truth, contrarians risk becoming ï¬‚at 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.
- S. Korean President: “There is an increasing likelihood of a food crisis globally due to climate change.”
- Washington Post, Lester Brown explain how extreme weather, climate change drive record food prices
- The Economist: “The high cost of food is one reason that protesters took to the streets in Tunisia and Egypt”; Nobelist Krugman: “It sure looks like climate change is a major culprit” in the extreme weather that has run up food price
- As floods and extreme weather devastate the world, CBS News explains the link to global warming.