GDP Growth, Bubbles, Oil: Ten Quick Topics To Ruin Your Summer by GMO
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 organization 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 summarize 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…
- Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%
- The age of plentiful, cheap resources is gone forever
- Climate problems
- Global food shortages
- Income inequality
- Trying to understand deficiencies in democracy and capitalism
- Deficiencies in the Fed
- Investment bubbles in a world that is, this time, interestingly different
- Limitations of homo sapiens
1. Pressure on GDP growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%
Factors potentially slowing long-term growth:
a) Slowing growth rate of the working population
b) Aging of the working population
c) Resource constraints, especially the lack of cheap $20/barrel oil
d) Rising income inequality
e) Disappointing and sub-average capital spending, notably in the U.S.
f) Loss of low-hanging fruit: Facebook is not the new steam engine
g) Steadily increasing climate difficulties
h) Partially dysfunctional government, particularly in economic matters that fail to maximize growth opportunities, especially in the E.U. and the U.S.
Mainstream economists, with their emphasis on highly theoretical models, have been perplexed by the recent chain of disappointments in productivity and GDP growth and would disregard all or most of these factors as theoretically unsatisfactory.
I am impressed by how many of these factors intersect with the important problems I obsess about. This might offer a reason for taking them more seriously, for few things could be more important background information for any market analyst than to have been prepared for a steady diet of top-line disappointments.
2. The age of plentiful, cheap resources is gone forever
After every historical major rally in commodity prices, there has been the predictable reaction whereby capacity is increased. Given the uncertainties of guessing other firms’ expansion plans, the usual result is a period of excess capacity and weaker prices as everyone expands simultaneously. The 2000 to 2008 price rally was the biggest in history, above even World War II. It was therefore not surprising that the reflex this time was the mother of all expansions and excess capacity. This was further exaggerated by a sustained slowdown in demand from China, which is still playing through. The most dramatic example of this was in China’s use of coal, which had grown from 4% of world use in 1970 to 8% in 1988 and to 50% in 2013, the world’s most remarkable expansion in the use of anything since time began. And yet this remarkable surge was followed in 2014 by a reduction in China’s use of coal! And that in a year in which China was still growing at over 6%.
So, how profound was this supply surge and price decline? Exhibit 1 shows our original index, which is made up of 33 important commodities equally weighted to avoid the data being overwhelmed by oil, which constitutes around 50% of all tradable value in commodities. You can see that although the average price has declined handsomely, it has only given back about one-third of the preceding great price surge. And now with a further sell-off in commodities following China’s recent mini stock bust, the reaction phase may be more or less complete: projects have been cancelled and capital spending plans in general have been savaged. Investment attitudes are extremely negative, which is, as always, a requirement for change. Today’s Wall Street Journal (July 21, 2015) carries a headline: “Investors Flee Commodities.” Promising. 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.
See full PDF below.