GMO’s Jeremy Grantham discusses the topic, “The Heat Is On,” at the PC conference market summit 2019.
GMO’s Jeremy Grantham: Race Of Our Lives
Q4 hedge fund letters, conference, scoops etc
Transcript
Hello. It’s a pleasure for me to be here at this PC conference market summit 2019 because the topic The Heat Is On is exactly my topic a topic I’ve been obsessing about for the last 10 years mostly to around the bulled audience. But now since 2018 was so remarkable so many hard hitting scientific papers against a background of disastrous deadly fires in California everyone appears to be waking up. What I’m going to try and do today is race through the race of our lives the paper I’ve been working on for five years and the update of which I would urge you to read was done in the middle of last year. I’m going to compare the rapid increases in the deadliness of the climate with the rapid increases in the technology. That may one day save our bacon. Let’s get this first slide out of the way. It’s an idea what a portfolio might look like if you were entirely focused on climate change has 40 percent and energy efficiency 20 percent in agriculture and what you might call the usual suspects like copper of which three or four times the amount is used and in a world that is decarbonizing I can’t guarantee much about this portfolio rapidly growing areas can be very difficult from an investment point of view. But I can guarantee one thing the top line revenues of that portfolio will handsomely outgrow the rest of the GDP. Another side topic we should cover quickly is the topic of divestment. It’s been generally held in the US by investment committees that you can’t divest of anything without ruining your performance forever.
And finally much too late we got around to testing it. What we did is we took out each of 10 major groups of the market and ran with the remaining 90 percent for 30 years and thence 60 years or 90 years. And what we found is it didn’t make any difference in the first period doing without oil for example. Actually gained three or four basis points and since 1925 it cost you four or five and the same for all the other groups. Well we’ve done that underneath this exhibit is charted each one separately. And as you can see it looks like a single line with a little break out in the year 2000. It turns out the market is very very efficient at pricing these big groups so that there’s no free lunch buying. Sexy growth stocks will not give you an easy win over buying dopey utilities dopey utilities or simply price cheaper and the sexy growth stocks are more expensive. And it works out pretty well. Who knew. The next exhibit just indicates what this looked like if you extended it back from our original 30 years to 60 years and 90 years and the same pattern. A remarkable range. Since 1925 a plus or minus 26 basis pointsi.e. nothing. That’s the price you might say that you can put on your ethics and it isn’t cost because it’s just as likely to be positive as negative. The real cost would be what would an investor pay to to avoid a range around his benchmark a plus or minus 25 basis points. I would guess about 5 bips.
That’s the real price of that X this exhibit quite well known from Al Gore’s days shows over the last four hundred thousand years how little the changes in carbon dioxide are and how enormous the effect is only 100 parts per million. Separate the depths of an Ice Age with two miles of ice on Manhattan from the interglacial. Not that we enjoy today and that we were in 1950 sitting on the typical range of 280 parts per million. As the other interglacial is dead and then we went ballistic with the bursting of coal and oil in the space of 70 years since World War II. We doubled the range that’s now twice the range that separate an Ice Age from an interglacial. And I guarantee you we will triple that before this game is over everything. It’s not just getting worse but it’s getting worse at an accelerating rate. And the scientists had a great deal of difficulty.
