Fewer, Richer, Greener: Why Jeremy Grantham is (Partly) Wrong
April 3, 2012
by Laurence B. Siegel
Is the human experience getting better or worse? This is a big question investors are rarely asked to confront, yet its answer has profound consequences for market returns.
If the global economy continues its robust growth, then equities are the investment of choice. If demographics, environmental limitations, or something else unforeseen causes a prolonged period of slow or negative growth, then investors should prefer defensive positions, such as a portfolio heavily weighted to fixed income. Clues regarding the long-run future for the global economy may also be helpful in active management, because they indicate which countries and industries to favor.
A recent Advisor Perspectives article described how legendary value investor Jeremy Grantham now believes that dire sentiments may for once be correct when it comes to natural resources – this from a man whose general view is that history repeats itself and that “this time it’s different” are the four most dangerous words in the English language.
What’s different? According to Grantham, the extraordinary global economic growth of the last 200 or 250 years has been a temporary reprieve from an almost infinitely long history of hardship and deprivation. The reprieve, in his telling, was caused by the previously untapped boon of cheap energy from burning wood and then fossil fuels. But compound growth in consumption of a resource that is in fixed supply cannot continue forever; that’s a mathematical certainty.
Grantham concluded that two centuries of volatile but – in the long run – steadily falling real prices of energy and other resources ended with the commodity price bottom of 2002. In the decade since, he pointed out, the price of an index of 33 commodities has risen enough to reverse its entire real decline since 1900.
In the future, Grantham predicted, “price pressure and shortages of resources will be a permanent feature of our lives.” A decreasing population is the only thing, he argued, that will allow the human race to “gracefully, rather than painfully” achieve “a fully sustainable world economy.”
That’s Grantham’s outlook, and it’s fairly grim. Fortunately, there’s ample justification to take a much more sanguine view. I would argue that the world our children and grandchildren will inherit will suffer less overpopulation, less poverty, and less environmental disaster than we do. Resources will be far more abundant than Grantham forecasts, as the dominant paradigm becomes “fewer, richer and greener.”
You may not know it from reading the newspaper, but Grantham will get his wish. It will take a while. The world’s population will first creep up from its current seven billion people to about 10 billion two generations hence, but then the population will stabilize, and probably experience an absolute decline.
This stabilization and likely decline will not be caused by famine, war, or disease. It will be caused by parents making rational economic decisions to have fewer children as incomes rise. When incomes are low, having an additional child is a sensible economic choice, because a child isn’t very costly and provides both cheap labor and insurance against penury in old age. When incomes are high, however, having a child is expensive, and there are better ways to make money than by putting one’s children to work on the farm.
This transition already took place decades ago in Europe, Japan, China, and Russia, where the total fertility rate is already way below the “replacement rate” of just over two children per couple. Some readers will be surprised to find out that Brazil, Iran, Thailand, and Vietnam are also on the below-replacement list. In the United States, the replacement rate has been reached; Indonesia and Mexico are not far off the mark; and giant India, while still growing in population, has experienced a tremendous fertility decrease over the last 40 years. Only in Africa and parts of the Middle East are fertility rates anywhere near the high levels that traditionally prevailed worldwide, and fertility in these regions is falling even faster than it did in the First World a generation or two ago.
In other words, the population explosion is almost over. Peak population of about 10 billion, expected to be reached later in this century, sounds like a big increase over today’s seven billion, but consider how frequently the population has doubled in the recent past. Another 3 billion, on the other hand, is not even a 50% increase at this point.
Now, what does this mean for the economy and the environment?
1. Full disclosure: This is a barroom argument among friends. I have the highest respect for Jeremy Granthams investment talent and writing, and for the integrity of his firm. The complete version of Fewer, Richer, Greener is available here.