Jeremy Grantham, chief investment strategist at GMO and one of the biggest proponents of the super-cycle theory of ever rising prices, has long warned that natural resources are running out and that the price of everything from minerals and energy to food would remain high. He now admits that he was wrong (click here for client note).
Grantham, best know for spotting bubbles in equity markets, recognises that they are hard to spot:
"Giant bubbles are easy to spot statistically but hard to call from a career risk perspective. It is easy to be early, and being early may lose you your job, your clients, and your credibility. The fear is always, “Are these new high prices permanent? Is it a paradigm shift?” Every major bull event is called a paradigm shift but they almost never exist. Almost never. But not never, ever."
And even harder to make money out of:
"I could and should have made good money playing against the bubble in minerals, as we did playing against the three other major asset bubbles of the last 20 years. This event in metals indeed turned out to be not the second important paradigm shift, as I thought, but the fourth great bubble of the last 100 years!"
To his defense, Grantham did warn of the possible risks in his original report 2011:
“If China stumbles or if the weather is better than expected, a probability I would put at, say, 80%, then commodity prices will decline a lot. But if both events occur together, it will very probably break the market en masse. Not unlike the financial collapse. And this is indeed what happened. I had thought it probable that short-term prices would decline, possible that both negatives would occur together, but highly unlikely that they would both be as extreme, as turned out to be the case."
One should probably question the wisdom of his investment strategy if he saw an 80% chance of events occurring that would cause commodity prices to collapse.
Anyway, here is Grantham’s advice for the future for oil:
Today’s draconian cutbacks in exploration almost guarantee another sharp price spike in the next two to four years. But beyond a five-year recovery for oil prices and oil stocks, there lurks a third paradigm shift: the terra incognita of electric, self-driving vehicles; cheap electric storage; climate change; and carbon taxes. Taken together, this shift to alternative fuels is likely to cause oil’s final paradigm shift!
Another word of caution, Grantham appears unable to consider the power of supply side factors. Back in 2013, when US natural gas prices were around $4/mmbtu, he concluded that a manufacturing renaissance in the US would cause natural gas prices to triple.
The lesson: always watch out for forecasters that don’t consider how the very thing they are forecasting affects incentives.