On the investment front the equation remains the same: pushing stock prices higher are the twin forces of the Fed's policy and corporate buybacks. Trying to push prices down is an impressive array of everything else: disappointing productivity, growth, and profit margins together with all our domestic and international political uncertainties. And now Brexit! It is a testimonial to the strength of those two bullish forces that they can steady the US market near its high, regardless, apparently, of what is thrown at it.
I therefore remain, on the basis of those two remarkable pillars of support, for at least one more quarter, where I have been for the last two years; despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break, indeed cash reserves and other signs of bearishness are weirdly high.
In my opinion, the [US] economy still has some spare capacity to grow moderately for a while. All the great market declines of modern times – 1972, 2000, and 2007 – that went down at least 50 per cent were preceded by great optimism as well as high prices. We can have an ordinary bear market of 10 per cent or 20 per cent but a serious decline still seems unlikely in my opinion.
Now if we could just have a breakout rally to over 2300 on the S&P 500 and a bit of towel throwing by the bears, things could change. (2300 is our statistical definition of a bubble threshold.)
But for now I believe the best bet is still that the US market will hang in or better, at least through the election.
Wednesday, July 20, 2016
Monday, June 20, 2016
GMO downsizes reducing staffing levels
Boston-based Grantham has cut about 10% of its 650-person staff, according to Bloomberg. The layoffs include nine stock and bond analysts. The firm's assets have fallen about 20% in the past two years, to $99 billion, according to Morningstar.
In addition to the layoffs, several members of top management are leaving Jeremy Grantham's GMO. David Cowen, head of global equity, and Chris Fortson, head of fundamental research in global equity, will leave GMO at the end of the month.
In addition to the layoffs, several members of top management are leaving Jeremy Grantham's GMO. David Cowen, head of global equity, and Chris Fortson, head of fundamental research in global equity, will leave GMO at the end of the month.
Monday, May 16, 2016
Jeremy Grantham Letter - Q1 2016
The tone of the market commentators back in January, when I was writing my last quarterly letter, seemed much too pessimistic on global stock markets, particularly the U.S. market, and I said so.
This relative optimism was an unusual position for me and the snap-back in these markets has validated, to a modest degree, my thinking at the time. I still believe the following: 1) that we did not then, and do not today, have the necessary conditions to say that today’s world has a bubble in any of the most important asset classes;
2) that we are unlikely, given the beliefs and practices of the U.S. Fed, to end this cycle without a bubble in the U.S. equity market or, perish the thought, in a repeat of the U.S. housing bubble;
3) the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500, about 10% above current levels, and would normally require a substantially more bullish tone on the part of both individual and institutional investors;
4) it continues to seem unlikely to me that this current equity cycle will top out before the election and perhaps it will last considerably longer; and
5) the U.S. housing market, although well below 2006 highs, is nonetheless approaching a one and one-half-sigma level based on its previous history. Given the intensity of the pain we felt so recently, we might expect that such a bubble would be psychologically impossible, but the data in Exhibit 1 speaks for itself. This is a classic echo bubble – i.e., driven partly by the feeling that the substantially higher prices in 2006 (with its three-sigma bubble) somehow justify today’s merely one and one-half-sigma prices. Prices have been rising rapidly recently and at this rate will reach one and three-quarters-sigma this summer. Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices – much more dangerous than inflated stock prices in my opinion – might beat the U.S. equity market in the race to cause the next financial crisis.
In the meantime, however, we continue to have the typical equity overpricing that has characterized the great majority of time since the Greenspan regime introduced the policy of generally pushing down on short-term rates. At current prices it is very close to impossible for the mass of pension funds or other institutions to realize longer-term targets of 5% a year, let alone 7%. A 60% stock/40% bond portfolio would be lucky to deliver 3% even if we were to lock in current high P/Es and above-normal margins. Prudent managers will just have to grin and bear it. The worst argument is always that extra risk has to be taken because the need to deliver higher returns is desperate. The market does not care what your targets are! And, in any case, there is a very wobbly relationship between risk and return, as the 50-year underperformance of high-risk equities to lower-risk equities attests. (And this underperformance applies to a varied definition of risk: Table 1 shows the gap between the top and bottom 20% in the U.S. equity market for volatility, beta, and fundamental quality – stability of high return and low debt.) My point over the last two years has been to emphasize how long and painful the grinning and bearing can be, and I firmly believe that investors should be prepared for considerably more pain (of overpriced assets becoming yet more overpriced) without throwing in the towel 1999-style at the worst time possible time.
Oil
As with stock prices, I am encouraged by the rise in oil prices since my unusual bullishness of last quarter. My belief remains that a multi-year clearing price for oil would be the cost of finding a material amount of new oil. This appears to be about $65 a barrel today, and costs are drifting steadily higher as the cheapest old oil is pumped. My guess is that the price of oil will indeed be as high as $100 a barrel again within five years and, perversely, I feel encouraged by the growing host of longer-term pessimists. Much as I would love as an environmentalist to have oil for transportation almost disappear in 10 years, it simply isn’t going to happen. However, there will be dramatic technological improvements in non-oil based transportation well before 10 years is out, and after 10 years… well, the oil companies will wish they had taken Ted Levitt’s advice in 1960 in his then groundbreaking “Marketing Myopia” article and defined themselves as energy and chemical companies and not defended their narrower definition of “oil companies.”
New technologies for energy and transportation
The new discoveries and engineering insights in these fields keep coming. The Grantham Foundation’s attraction to venture capital, described last quarter, plays conveniently into this and we are investing 20% of our total capital in “mission-driven” projects, mainly in venture capital. One investment is aiming at doubling the power-to-weight ratio of lithium ion batteries and another at a 200-second charge time for some types of lithium ion. Vehicle development we see includes ultra-light and ultra-streamlined electric-powered people movers, suitable for commuting and shopping in developed countries, and as a first cheap yet state-of-the-art vehicle everywhere, very fast and with a long range. (Better make hay soon, Tesla!) But, you never know. And venture investing is particularly full of disappointments. So, just in case, I am one of the 400,000 preorders for the $35,000 Tesla Model 3, likely to be the cheapest electric car per mile of range at least for a while. The mission component on some of our investments is so on target that even if they fail they represent attempts that will have deserved some of our non-profit making grants. As it is, we hope that at least one of the several game-changing projects driving these CO2-reducing technologies forward will simultaneously make our foundation a fortune!
Global warming accelerates: “so much for the pause”
Because 1998 was an outlier warm year due to a large El Niño effect in the Pacific, many subsequent years, including 2013, had lower global temperatures and led some to believe, or claim to believe, that global warming had ceased. But it turned out to be, after all, just another series like that of the S&P 500 in real terms with a little steady signal often obscured by a very great deal of noise. As it turned out, the below-trend 2013 was followed immediately by a modest new record in 2014. And then came the real test as a new powerful El Niño started to build up in 2015. Ten of the twelve months of 2015 set new all-time records, an unheard of event, and 2015 in total became a monster, not only the warmest year in recent millennia but by a record increment. Yet, the early months of 2016, still under the influence of what had become one of the most powerful El Niño effects, showed temperature increases that were even more remarkable.
This current El Niño has accelerated underlying warming caused by increasing CO2 – as all El Niños do – but this time the combined effect has been far ahead of scientific forecasts that in general remain dangerously conservative. January 2016 was the hottest January ever on the NASA series and by a new record amount. It was a full 0.22 degrees Celsius above the previous high for January. Then February became the new shocker, washing away that record by being 0.33 degrees Celsius above the previous February record. Most recently, March was once again the warmest ever March, although not quite by a record amount (see Exhibit 2). The exhibit makes the scary point clear: global temperature is not just increasing, but accelerating. The average increase from 1900 to 1958 was about 0.007 degrees Celsius per year. From 1958 to 2015 it doubled to 0.015 degrees Celsius per year, and from February 1998 to February 2016 it rose by an average of 0.025 degrees Celsius per year! Time is truly running out.
Sadly, it has become obvious that the recent talk in Paris of limiting warming to 1.5 degrees Celsius is toast, as it were. And the dreaded 2 degrees Celsius is highly unlikely to be the limit of our warming. If you line up the previous El Niño outlier of 1998 with this March 2016 El Niño (as we might do in lining up bull market highs) it gives an idea of when 2 degrees Celsius might first be broached in a future El Niño effect: just 17 years! Meanwhile, the most obvious effect to watch for in destabilizing weather patterns is an increase in record breaking, intense rainfall, such as occurred last month in Houston. Three inches an hour1 fell and kept falling hour after hour, delivering four months’ average rain in under 24 hours (unprecedented without a major hurricane), flooding major parts of the city under several feet of water.
Let me just make the point here that those who still think climate problems are off topic and not a major economic and financial issue are dead wrong. Dealing with the increasing damage from climate extremes and, just as important, the growing economic potential in activities to overcome it will increasingly dominate entrepreneurial efforts in future decades. As investors we should try to be prepared for this.
This relative optimism was an unusual position for me and the snap-back in these markets has validated, to a modest degree, my thinking at the time. I still believe the following: 1) that we did not then, and do not today, have the necessary conditions to say that today’s world has a bubble in any of the most important asset classes;
2) that we are unlikely, given the beliefs and practices of the U.S. Fed, to end this cycle without a bubble in the U.S. equity market or, perish the thought, in a repeat of the U.S. housing bubble;
3) the threshold for a bubble level for the U.S. market is about 2300 on the S&P 500, about 10% above current levels, and would normally require a substantially more bullish tone on the part of both individual and institutional investors;
4) it continues to seem unlikely to me that this current equity cycle will top out before the election and perhaps it will last considerably longer; and
5) the U.S. housing market, although well below 2006 highs, is nonetheless approaching a one and one-half-sigma level based on its previous history. Given the intensity of the pain we felt so recently, we might expect that such a bubble would be psychologically impossible, but the data in Exhibit 1 speaks for itself. This is a classic echo bubble – i.e., driven partly by the feeling that the substantially higher prices in 2006 (with its three-sigma bubble) somehow justify today’s merely one and one-half-sigma prices. Prices have been rising rapidly recently and at this rate will reach one and three-quarters-sigma this summer. Thus, unlikely as it may sound, in 12 to 24 months U.S. house prices – much more dangerous than inflated stock prices in my opinion – might beat the U.S. equity market in the race to cause the next financial crisis.
In the meantime, however, we continue to have the typical equity overpricing that has characterized the great majority of time since the Greenspan regime introduced the policy of generally pushing down on short-term rates. At current prices it is very close to impossible for the mass of pension funds or other institutions to realize longer-term targets of 5% a year, let alone 7%. A 60% stock/40% bond portfolio would be lucky to deliver 3% even if we were to lock in current high P/Es and above-normal margins. Prudent managers will just have to grin and bear it. The worst argument is always that extra risk has to be taken because the need to deliver higher returns is desperate. The market does not care what your targets are! And, in any case, there is a very wobbly relationship between risk and return, as the 50-year underperformance of high-risk equities to lower-risk equities attests. (And this underperformance applies to a varied definition of risk: Table 1 shows the gap between the top and bottom 20% in the U.S. equity market for volatility, beta, and fundamental quality – stability of high return and low debt.) My point over the last two years has been to emphasize how long and painful the grinning and bearing can be, and I firmly believe that investors should be prepared for considerably more pain (of overpriced assets becoming yet more overpriced) without throwing in the towel 1999-style at the worst time possible time.
Oil
As with stock prices, I am encouraged by the rise in oil prices since my unusual bullishness of last quarter. My belief remains that a multi-year clearing price for oil would be the cost of finding a material amount of new oil. This appears to be about $65 a barrel today, and costs are drifting steadily higher as the cheapest old oil is pumped. My guess is that the price of oil will indeed be as high as $100 a barrel again within five years and, perversely, I feel encouraged by the growing host of longer-term pessimists. Much as I would love as an environmentalist to have oil for transportation almost disappear in 10 years, it simply isn’t going to happen. However, there will be dramatic technological improvements in non-oil based transportation well before 10 years is out, and after 10 years… well, the oil companies will wish they had taken Ted Levitt’s advice in 1960 in his then groundbreaking “Marketing Myopia” article and defined themselves as energy and chemical companies and not defended their narrower definition of “oil companies.”
New technologies for energy and transportation
The new discoveries and engineering insights in these fields keep coming. The Grantham Foundation’s attraction to venture capital, described last quarter, plays conveniently into this and we are investing 20% of our total capital in “mission-driven” projects, mainly in venture capital. One investment is aiming at doubling the power-to-weight ratio of lithium ion batteries and another at a 200-second charge time for some types of lithium ion. Vehicle development we see includes ultra-light and ultra-streamlined electric-powered people movers, suitable for commuting and shopping in developed countries, and as a first cheap yet state-of-the-art vehicle everywhere, very fast and with a long range. (Better make hay soon, Tesla!) But, you never know. And venture investing is particularly full of disappointments. So, just in case, I am one of the 400,000 preorders for the $35,000 Tesla Model 3, likely to be the cheapest electric car per mile of range at least for a while. The mission component on some of our investments is so on target that even if they fail they represent attempts that will have deserved some of our non-profit making grants. As it is, we hope that at least one of the several game-changing projects driving these CO2-reducing technologies forward will simultaneously make our foundation a fortune!
Global warming accelerates: “so much for the pause”
Because 1998 was an outlier warm year due to a large El Niño effect in the Pacific, many subsequent years, including 2013, had lower global temperatures and led some to believe, or claim to believe, that global warming had ceased. But it turned out to be, after all, just another series like that of the S&P 500 in real terms with a little steady signal often obscured by a very great deal of noise. As it turned out, the below-trend 2013 was followed immediately by a modest new record in 2014. And then came the real test as a new powerful El Niño started to build up in 2015. Ten of the twelve months of 2015 set new all-time records, an unheard of event, and 2015 in total became a monster, not only the warmest year in recent millennia but by a record increment. Yet, the early months of 2016, still under the influence of what had become one of the most powerful El Niño effects, showed temperature increases that were even more remarkable.
This current El Niño has accelerated underlying warming caused by increasing CO2 – as all El Niños do – but this time the combined effect has been far ahead of scientific forecasts that in general remain dangerously conservative. January 2016 was the hottest January ever on the NASA series and by a new record amount. It was a full 0.22 degrees Celsius above the previous high for January. Then February became the new shocker, washing away that record by being 0.33 degrees Celsius above the previous February record. Most recently, March was once again the warmest ever March, although not quite by a record amount (see Exhibit 2). The exhibit makes the scary point clear: global temperature is not just increasing, but accelerating. The average increase from 1900 to 1958 was about 0.007 degrees Celsius per year. From 1958 to 2015 it doubled to 0.015 degrees Celsius per year, and from February 1998 to February 2016 it rose by an average of 0.025 degrees Celsius per year! Time is truly running out.
Sadly, it has become obvious that the recent talk in Paris of limiting warming to 1.5 degrees Celsius is toast, as it were. And the dreaded 2 degrees Celsius is highly unlikely to be the limit of our warming. If you line up the previous El Niño outlier of 1998 with this March 2016 El Niño (as we might do in lining up bull market highs) it gives an idea of when 2 degrees Celsius might first be broached in a future El Niño effect: just 17 years! Meanwhile, the most obvious effect to watch for in destabilizing weather patterns is an increase in record breaking, intense rainfall, such as occurred last month in Houston. Three inches an hour1 fell and kept falling hour after hour, delivering four months’ average rain in under 24 hours (unprecedented without a major hurricane), flooding major parts of the city under several feet of water.
Let me just make the point here that those who still think climate problems are off topic and not a major economic and financial issue are dead wrong. Dealing with the increasing damage from climate extremes and, just as important, the growing economic potential in activities to overcome it will increasingly dominate entrepreneurial efforts in future decades. As investors we should try to be prepared for this.
Monday, May 2, 2016
Jeremy Grantam focuses on Venture Capital
Venture capital has always been a high-risk, high-reward proposition. Its current surge is finding an unlikely proponent in legendary investor Jeremy Grantham.
The billionaire has a worthy cause in mind: his Grantham Foundation for the Protection of the Environment. My foundation is aspiring to an extremely large 40 percent allocation to venture capital, because that is where I see the greatest potential, and we certainly need all the money we can
make trying to protect the environment, Grantham says in his office at the Boston headquarters.
The U.K. native launched his $617 million foundation in 1997 to concentrate on Climate Change and Agriculture. In February it announced its involvement in a new $430 million fund with Boulder,
Colorado based Vision Ridge Partners and Capricorn Investment Group of New York that will focus on clean-energy companies and other sustainable assets.
Venture capital is uniquely suited for mission-driven, or impact, investing because investors can give early support to companies that share their values and help to bring those businesses and values to market, says the slender, sharply dressed Grantham.
The billionaire has a worthy cause in mind: his Grantham Foundation for the Protection of the Environment. My foundation is aspiring to an extremely large 40 percent allocation to venture capital, because that is where I see the greatest potential, and we certainly need all the money we can
make trying to protect the environment, Grantham says in his office at the Boston headquarters.
The U.K. native launched his $617 million foundation in 1997 to concentrate on Climate Change and Agriculture. In February it announced its involvement in a new $430 million fund with Boulder,
Colorado based Vision Ridge Partners and Capricorn Investment Group of New York that will focus on clean-energy companies and other sustainable assets.
Venture capital is uniquely suited for mission-driven, or impact, investing because investors can give early support to companies that share their values and help to bring those businesses and values to market, says the slender, sharply dressed Grantham.
Wednesday, April 27, 2016
US markets can rally higher before it becomes a full bubble
Looking to 2016, we can agree that uncertainties are above average. I must admit to feeling nervous for this year’s equity outlook in the U.S. But I am not entirely convinced. Sure, we can have a regular bear market. That is always the case. But the BIG ONE? I doubt it..
But I think the global economy and the U.S. in particular will do better than the bears believe it will because they appear to underestimate the slow-burning but huge positive of much-reduced resource prices in the U.S. and the availability of capacity both in labor and machinery.
The ability of the market to hurt eager bears some more is probably not exhausted. I still believe that, with the help of the Fed and its allies, the U.S. market will rally once again to become a fully-fledged bubble before it breaks. That is, after all, the logical outcome of a Fed policy that stimulates and overestimates some more until, finally, some strut in the complicated economic structure snaps. Good luck in 2016.
Tuesday, January 19, 2016
Earth has limited resources says Jeremy Grantham
It takes little experience in the investment business to realize that investors prefer good news. As a bear in the bull market of 1999, I was banned from an institution’s building as being “dangerously persuasive and totally wrong!” The investment industry also has a great incentive to encourage this optimistic bias, for little money would be made if the market ticked slowly upwards. Five steps forward and two back are far more profitable.
Similarly, we environmentalists were shocked to realize how profoundly the general public preferred to believe good news on our climate, even if it meant disregarding the National Academies of the world. The fossil fuel industry, not surprisingly, encouraged this positive attitude. They had billions of dollars to protect. If the realistic information were to be widely believed, most of their assets would be stranded. When dealing with realistic limits to growth it is also obvious how reluctant everyone is to accept the natural mathematical limits: There simply cannot be compound growth in a finite world. A modest 1% growth compounded for the 3,000 years of Ancient Egypt’s population would have multiplied its economic output by nine trillion times!
Yet, the improbability of feeding 10 billion or so global inhabitants in 50 years is shrugged off with ease. And the entire economic and political system appears eager to encourage optimism on resources for it is completely wedded to the virtues of quantitative growth forever. Hard realities in these three fields are inconvenient for vested interests and because the day of reckoning can always be seen as “later,” politicians can always find a way to postpone necessary actions, as can we all: “Because markets are efficient, these high prices must be reflecting the remarkable potential of the Internet”; “the U.S. housing market largely reflects a strong U.S. economy”; “the climate has always changed”; “how could mere mortals change something as immense as the weather”; “we have nearly infinite resources, it is only a question of price”; “the infinite capacity of the human brain will always solve our problems.”
Having realized the seriousness of this bias over the last few decades, I have noticed how hard it is to effectively pass on a warning for the same reason: No one wants to hear this bad news. So a while ago I came up with a list of propositions that are widely accepted by an educated business audience. They are widely accepted but totally wrong. It is my attempt to bring home how extreme is our preference for good news over accurate news. When you have run through this list you may be a little more aware of how dangerous our wishful thinking can be in investing and in the much more important fields of resource (especially food) limitations and the potentially life-threatening risks of climate damage. Wishful thinking and denial of unpleasant facts are simply not survival characteristics.
Let me start with one of my favorites. For the 50 years I have been in America, Business Week and The Wall Street Journal have been telling us how incompetent at business the French are and how persistently we have been kicking their bottoms.
If only they could get over their state socialism and their acute Eurosclerosis. And as far as I can tell we have generally accepted this thesis. Yet France’s median hourly wage is up 180% in 45 years! Japan is up 140% and even the often sluggish Brits are up 60%. But the killer is the U.S. median wage. Dead flat for 45 years! These are the uncontestable facts. So, all I can say is that it is just as well the French have not been kicking our bottoms. But how is it that we can believe so firmly in something that just ain’t so, and by such a convincing amount?
While other developed countries continued to increase their participation rate, that of the U.S. declined from first to last in fairly rapid order. What a far cry this reality is from the view generally accepted by our business world.
But if you really want to be worried about our comparative health you should take a look at the death rate for U.S. whites between the ages of 45 and 54, which happily these days is when very few people drop off. Since 1990 there has been a quite remarkable decline for other developed countries, about a one-third reduction, including for U.S. Hispanics. But for U.S. whites there is a slight increase! Further analysis for that group reveals that the general increase is caused by quite severe increases in deaths related to alcoholism, drug use, and suicides. Had the rate for U.S. whites declined in line with the others there would have been about 50,000 fewer deaths a year! (For scale, this is nearly twice the yearly number of traffic deaths in the U.S.)
You have to be careful these days when you suggest connections. For example, people have been told off for proposing that dramatic increases in population can help destabilize societies. Syria had two and a half million people when I was born and has 29 million people now. You can guess how much worse the situation is because of this, but you should not talk about it. Similarly, Prince Charles has been extensively criticized by professors in The Guardian for suggesting that a several-year drought in Syria exacerbated social tensions by ruining many farmers. As if! (You cannot prove precisely what effect climate damage had, but you certainly cannot prove that it did not have a large effect. It certainly had a contributory effect.)
Even as more people can see the problems with climate damage, the richer countries can convince themselves that the damage is not that serious. Poorer countries, meanwhile, do not have that luxury and about 20% more are actively concerned (about 80% versus 60%) than are the richer countries.
And this brings me to the last and my absolute favorite of these false propositions, which I label, “I wish the U.S. government wouldn’t give so much to foreign countries (especially when times are bad)!” Now, I do not think I have met a single American who does not believe that the U.S. government is generous in its foreign aid. Yet, it just ain’t so, and by a remarkable degree.
Conclusion
We in the U.S. have a broad and heavy bias away from unpleasant data. We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff “that just ain’t so.”
We are dealing today with important issues, one so important that it may affect the long-term viability of our global society and perhaps our species. It may well be necessary to our survival that we become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news.
I recently found myself looking at a cover story for The Economist (Nov 7, 2015) that seemed to be a wonderfully convenient example of my general thesis: the efforts that are made by vested interests to exploit our reluctance to face inconvenient facts. The Paris climate talks have begun and a large number of reasonable speeches and articles are putting their best foot forward in support of sensible progress. But The Economist’s special coverage on climate is not one of them. In fact, I urge you to realize that this normally reasonable newspaper, inadvertently I’m sure, is regrettably helpful in this report to the fossil fuel industry: Ignore carbon taxes, they suggest, and follow Bjorn Lomborg and his Copenhagen Consensus Center, which is discussed so favorably here, into scores of deworming programs before you waste money on combatting climate change.
When finally you spend any money at all, spend it on completely new technologies and not on solar and wind, which are by implication considered failed approaches despite the remarkably rapid decline in prices in recent years. But if we wait for entirely new technologies, climate damage may have by then gone beyond a tipping point. Indeed, a great majority of climate scientists would say that there is some chance of that and what chance of real disasters should we be willing to take? Any successful attempt to limit climate damage must at least include a price on carbon. Any suggested program that does not is either disingenuous or an outright con. They may argue that we can wait and research until we have a more perfect solution, but I believe that “wait” is their main purpose, not “solutions.”
Similarly, we environmentalists were shocked to realize how profoundly the general public preferred to believe good news on our climate, even if it meant disregarding the National Academies of the world. The fossil fuel industry, not surprisingly, encouraged this positive attitude. They had billions of dollars to protect. If the realistic information were to be widely believed, most of their assets would be stranded. When dealing with realistic limits to growth it is also obvious how reluctant everyone is to accept the natural mathematical limits: There simply cannot be compound growth in a finite world. A modest 1% growth compounded for the 3,000 years of Ancient Egypt’s population would have multiplied its economic output by nine trillion times!
Yet, the improbability of feeding 10 billion or so global inhabitants in 50 years is shrugged off with ease. And the entire economic and political system appears eager to encourage optimism on resources for it is completely wedded to the virtues of quantitative growth forever. Hard realities in these three fields are inconvenient for vested interests and because the day of reckoning can always be seen as “later,” politicians can always find a way to postpone necessary actions, as can we all: “Because markets are efficient, these high prices must be reflecting the remarkable potential of the Internet”; “the U.S. housing market largely reflects a strong U.S. economy”; “the climate has always changed”; “how could mere mortals change something as immense as the weather”; “we have nearly infinite resources, it is only a question of price”; “the infinite capacity of the human brain will always solve our problems.”
Having realized the seriousness of this bias over the last few decades, I have noticed how hard it is to effectively pass on a warning for the same reason: No one wants to hear this bad news. So a while ago I came up with a list of propositions that are widely accepted by an educated business audience. They are widely accepted but totally wrong. It is my attempt to bring home how extreme is our preference for good news over accurate news. When you have run through this list you may be a little more aware of how dangerous our wishful thinking can be in investing and in the much more important fields of resource (especially food) limitations and the potentially life-threatening risks of climate damage. Wishful thinking and denial of unpleasant facts are simply not survival characteristics.
Let me start with one of my favorites. For the 50 years I have been in America, Business Week and The Wall Street Journal have been telling us how incompetent at business the French are and how persistently we have been kicking their bottoms.
If only they could get over their state socialism and their acute Eurosclerosis. And as far as I can tell we have generally accepted this thesis. Yet France’s median hourly wage is up 180% in 45 years! Japan is up 140% and even the often sluggish Brits are up 60%. But the killer is the U.S. median wage. Dead flat for 45 years! These are the uncontestable facts. So, all I can say is that it is just as well the French have not been kicking our bottoms. But how is it that we can believe so firmly in something that just ain’t so, and by such a convincing amount?
While other developed countries continued to increase their participation rate, that of the U.S. declined from first to last in fairly rapid order. What a far cry this reality is from the view generally accepted by our business world.
But if you really want to be worried about our comparative health you should take a look at the death rate for U.S. whites between the ages of 45 and 54, which happily these days is when very few people drop off. Since 1990 there has been a quite remarkable decline for other developed countries, about a one-third reduction, including for U.S. Hispanics. But for U.S. whites there is a slight increase! Further analysis for that group reveals that the general increase is caused by quite severe increases in deaths related to alcoholism, drug use, and suicides. Had the rate for U.S. whites declined in line with the others there would have been about 50,000 fewer deaths a year! (For scale, this is nearly twice the yearly number of traffic deaths in the U.S.)
You have to be careful these days when you suggest connections. For example, people have been told off for proposing that dramatic increases in population can help destabilize societies. Syria had two and a half million people when I was born and has 29 million people now. You can guess how much worse the situation is because of this, but you should not talk about it. Similarly, Prince Charles has been extensively criticized by professors in The Guardian for suggesting that a several-year drought in Syria exacerbated social tensions by ruining many farmers. As if! (You cannot prove precisely what effect climate damage had, but you certainly cannot prove that it did not have a large effect. It certainly had a contributory effect.)
Even as more people can see the problems with climate damage, the richer countries can convince themselves that the damage is not that serious. Poorer countries, meanwhile, do not have that luxury and about 20% more are actively concerned (about 80% versus 60%) than are the richer countries.
And this brings me to the last and my absolute favorite of these false propositions, which I label, “I wish the U.S. government wouldn’t give so much to foreign countries (especially when times are bad)!” Now, I do not think I have met a single American who does not believe that the U.S. government is generous in its foreign aid. Yet, it just ain’t so, and by a remarkable degree.
Conclusion
We in the U.S. have a broad and heavy bias away from unpleasant data. We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff “that just ain’t so.”
We are dealing today with important issues, one so important that it may affect the long-term viability of our global society and perhaps our species. It may well be necessary to our survival that we become more realistic, more willing to process the unpleasant, and, above all, less easily manipulated through our need for good news.
I recently found myself looking at a cover story for The Economist (Nov 7, 2015) that seemed to be a wonderfully convenient example of my general thesis: the efforts that are made by vested interests to exploit our reluctance to face inconvenient facts. The Paris climate talks have begun and a large number of reasonable speeches and articles are putting their best foot forward in support of sensible progress. But The Economist’s special coverage on climate is not one of them. In fact, I urge you to realize that this normally reasonable newspaper, inadvertently I’m sure, is regrettably helpful in this report to the fossil fuel industry: Ignore carbon taxes, they suggest, and follow Bjorn Lomborg and his Copenhagen Consensus Center, which is discussed so favorably here, into scores of deworming programs before you waste money on combatting climate change.
When finally you spend any money at all, spend it on completely new technologies and not on solar and wind, which are by implication considered failed approaches despite the remarkably rapid decline in prices in recent years. But if we wait for entirely new technologies, climate damage may have by then gone beyond a tipping point. Indeed, a great majority of climate scientists would say that there is some chance of that and what chance of real disasters should we be willing to take? Any successful attempt to limit climate damage must at least include a price on carbon. Any suggested program that does not is either disingenuous or an outright con. They may argue that we can wait and research until we have a more perfect solution, but I believe that “wait” is their main purpose, not “solutions.”
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