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Market commentary May 2011

By May 12, 2011No Comments

SUMMARY The end of humanity is nigh, but not before a commodity price crash, followed by the greatest investment opportunity ever! At least that’s the gist of a recent piece of research produced by a company called GMO.

Space and time usually prevent us from drawing your attention to some of the outstanding research which comes across our desks. But as the markets continue their “cartoon moment” (see last time), it is useful to reflect on one of the big themes of our time, the commodity cycle – which is basically all about the extraordinary demand for resources, from China to date, and from India and elsewhere as we move forward.

Analyst Jeremy Grantham has been a fan of commodities for years, due to growing demand from China in particular, but also because of growing investor demand driven by low interest rates and greater accessibility (through ETFs).

Now Jeremy counsels caution. In a sweeping commentary ( for the original piece) he warns that commodity prices are on the verge of a crash (this was just before silver fell more than 30% in the last fortnight!). But it’s not all bad news he says. This will in turn present a very rare opportunity to buy before a huge boom. (Though, he goes on, there is the risk of the extinction of mankind beyond that point because we have sucked all the resources out of our planet at an unsustainable rate. But let’s not get too depressed just yet!)

He tells us that humanity has two inherent problems: we can’t see beyond the end of our noses: and we are appalling at maths, in particular we struggle with the power of compound growth.

For example, he was talking to a group of geeks, mostly PhDs in maths. He wanted to point out how ludicrous was our obsession with growth from year to year. Imagine the Ancient Egyptians whose civilization lasted for over 3000 years.

Now assume that each Egyptian started off with a modest cubic metre of physical possessions (say that would fill a washing machine). He asked how much physical wealth would have been accumulated by those Egyptians over the next 3,000 years at 4.5% compound growth (which happens to have been the global growth rate over the last couple of years).

They struggled. “Miles around the planet”, guessed one, “from here to the moon” another. No one came close. The actual number is so vast (1057) that it could not be squeezed into a billion of our solar systems (so says Jeremy, we haven’t checked the maths).

This highlights how ludicrous is our obsession with growth. And ultimately how we will destroy our planet. Something clearly must change. Does it not make you wonder if the Japanese “lost decade”, of limited or no economic growth, is not something to which we should aspire, permanently?

If you wish to dig around on the maths a bit more (even if maths aren’t usually your thing) you must see this on YouTube.

Dennehy Wealth