In 2011, GMO’s Jeremy Grantham made a pretty bold call to buy commodities:
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.
The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
Maybe Grantham will still be right from a resources perspective, but from an investment perspective this one won’t go down in history as one of his better calls. See the price of oil since August of 2011, just after Grantham’s research note came out:
Here’s natural gas:
Now here are the returns on each of these commodities since Grantham’s dire proclamations:
If you look at individual stock names the results get even worse. Freeport-McMoRan (FCX) is down -91%. Potash of Saskatchewan (POT) is down -71%.
This is not an indictment on Grantham or an investor’s ability to forecast the future. The guy has been investing at a high level since the early 1970s and has an amazing long-term track record. His firm manages over $100 billion. He’s legit. But even the legends get these big calls wrong on occasion.
I remember reading this piece at the time and thinking much of what he was saying seemed to make for a compelling narrative. He was much more pessimistic about the future than I am, but many investors echoed his sentiments following the release of that outlook. There are plenty of commodities investors who have been burned in this cycle looking for a bottom. People were extremely worried about inflation because of the Fed’s “money printing” in 2011. You can probably count on one hand the number of people on this planet who were predicting $30/barrel oil in early 2016.
Getting these types of bold macro calls correct is insanely difficult, especially when you’re looking for a genuine regime change. Grantham has something like 40 years in this business. He’s lived through a number of different cycles and economic environments. I’m sure he himself and his firm have access to some of the top minds in the field. And he still couldn’t have been more wrong about this call.
It’s not only supply and demand that you have to worry about, but technological advances are nearly impossible to predict more than a few years out into the future. Preferences change. Demographics and economic growth rates have to be factored in. Plus, we are now dealing with more speculators than ever in the commodities futures markets. Funds are now employing satellites to track crops and livestock. They’re sending people to mines all around the world to check supplies of different precious metals and energy sources. These people still have a hard time making investment decisions based on this analysis.
Fundamental analysis is very difficult in the stock and bond markets. In commodities it’s damn near impossible.
Reminder: Markets are hard, even for the best in the profession.
Are Commodities For Trading or Investing?