Trailer Park Investor

Written By Christian DeHaemer

Posted April 28, 2011

The roof just blew off. Hail the size of beach balls is pounding the house, breaking off drywall. The rain is running in like the North Shore at Oahu, and there is an electric shock every time I touch the ‘shift’ key.  

A force five tornado just roared past and I live in freaken Baltimore. 

That’s not supposed to happen… This isn’t Oklahoma. There are no trailer parks around here.

But if the weather wasn’t enough to get me going, I get this email written by a Wall Street hotshot which says — and I quote: This time, it’s different.

What? Are you insane?

This time it’s different?

dow 30000

That’s the death knell for Wall Street. You’d be better to talk about a no-hitter, rat out the Godfather, or stand in front of the yellow line on the bus while it’s in motion than say “this time it’s different.”

You can’t say that. That’s what analysts claim at the top of markets…

The Dow is going to 38000, Enron has a new model, nanotech would change all manufacturing — all because this time it was different.

Remember this guy?

Certified Genius

But no, ignoring all previous evil omens, this genius over at GMO LLC — one Jeremy Grantham — had the cojones to say it. 

Mr. Grantham manages a measly $107 billion at his fund. Granted, I wouldn’t condescend to floss my teeth for that beggarly sum, but despite this, it turns out Jeremy has some ideas worth checking out.

In fact he made a chart which I promptly stole and reprinted here for your enjoyment:


This chart shows the top 33 commodities, from gold to pork bellies.

It says that over 102 years, commodity prices go up due to war demand or supply shocks. Prices go down in recessions.

But right now, dear reader, they are going up despite low inflation and the biggest global recession in 80 years…

Here is what Mr. Grantham says:

The history of pricing for commodities has been an incredibly helpful one for the economic progress of our species: in general, prices have declined steadily for all of the last century.

The average price falls by 1.2% a year after inflation adjustment to its low point in 2002. Just imagine what this 102-year decline of 1.2% compounded has done to our increased wealth and well-being. Despite digging deeper holes to mine lower grade ores, and despite using the best land first, and the best of everything else for that matter, the prices fell by an average of over 70% in real terms.

Yeah, yeah, blahblahblah, the price of stuff has been falling for a 102 years.

What’s the point?

You skip down a few paragraphs and here is where it gets interesting — and Grantham says, “It is here, recently, that our luck has begun to run out.”

Rut-row, Shaggy…

Just as we began to see at least the potential for peak oil and a rapid decline in the quality of some of our resources, we had the explosion of demand from China and India and the rest of the developing world. Here, the key differences from the past were, as mentioned, the sheer scale of China and India and the unprecedented growth rates of developing countries in total.

This acceleration of growth affected global demand quite suddenly. Prior to 1995, there was (remarkably, seen through today’s eyes) no difference in aggregate growth between the developing world and the developed world. And, for the last several years now, growth has been 3 to 1 in their favor!

The 102 years to 2002 saw almost each individual commodity — both metals and agricultural — hit all-time lows. But since 2002, we have the most remarkable price rise, in real terms, ever recorded, and this, I believe, will go down in the history books.

Until 20 years ago, there were no surprises at all in the sense that great unexpected events like World War I, World War II, and the double inflationary oil crises of 1974 and 1979 would cause prices to generally surge; and setbacks like the post-World War I depression and the Great Depression would cause prices to generally collapse.

Much as you might expect, except that it all took place around a downward trend. But in the 1990s, things started to act oddly. First, there was a remarkable decline for the 15 or so years to 2002.

And more to the point, what description do we put on the surge from 2002 until now? It is far bigger than the one caused by World War II, happily without World War III. My own suggestion would be “The Great Paradigm Shift.”

Paradigm shift is one of those trite yuppie phrases from the 90s, but it means this time it’s different

But that’s not all…

Our good friend Mr. Grantham, who is sticking his neck out like a giraffe on a treadmill, goes on to say:

I believe that we are in the midst of one of the giant inflection points in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution. The unprecedented broad price rise would seem to confirm this.


Malthusian Death Spiral

GIANT INFLECTION POINT! Did you read that?

Fund guys don’t talk like that; they talk about diversification and Lipor averages and historic Dow returns.

This makes as much sense as that tulip poplar sitting on my couch.

Commodities are up despite a massive recession, a low CPI, a dead housing market, and declining manufacturing output.

What prices do we hit when these trends reverse? Can it all be explained by Fed easing? Are we running out of stuff to pull out of the earth and farmland to put seeds in?

Did we cross some Malthusian line at seven billion people?

I don’t know. But I will keep buying oil, gold, and farmland just in case.

You can read Mr. Grantham’s full Q1 letter here.


Christian DeHaemer
Editor, Energy and Capital

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