Grantham on a More Sustainable and Balanced World and a Health Tip!

From: Aditya Rana
Date: Sat, Nov 24, 2012 at 2:40 PM
Subject: Grantham on a More Sustainable and Balanced World and a Health Tip!


As I have noted in previous newsletters, Jeremy Grantham’s quarterlies are a must read – not just for students of financial markets – but for the broader public as well, given that they provide unique insights into long-term economic, political and social trends which would have a deep impact on various aspects of our lives going forward. His latest quarterly is a masterpiece and covers areas like declining manufacturing capacity, resource scarcity, environmental costs, adverse trends in demographics, the trade-off between capital and labour – all in the context of an era of permanently low economic growth. To summarise:

-U.S. GDP growth has averaged 3.4% over the last hundred years, but now faces a declining growth trend of about 1.4% , and even lower at 0.9% if adjusted for some factors which have artificially boosted the growth rate in the past.

-An important factor behind this has been the decline in population growth from over 1.5% per year in the 1970s to less than 0.5% for the foreseeable future, with the man-hours worked growth rate declining even further to 0.2% annually. They have caused GDP growth to drop by 1% from the average over the last 30 years, a factor not fully appreciated by investors and businesses.

-Productivity growth rates, which rose slowly over centuries to a peak of 2.5% in the 1950s, have been In a long-term declining trend and are expected to fall to 1.3% by 2025.

-While manufacturing productivity is high, its share in the economy is declining steadily from 24% in 1900, to 15% in 1990 and reaching 5% by 2040, thereby limiting its impact on growth and productivity. In contrast, growth in service productivity is currently low (at 1.2%) and declining.

-Four vital factors are negatively influencing both near-term and long-term growth prospects: reduced capital spending, a maturing economy with a diminishing manufacturing component, increasing resource constraints and environment costs.

-Rather than debt and monetary factors, the quality and quantity of capital and people are key in determining long-term growth. The level of capital investment spending in the U.S. is abnormally low (3.5% of GDP) and trending down , partly due to the “Bonus Culture” which has forced companies to focus on short-term profits rather than capital spending to boost long-term growth.

-A maturing economy, with a declining share of manufacturing in employment (currently at 8%) but high productivity due to a deepening of technology and capital, portends a scenario where manufacturing employment dwindles to almost zero and workers are all engaged in the less productive service sector leading to (hard to measure) qualitative growth but zero quantitative growth.

-The shift from a world of declining resource prices to a world of rising prices will lower the growth rate indefinitely and the impact will be felt more on emerging markets than the developed world.

-The share of resource costs in the U.S. economy has risen from a historical low of 3% of GDP in 2000 to 7% today (a remarkable more than doubling within a decade), reducing the growth of the resource part of the economy by 0.4% per annum.

– Resource costs have been increasing by 7% a year since 2000 primarily due to an increase in costs, after declining by 1.2% a year over the previous 100 years. If this is maintained in a world growing at 4% and the developed world at under 1.5%, the squeeze on growth will be significant. If they rise by 9% it will take 11 years for growth to start declining, and if they increase by 5% it will take 31 years. While technological breakthroughs might lengthen this time-frame further , it would be dangerous to count on it.

-As this almost certain trend of commodity price increases continues (after a possible 20% correction in the near-term due to slowing growth in China and supply increases), commodity company profits and their stocks will continue to outperform as they have since 2002, but the squeeze on the rest of the economy will continue.

-Lateral drilling and fracking will be helpful to growth over the next few years, but the maximum impact from the first stage of drilling is already past leading to the secondary impact from cheaper fuel which is likely to peak at 0.5% per annum within five years.

-Climate damage, reflected in increasing food prices and flood damage, is going to increase. Hopefully, this will not be severe before 2030 but is very likely to accelerate for the following twenty years.

-The base case for U.S. real growth is 0.9% until 2030, and 0.4% a year from 2030 until 2050. This is the normal “muddling through” scenario.

–Developing countries will (over the next 50 years) experience a decline in population growth towards zero together with declining hours worked per person and an aging population – led by China and most other countries (with the exception of India and some other countries which will experience a rising working age population over most of the next 50 years). They will also be impacted more by the rising resource and environmental costs, as their resource intensity and pollution damage is higher.

-GDP measures need to be improved to capture output of real usefulness or utility. It largely measures labour costs in a year which is very different from the sum of goods and beneficial services and it motivates us to grow regardless of the costs. For example, spending $150-200 a barrel in offshore Brazil in the future to deliver the same barrel of oil produced by the Saudis at $10 per barrel will result, perversely, in a huge increase in Brazilian GDP.

-Accurate measurements of growth must include the full costs of running down our natural assets , allowing for sustained productive capacity which the current measures clearly do not. If they had done so, growth in the developed world may have been negative over the last 20 years.

Fascinating stuff – as I have mentioned in previous newsletters, it is extremely important to incorporate long-term trends in the financial, economic and social spheres into your investment (and life!) framework – and getting lost in the “weeds” would expose you the adverse impacts of important regime changes. The outlook for the foreseeable future is clear – subdued growth, rising resource costs, increasing environment costs – leading to world where we have zero quantitative growth (in real goods) and indefinite qualitative growth ( in services), which is actually a good outcome as it is a more sustainable and balanced existence.

While emerging markets will be adversely impacted by rising resource and environment costs, their significantly lower cost base, positive urbanization trends and relatively better demographic outlook would ensure their economic and stock market outperformance. Increasing allocation to resources and resource stocks would also be critical in constructing a “all weather” portfolio.

I ran out of time to write the final conclusions of “The China Study” so I present below an interest article which discusses evidence that eating more fruits and vegetables could also lead to better mental health (in addition to the proven benefits on physical health!):

Are fruit and vegetables good for your mental health as well as your physical health?

Sarah Stewart-Brown, 11 November 2012, Professor of Public Health at Warwick Medical School, University of Warwick

Eating fruit and vegetables could be good for your mental health. This column explores the evidence, arguing that better surveys need to be carried out if we are to accurately establish causality. If we can understand how mental health is linked to diet, the benefits to the public – and those who decide public policy – could be huge.

Public health policy has an enormous impact on national wellbeing (Delaney, Smith and McGovern 2011). A study recently published in Social Indicators Research (Blanchflower, Oswald and Stewart-Brown 2012) investigated the relationship between fruit and vegetable consumption and mental health. The study drew upon three robust, representative, cross-sectional studies of random samples of adults in three UK countries; England, Scotland, and Wales. Each of these surveys gathered self-reported intake data, measured in portions of fruit and vegetables of up to eight or more a day. Most surveys stop at the recommended five or more. The study also gathered data on seven different measures of mental health, from mental wellbeing (WEMWBS) through mental illness (GHQ-12), life satisfaction, happiness, nervousness and downheartedness.

Together these surveys captured information from more than 80,000 people, taking account of a wide range of other potential explanatory factors such as age, sex, ethnic group, socioeconomic and educational circumstances; and other lifestyle factors, such as smoking. They show a remarkably monotonic dose-response relationship between mental health and the number of portions of fruit and vegetables consumed. That is, the more fruit and vegetables consumed, the greater the mental wellbeing. In models based on indicators of positive mental health (WEMWBS, Life Satisfaction and Happiness) the corresponding coefficients continued to increase by up to seven or more portions of fruit and vegetables. In models based on mental health problems (GHQ-12, nervousness, feeling downhearted) they increased by up to five or more.

Establishing causality?

A strong and consistent dose-response relationship, as shown in these studies, acts as evidence that fruit and vegetable consumption is influencing mental health. Yet, the possibility remains that we could just be documenting a simple correlation; people with better mental health tend to look after themselves – by eating more fruit and vegetables – than those worse mental health.

Traditionally, public health researchers strengthen evidence for causality by analysing cohort studies. Cohort studies allow us to see whether the putative cause (fruit and vegetable consumption) precedes the putative effect (mental health). This approach gets round what is known as ‘recall bias’ in which individuals who have a problem, such as depression, reflect on possible causes and may therefore be more accurate reporters of their dietary intake. Cohort studies depend on the right data being gathered and, until recently, few of these studies have collected good data on diet. Even fewer have included measures of mental wellbeing, as opposed to mental illness. With cross-sectional data as strong as this, in an area of great relevance to public health policy, longitudinal or cohort studies will soon be carried out. Yet, even these may not be definitive.

How do fruit and vegetables influence mental health?

The main mechanism through which fruit and vegetable consumption is likely to influence mental health is through the absorption of water-soluble minerals such as potassium (Torres, Nowson and Worsley 2009) and vitamins such as folic acid and B-12 (Gilbody, Lewis and Lightfoot 2007; Gilbody, Lightfoot and Sheldon 2007; Fava et al. 1997) which have an impact on adrenaline and serotonin receptors. This may create problems for anyone wanting to prove causality. Water-soluble vitamins and minerals are not stored in the body. As such, intake at one point in time could not be expected to have an influence on health at a later date. What would matter with regard to fruit and vegetable consumption is current intake, which can only be measured in cross-sectional studies.


If it could be shown that fruit and vegetable consumption made a difference to how happy people felt, public health messages to increase their consumption would probably be greatly enhanced. We already know that increasing fruit and vegetable consumption would meet a wide range of public health goals including reducing cardiovascular disease and cancer. If it proved that consumption also improved mental health, the imperative to do something about inadequate dietary patterns in the UK would be greatly strengthened. If it could be shown for certain that five portions a day was not optimal for mental health, public health messages would also need to change. The point is that with the evidence that is available from the Social Indicators Research study it is possible to claim that fruit and vegetable consumption is good for your mental health. However, we urgently need prospective supplementation studies to further investigate this likelihood and, ultimately, to prove things one way or another.

Here is to (eventually) having a more sustainable and balanced world and to the daily servings of fruits and vegetables!



112012-on the road to zero growth.pdf


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