On Grantham’s Quarterly; Vegetarian Diets Improves Metabolism!

From: aditya rana
Date: Sat, Aug 1, 2015 at 2:10 PM
Subject: On Grantham’s Quarterly; Vegetarian Diets Improves Metabolism!


Jeremy Grantham, co-founder of the famed value investing firm GMO, writes a quarterly which is a must read for serious investors. The letters typically focus on a wide range of big picture themes, from the financial world to important topics like resource depletion and climate. His latest quarterly provides an update on these themes –to summarise some key aspects of the note:

-GDP growth in the U.S. (and the rest of the developed world) is unmistakably slowing – from a historical level of 3.0% to 1.5%. This is being driven by multiple factors: slowing growth and aging of the working age population; resource constraints, especially of cheap $20 oil; rising income inequality; low levels of capital spending; lack of drivers like the steam engine to spur growth; increasing climate uncertainty; and, partially dysfunctional governments. Mainstream economists continue to be puzzled by the lack of productivity and GDP growth as they do not take into account most of these factors.

-The era of abundant and cheap resources is gone forever. The biggest commodity price rally in history (from 2000-2008), was followed by a massive expansion and excess capacity. The slowdown in demand from China further exacerbated this excess capacity; for example, China’s use of coal went from 4% of the world to 50% in 2013, and actually contracted in 2014.

-Looking at an index of 33 equally weighted commodities, the large recent price decline has reversed about a third of the previous historic surge in commodity prices (see chart below) , and has resulted in projects being cancelled and investment spending being curtailed. Combined with the extremely negative sentiment towards commodities, it signals a bottoming out process and it is unlikely that prices will continue their prior 100-year price decline trend which ended in 2000.

-Regarding agriculture, grain prices peaked in 2011, following three years of extremely bad weather conditions. The subsequent two years of good weather helped in bringing prices down by 40% from their peak, but are still up 70% from their 2000 lows. With bad weather conditions likely to come back (and sporadic signs of that are emerging), agricultural prices are likely to resume their uptrend.

-Since 1982, oil prices have benefited as we have pumped more oil than we have found – with recovery rates from oil fields rising from 20% to 60% (about 3.5% per annum) using a variety of extraction methods (including fracking). During the same period, oil demand has increased by only 1.5% per year, resulting in excess oil supply and lower prices. However, the cost of recovering this oil has also increased significantly, and somewhere between 75 and 85% recovery rates, the cost will be simply unaffordable.

-Over the next 15 years, assuming an increase in the recovery rates to about 80% (i.e. 0.9% per annum) should roughly match lower growth in demand of 1.0% per annum (given the global slowdown), the continued increase in the cost of extraction should push oil prices higher which will act as a drag of economic growth. The good news is that beyond this period, oil demand should decrease due to cheaper electric cars, changes in environmental policies and advances in technological renewable energy sources.

-2014 was the hottest year ever recorded, and this year looks even worse (helped by El Nino) with most of the months so far being the hottest ever. This consistency is very unusual and ominous. Thankfully, awareness of the climate issues is also growing rapidly, with the G7 (led by Germany) committing to make their economies completely carbonless by 2100 and make improvements by 2050. Many developed and developing (like Brazil and Ethiopia) countries have also made commitments to reduced CO2 targets.

-The U.S. is now one of the most unequal societies in the developed world, both from an income and wealth perspective. This is another factor holding back growth in the U.S. – with the middle class making no progress in terms of real wages per hour for the last 40 years, resulting in lower consumption and growth rates as well as increasing debt levels to fund improvements in lifestyles.

-The current corporate culture of rewarding senior executives with 80% of their compensation in bonus (mainly stock options) which are not properly accounted for and not tied to average industry performance, has led to corporate cash-flow being diverted to stock buybacks (aided and abetted by the Fed’s low rate policy – a record $700 annualised rate for 2015) rather than investment. This has resulted in below average corporate investment in expansion and therefore lower GDP growth, lower job creation and lower wages.

-Two bubbles which , surprisingly, have not (yet) mean reverted are – profit margins in the U.S. and some real estate prices in parts of the world (U.K. and Australia). Why has this happened?

-Capital, like water, tends to find its own level. High profits attract more capital until a glut develops pushing margins down, and vice-versa, low profits deter capital flows leading to shortages and eventually higher margins. When profits stop mean reverting it means that capitalism is partially broken and needs to be fixed by non-free market interference.

-Looking first at housing , zoning laws in the U.K. prevented the construction of new homes and the price increases were driven mainly by foreign buyers and therefore prices have remained at bubble levels (see chart below). This will eventually be corrected when people and businesses put pressure on the government to act by increasing housing supply. In contrast, the price increases in the U.S., Spain and Ireland led to significant new construction which eventually broke the price bubble (see second graph below). However, the unintended consequences of government policy to keep rates and down payments low in the U.S., led to an artificial increase in home ownership ratios during the bubble which has now corrected all the way to levels below the ratios in the 1990s (see graph below).

-On the stickiness of profit margins, the mean reversion should take place over time as private companies with a longer term focus and more aggressive capital spending will increase their market share at the expense of public companies. Similarly, private equity and venture capital will have a longer term advantage as they spend more capital on new opportunities. In the interim, pressure from politicians, businessmen and economists, critical of the short-term stock option culture and its adverse consequences on productivity and growth, could lead to companies focusing more on the longer term and increased investment which will lower profit margins.

-The other change likely to happen over time is a shift from Greenspan-Bernanke-Yellen regime of promoting higher asset prices and lower borrowing costs, thereby facilitating stock buybacks and increased speculation. Ultimately this will be seen as a failed experiment leading to a regime change.

Fascinating insights (as usual) from Grantham, and makes one wonder about the current state of capitalism in most of the developed world – in particular, the U.S.. The case for lower growth in the developed world is persuasive, and while growth in the EM world will be slower going forward, they will continue to significantly outperform the developed world. As equity returns (over the longer term) are closely associated with economic growth, it reinforces my theme of remaining overweight to EM equity over the developed markets. As the financial advisory firm Research Affiliates illustrate in the chart below (from their latest quarterly update on 10-year forecasted real returns for a broad variety of asset classes based on fundamental value), EM equity (as well as debt) provide significantly higher expected real returns (6.2%) than the U.S.. Sure, they are likely to be more volatile, but for patient investors it will ultimately be a very rewarding strategy.

Vegetarian Diets Increase Metabolism:

The metabolic syndrome (i.e. low metabolism rates) is associated with obesity and a host of chronic diseases, ranging from heart disease, to diabetes. A vegetarian diet can boost your resting metabolic rate as the new research below demonstrates.

PRCM, July 31, 2015.


-Vegetarian diets are associated with higher metabolic rates, according to a study published in Nutrients. Researchers monitored the diets and metabolic rates for 24 vegetarian and 26 non-vegetarian participants.

-Biochemical analyses also monitored inflammatory markers associated with diet. Vegetarians lowered their cholesterol levels, had higher levels of anti-inflammatory cytokines, and had higher metabolic rates, compared with non-vegetarians. This study complements other research studies that suggest that nutrition plays a larger role than exercise in maintaining healthful metabolic rates.

Here’s to eating a predominantly plant based diet for a healthier life!




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