Over the years we've posted hundreds of links to Grantham's thinking and have noticed some problems with the weltanschauung. More after the jump
From Conversations With Tyler, December 1:
VC is an underrated weapon in the fight against climate change.
When it comes to fighting climate change Jeremy Grantham is optimistic about technology — but worried about timing. Known widely for his acuity in identifying bubbles, the British investor contends that the one created by our dependence on fossil fuels is about to pop. He’s on a mission to make green energy cheaper, faster and is well on his way. After a lifetime spent thinking about resources, he’s using his to power the development of green technology. The Grantham Foundation has invested into 45 early-stage green projects, such as improving the efficiency of lithium extraction.
He joined Tyler to discuss the most binding constraint on the green transition, why we need an alternative to lithium, the important message sent by Biden’s Inflation Reduction Act, the marginal cost basis of green energy, the topsoil crisis in the Midwest, why estimates of the cost of global warming vastly underestimate its effects, why he distrusts economists, the overpricing concentrated in the US stock market, the consequences of Brexit, the revolutionary tactics of Margaret Thatcher, how his grandparents shaped his worldview, why he’s optimistic about American venture capital, the secret to Boston’s success in asset management, how COVID changed his media diet, the political difficulty of passing carbon taxes, and more.
Jeremy requested a few edits to the transcript to clarify his comments, those have been marked with an asterisk. As usual, the transcript has been lightly edited for clarity.
TYLER COWEN: Hello, everyone, and welcome back to Conversations with Tyler. Today I’m chatting with the famous investor and thinker, Jeremy Grantham. He is co-founder of Grantham, Mayo & Van Otterloo, also known as GMO, and he has been in the news a great deal lately with his proclamations on the environment and also bubbles.
Jeremy, welcome.
JEREMY GRANTHAM: Hi, nice to be with you.
COWEN: Can the global mining industry produce sufficient raw materials for the green transition?
GRANTHAM: Not as currently configured, no. Not a prayer, not even close.
COWEN: Which is the most binding constraint?
GRANTHAM: Lithium today, I would say.
COWEN: Can’t we fix the lithium —
GRANTHAM: If we mined every ounce of lithium that is in the known reserves, it would probably be about 5 percent of what is required to green the entire economy once, forgetting about the fact that every 30 years, it would then need to be replaced.
COWEN: Can’t we get much more lithium from Australia, from Argentina, develop better ways of mining lithium, cheaper ways? Why is that harder, say, than developing fracking?
GRANTHAM: It’s harder because they’ve been looking for lithium now quite a few decades, and we have a pretty good idea where the best reserves are, and they are totally inadequate to the task. The lesson we draw from that is, we have to change the task. We have to redesign our way around lithium.
The Grantham Foundation, I’m happy to say, has a promising investment in extracting three or four times the lithium from brine, and extracting 50 percent more from the rock of the kind that occurs in Australia. But even with those improvements, we’re not close. This is not going to be a closely run battle.
We’re just going to have to find another way to make lightweight batteries using something other than lithium, and potassium and sodium are very good candidates and will probably do it. There are hundreds of times more sodium and potassium around than lithium.
COWEN: If we take away, say, the last 20 years — the era of explosive Chinese growth — isn’t the long-term trend for commodities prices really pretty modest? I know China is done growing; longer-term elasticities of supply are high; the world will be depopulating, as you’ve pointed out. Thus, we should think commodity prices, overall, will be falling for the next 50 years.
GRANTHAM: Well, commodities, unlike a lot of growth aspects — you’re dealing with a store that is completely finite, so even if your growth rate decelerates, your store gets less and less. If you’re growing at 10 percent in China, it gets less very rapidly. If you’re growing at 2 percent in Europe, it still gets less. If your growth rate slows, the reserves do not mystically increase. That’s the difference to almost all aspects of growth and resources.
COWEN: But we can dematerialize the economy, right? The finite supply argument has been made for a long time. It hasn’t yet turned out to be binding. Wouldn’t it be strange if, all of a sudden, it were now binding, and the last 20 years is more of a China phenomenon?
GRANTHAM: Absolutely not. We’re the bacteria in the petri dish. Someone discovered fossil fuels as sugar, and we accelerated into a frenzy. We can now see the rim of the petri dish, and you’re saying, “Let’s look back.” We’ve doubled and doubled 32 times from nothing to massive. We’re down to our last double. We can see the outer rim. Would it be surprising if the growth rate in the petri dish stopped, and stopped fairly abruptly? No, it wouldn’t. It would not only not be a surprise, it is inevitable.
COWEN: How effective do you think the Biden climate and taxes act will be in improving the climate situation?
GRANTHAM: I think, for climate, it’s an extremely important message. For green tech, which we’re invested in — I’m worried that people will suspect that we’ve bribed politicians because this bill could not possibly have been better for the Grantham Foundation that has half its money, half its principal in early-stage green tech, all of which will benefit.
All aspects of green are being encouraged in this bill. But more important than that, it sends a message to the rest of the world that dopey US, full of climate deniers and politicians with their heads in the sand, has finally begun to wake up.
COWEN: Is the long-run equilibrium that we make green energy much cheaper, but dirty energy becomes cheaper also when the world just uses much more energy? Because as we move away from oil, its price falls, so Vietnam, Africa, Bangladesh, wherever — they’ll just use that oil, and the world will remain dirty in terms of carbon.
GRANTHAM: The interesting thing about green energy is, on a marginal cost basis, which we economists know is the only thing that really matters, the marginal cost of wind and solar and almost all green energy is nil. It’s very hard for even a falling price of fossil fuels to get to nil. It is so cheap to generate wind and solar when you have built the expensive plant, and we will drive fossil fuels out of business.
COWEN: To bridge intermittency in, say, Vietnam and Bangladesh, won’t we need gas or something?....
....MUCH MORE
Cowen holds Grantham's feet to the fire throughout:
I also ask him why, if bubbles are so easy to spot, he isn’t richer than he already is…
Grantham's problem, shared by moi, is that just because one sees an anomaly, there really isn't any reason to think the market will act on it in the time frame that you think it might.
Way back in 2010 we were posting "Grantham’s ‘Horrifically Early’ Calls Challenge GMO".
Fast forward to June 2020 and Mr. G. was going short, which we dutifully noted. Followed by November 2020's: "Grantham's Short Call Cost His Hedge Fund Over $2 Billion".
One example of where Mr. Grantham isn't just early but wrong is seen in 2012's:
Vaclav Smil Takes on Jeremy Grantham Over Peak Fertilizer
We posted the whole of Mr. Grantham's Nov. 15 Nature piece for fear it would go behind Nature's paywall.
To date it hasn't. Also to date I haven't come through on my assurance in Nov. 24ths "Jeremy Grantham "On the Road to Zero Growth" as His Co-head of Asset Allocation Does the Full Monty". I promise I'll get to it.
We have almost as many posts on Professor Smil as we do on Mr. Grantham. This is the first time they've been together. I feel very uncomfortable being on the opposite side of Mr. G on just about anything but in this case Smil is right.
From The American:
Jeremy Grantham, Starving for Facts....
Finally, as one commenter at Cowen's Marginal Revolution put it:
