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Jeremy Grantham Quarterly Letter - Days of Abudant Resources and Falling Prices


Myth465
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Anybody knows why Buffett ceased to bring population control as one of it's main concern regarding humanity?

 

BeerBaron

 

I would guess it goes against his image (Grandpa Warren) and seems slightly tinfoily. Second populations have less kids as they get richer and enter consumerism, so I would guess developing developing nations would kill a few birds with one stone.

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Exactly, the zero population growth crowd wanted birth control as part of development.

 

Turns out development is its own birth control.

 

Thats really tin foily and would have just caused severe backlash. My folks are from a third world country, where a mans value is measured by how much money he has, and how many kids he has. I feel like my moms only goal in life was to raise kids and go to school. Trying to take that away from someone or a society would be quite futile.

 

I think we have too many people running around, but think nature will sort it out when things go too far. I have my popcorn and am just watching (I hope never to be in the show). China and India have both been featured in the Economist due to their very skewed sex ratios. Dealing with millions of men who lack women, from the ages of 18 - 28 is a problem I am glad we dont have. It will be interesting to watch.

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I've seen conspiracy theorists use a Bill Gates quote in which he seems to argue for the need to control populations through vaccines. Of course, if you look at the actual quote, he is linking vaccinations to socioeconomic development to rising opportunity costs of birth.

 

Conspiracies do occur, but man...

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When investing do any of you consider the implications of the macro-oriented views?  I like Jim rogers and Jeremy Grantham a lot, I'm terribly under-qualified to formulate my own opinions on the subjects they often talk about... But it's hard to ignore them.  I guess the answer is the focus a little more on companies which do not have high commodity costs or that can easily pass on costs to customer?

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"like Jim rogers and Jeremy Grantham a lot, I'm terribly under-qualified to formulate my own opinions on the subjects they often talk about... But it's hard to ignore them. "

 

I hear you and pretty much think the same way.  But if you have some time dig into some books on peak oil.  Once you see the math involved I don't think it takes a big brain to see what is coming

 

- all of the big oil fields were found prior to 1970 despite much better technology available to find it

- every year those big fields produce less oil

- we use more oil than we find every year

- the amount of oil we use grows every year and that isn't going to change when India and China have less than 10% per capita car use that the States does

- the oil we do find now is either deep under the sea, in the oil sands, basically somewhere more difficult and expensive to retrieve it from

 

It isn't that there is no oil, it is just that we are right up against the fastest rate we are ever going to be able to get it out of the ground on a daily basis.

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From 2007 - 2008 I watched about 7 well done peak oil documentaries. Its made me a firm believer. Also its just logical. As Grantham said these things are finite resources. Look at Mexico's production from their large field or just look at any E&Ps well production to get an understanding of how decline rates work.

 

All the smart guys (Buffett, Rogers, Grantham, Pickens, Longleaf) are saying the same thing. Its moved beyond the Tin Foil hat crowd. I mean the US and Canadian militarys are both warning about it and global warming as our largest threats. I know we use a ton of oil. Something like 25%. If India and China on a per capital basis use anywhere near what we use, even half, even 25% of what we use then things get quite interesting.

 

Think about it Buffett is so far ahead of everyone on this. He is past peak oil. He has already factored in a windfall profits tax into the equation, and decided to just by a railroad instead. Thats crazy smart.

 

 

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This is a classic example of the attribution error of ascribing higher commodity prices to scarcity rather than monetary inflation.

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This is a classic example of the attribution error of ascribing higher commodity prices to scarcity rather than monetary inflation.

 

I agree that there is one other explanation for the hockey stick charts (USD based)... they would look very different if measured in a constant uninflatable monetary unit and reveal the extent of monetary inflation and subsequent real purchasing power dillution.

 

After all, supply and demand realities are that commodity prices should hold steady over the long term if supply and demand stimulate one another. In fact prices should be in a long term downtrend due to the ever increasing efficiency of the capitalist profit motive driven marketplace. The poor should have died out long ago instead of increasing their number and purchasing power.

 

These hockey stick charts can be explained another way... the beginning of hyperinflation. Here is an alternate view from a commentator who accepts that gold is the ultimate money:

 

Usual disclaimers, warnings of unsuitability for viewing to dollar bugs:

 

http://www.321gold.com/editorials/thomson_s/thomson_s_042611.html

 

 

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I find Thomas Gold's abiotic hydrocarbon hypothesis interesting but it's never yielded sizeable discoveries.  IIRC, the Soviets did some drilling near Lake Baikal with the idea that the deep trench there might expose some abiotic hydrocarbons.  No go.

 

For what it's worth Bill Miller talked up abiotic hydrocarbons prior to 2008.

 

It has a sublime fascination for natural contrarians, but I'm afraid it's like the philosopher's stone and will never be found.

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This is a classic example of the attribution error of ascribing higher commodity prices to scarcity rather than monetary inflation.

 

Most people agree its both though. He even said in the letter that the long term price of oil and gas has been $16 for the last several decades adjusted for inflation. Has the dollar really been cut down by 60%- 70% over the last 10 years?

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I find Thomas Gold's abiotic hydrocarbon hypothesis interesting but it's never yielded sizeable discoveries.  IIRC, the Soviets did some drilling near Lake Baikal with the idea that the deep trench there might expose some abiotic hydrocarbons.  No go.

 

For what it's worth Bill Miller talked up abiotic hydrocarbons prior to 2008.

 

It has a sublime fascination for natural contrarians, but I'm afraid it's like the philosopher's stone and will never be found.

 

 

The great physicist Freeman Dyson wrote the forward to the book. It is a very serious theory.

 

If you read the links, it was found on Saturn's Moon Titan, which is proof of the pudding. They are massive deposits of abiogenic hydrocarbons, unless you believe there were vast oceans on Titan that were teeming with life at one point. It is the Titan find that has created great renewed interest in Gold's theory. It is quite simply the find which proves his theory to be correct. If you've seen what's happened in places like Penn. where they've found huge deposits of natural gas where there used to be coal, that's another prediction of the theory.

 

The huge amounts of natural gas, far in excess of oil, that are being found is another prediciton of the theory. Of course, then it follows, as has happened, that the historical pricing relationship between oil and natural gas has broken down.

 

Most important, however, is the concept of operationalism in science. The test of any chemical theory is whether we can recreate a substance in the lab under the conditions a theory describes. If you take biological matter, and apply pressure/forces similar to those described necessary for a diamond, we can make artificial diamonds. No one has ever been able to recreate light sweet crude, or even lower grades of crude, in any way similar to how they come out of the ground, using biological material.

 

However, usng a Fischer-Trope-like process of applying heat and pressure, as Gold described happens deep within the earth, you can create oil.

 

His theory is quite simple--the biological matter is feeding off the oil--it is not where the oil comes from. His theory is that it comes from vast stores of natural gas that were trapped within the earth's crust during the Earth's formation.

 

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His theory is often mis-stated as just a theory about the origins of petroleum. That is inaccurate. His theory is actually a sub-theory of his theory about the origin of life itself on the earth. We often think of the early surface of the earth as similar to our own, but it was actually a very frightening place, since the atmosphere had not fully formed yet. Imagine a surface bombarded with radiation. Gold did some of the first work linking his theory that life first developed under the surface of the earth, with early life feeding off chemical nutrient sources, to places such as deep undersea ocean vents, where he argues that the life up-welled from.

 

Biologists working on deep undersea ocean vents have largely proven his theory to be correct.

 

Photosynthesis is a vastly more complex process than simply feeding off chemicals that are present, so if we believe in evolution, by definition, it is probabalistically almost impossible that something which is evolutionarily far more complex would have evolved first.

 

http://en.wikipedia.org/wiki/Hydrothermal_vent

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This board is getting deep.

 

Harry - do you feel the studies you have cited pose a threat to the basis of any religions?

 

Great stuff. 

 

 

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His theory is often mis-stated as just a theory about the origins of petroleum. That is inaccurate. His theory is actually a sub-theory of his theory about the origin of life itself on the earth. We often think of the early surface of the earth as similar to our own, but it was actually a very frightening place, since the atmosphere had not fully formed yet. Imagine a surface bombarded with radiation. Gold did some of the first work linking his theory that life first developed under the surface of the earth, with early life feeding off chemical nutrient sources, to places such as deep undersea ocean vents, where he argues that the life up-welled from.

 

Biologists working on deep undersea ocean vents have largely proven his theory to be correct.

 

Photosynthesis is a vastly more complex process than simply feeding off chemicals that are present, so if we believe in evolution, by definition, it is probabalistically almost impossible that something which is evolutionarily far more complex would have evolved first.

 

http://en.wikipedia.org/wiki/Hydrothermal_vent

 

DNA polymerase was discovered in a boiling hotspring.  But that's not surprising because the Earth when it was created was "without form and void".  :o

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This is a classic example of the attribution error of ascribing higher commodity prices to scarcity rather than monetary inflation.

Has the dollar really been cut down by 60%- 70% over the last 10 years?

 

The world beverage market has a value, no matter what currency it is priced in (sea shells, dollars, gold, oil).

 

But the price of KO hasn't followed the same path as gold in the past few years -- this despite the fact that KO was fairly priced a few years ago and the global beverage market has only grown since then.

 

So if this gold and commodities rally is for real and it's truly monetary inflation driving it, then it would stand to reason that a hedge with KO calls should achieve the desired result of protection your ass if the dollar really is going to be worthless tomorrow morning.  But it should do even better than gold because gold already has such a head start on KO.

 

 

 

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I always enjoy reading. Mr Granthams letters but admit I am a recent fan of his musings.  Am I the only one who finds a strong under current of constant pessimism in his outlook. His neo Malthusian commentary makes one want to scout out farm land and defensible castles as a return to the dark ages is possible .

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Ericopoly, I would say that KO was probably overvalued 10 years ago + that is why it has lagged gold("hasn't followed the same path as gold in the past few years"). Now perhaps it is the opposite.

 

I agree with your post.

 

Like someone else said on a prior post that the value of KO operation in Zimbabwae (how do you spell that?) has been preserved while the value of their currency has evaporated.

 

What is your thoughts on just owning KO (or other business that can pass on their cost) vs their calls?

 

I have never used options. I have never used leverage. I have tried not to be greedy(mostly out of fear + feeling humbled by the market/and board members here who are way smarter than me).

 

Currently feel uncomfortable with amount of cash. At the same time am having a hard time finding high quality business at a deep discount.

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I have never used options. I have never used leverage. I have tried not to be greedy(mostly out of fear + feeling humbled by the market/and board members here who are way smarter than me).

 

Currently feel uncomfortable with amount of cash. At the same time am having a hard time finding high quality business at a deep discount.

 

The KO $85 strike calls cost less than 0.5% of notional annualized -- plus you can deduct the expenses when they expire worthless if our fears of dollar Armageddon are disappointed..

 

This is cheaper than the management fees on some of these physical gold funds -- if you were to view the KO calls as just a hedge on your notional net worth.

 

So you'd lose maybe 20% of value in a complete dollar disaster -- compared to today's stock price.  However, that's no so bad if you look at how gold has outpaced KO in the past two or three years.  That 20% gap from the options is smaller than the gap between gold and KO.

 

The settlement date is in 2013 and the intrinsic value of KO will probably be at least 5% higher or something.  So it wouldn't even be a 20% loss -- something less than that, depending on the growth of KO over the next 2 years.

 

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