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Prem Watsa And Jeremy Grantham Have Completely Opposite Views On Commodity Price


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http://seekingalpha.com/article/1273241-prem-watsa-and-jeremy-grantham-have-completely-opposite-views-on-commodity-prices

 

 

A great question?

 

What do you do when two people that you admire greatly are each giving you the exact opposite advice?.....

 

Figure out who has a consensus opinion and who doesn't.

 

I'm going to say Prem is the contrarian here.

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http://seekingalpha.com/article/1273241-prem-watsa-and-jeremy-grantham-have-completely-opposite-views-on-commodity-prices

 

 

A great question?

 

What do you do when two people that you admire greatly are each giving you the exact opposite advice?.....

 

Look at their timeline.

 

They may both be right. I suspect Prem will be right over the next decade-- while Jeremy will be proven right over the next four decades.

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A great question?

 

It's very interesting - I've thought about this subject a lot.  There are actually two questions:

 

1) Are we running out of resources? (Grantham's first assertion)

2) Inclusive of but not limited to #1, where are resource prices going?

 

In regard to #1, I am not sold.  I find it an inconvenient piece of information that the commodity price turning point that Grantham illustrates is in the late age of central banking (largely the last ten years, where central banks have gradually waged a greater and greater war on real yield) and with the advent of the financialization of those products (resource ETF's being an obvious example but really just the tip of the iceberg).  I think it is more likely that what we have seen is a one-time adjustment in price as these products are accumulated by intermediaries that can now get their hands on them in order to hedge, store value, or speculate (or all three).

 

The alternative - that we are suddenly (and simultaneously) running out of a broad range of basic resources - seems unlikely, although I cannot dismiss the possibility.

 

I have no opinion on #2.

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Think for your self ,they both could be wrong or they both could be right. Commodity prices are going to go up over the long term, well I think that you can count on that but I would like to make some dough in THIS lifetime. I think the cyclical factors trump the secular in a time frame that is going to be of interest to most of us.

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Just a few years ago we were talking about 'peak oil' (maybe still are).  Now we have more NG than we know what to do with it.  History is full of these types of examples, but we seem to always think this time is different.

 

Another example, I just read that a few years ago the folks in Alabama found a cypress forest.  O.K., big deal right.  Well, the forest was 10 miles off the coast!!  Carbon dating indicated that the trees are 50,000 years old.  If so, then I guess global warming started back then as the seas are still rising -- right?  I thought of Munger when I read the story when he indicated that an extra degree will not change things much, deal with it.

 

Grantham may be exactly right in 40+ years, or more, but his outlook just seems too Malthusian as in we are going to run out of food, and everything.  The USDA indicates that 2013 will plant the most acreage ever, and if we have a normal growing season, the US will produce more bushels of grains in our history! Hard to be running out of stuff when supply exceeds demand.

 

Cheers

JEast

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They may both be right. I suspect Prem will be right over the next decade-- while Jeremy will be proven right over the next four decades.

 

4 decades? seriously?  wow..  At the pace things are changing, and that change is accelerating, predicting anything 4 decades down the road seems kind of out there.  Think of where technology will be 4 decades from now.  Read some of the wild stuff proposed by Ray Kurzweil who has studied this extensively, then try to make a prediction...  I agree with a later poster that here the jockey bet might be the best...  Solar looks like it's following a Moore's law-like trajectory:

 

http://blogs.scientificamerican.com/guest-blog/2011/03/16/smaller-cheaper-faster-does-moores-law-apply-to-solar-cells/

 

Cloud computing gets applied to new fields.  Genomes will be sequenced at lower and lower costs.  Driverless cars might make driving more efficient.  The availability of the cloud and the future application of Moore's law to all sorts of fields will cause really unforeseen changes. I think that trying to project out 4 decades is really really hard if not impossible...

 

Sorry if this seems like a  tangent to commodity prices, but I don't think it is...

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I guess the real question about solar is will the installation cost also decline as fast as the panels.  Interesting implications for electricity production as many of the coal plants and at some point nat gas plants may be replaced by solar.  Thanks for the article.

 

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I read the Sierra Club magazine.  The last issue was on Wind Power, and one of the prior issues was on solar. 

 

The price of both has come down dramatically.  Like hydro, these two renewables have upfront costs but become extremely cheap to run after installation.  I dont know if the Sierra Club articles are available online.  Anyway, the degree of adoption of Wind and Solar is so fast in the US that coal plants are being shuttered permanently, and future nuclear usage is done. 

 

I dont think any of this bodes well for the alberta tar sands, either.  If I were really pressed to make a prediction, I would say the price of oil and gas go nowhere from here, and coal for power production drops off a cliff.  Oil is still needed for plastics.  Natural gas stays cheap.  Nuclear is toast ( not literally :-) )

 

But, If the last few years have taught us anything, it is that the future is unpredictable. 

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But in the same time, I think it's always dangerous to only rely on some "magical" technological gains to solve a potential problem.  Actually, what I want to say is that we hear a lot of people who don't want to admit something could become a potential problem (like limited naturel resources availability or healthcare cost) by saying that anyway, technological advancement will take care of that. Sure, and I'm a scientist and I believe in science and technology, but it is often use as an excuse by most people to not tackle a problematic right away. Betting without knowledge on technology is good way to procrastinate!

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But in the same time, I think it's always dangerous to only rely on some "magical" technological gains to solve a potential problem.  Actually, what I want to say is that we hear a lot of people who don't want to admit something could become a potential problem (like limited naturel resources availability or healthcare cost) by saying that anyway, technological advancement will take care of that. Sure, and I'm a scientist and I believe in science and technology, but it is often use as an excuse by most people to not tackle a problematic right away. Betting without knowledge on technology is good way to procrastinate!

 

Definitely. This combined with short-term elected governments can lead to major future problems.

 

Grantham is also saying that we focus too much on technological advancement because of our relatively short history of prosperity and growth since the industrial revolution (so 200 years) where this was a major helping factor to overcome any problems on the way. Overconfidence in this technology could eventually be what causes our global civilization to "extinct" just like any other civilization in the past. At least, that's his opinion. I'm just agnostic on the whole thing but find it fascinating.

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My response is that the market has always provided the incentive to innovate.  If the resources become too scarce then the price will go up and the incentive will be greater.  His one time industrial revolution idea dismisses the notion that a global market will provide incentives to solve problems.  How long has such a market been around?  Maybe 200 to 300 years or so.  Coincidence that this is time of the industrial revolution.  I think not.  Before that time just about all of humanity was based upon subsistence farming.  In a market system, procrastination will only occur without an innovative incentive.  So I am not only relying on science but the profit incentive to innovate.  That is how we have Moore's Law and the decline PV cell pricing.  The gov't can assist but only around the edges.  When it tries to do major initiatives they will most likely be wrong but it is not because of the science is it because the future is not predictable.

 

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I read the Sierra Club magazine.  The last issue was on Wind Power, and one of the prior issues was on solar. 

 

The price of both has come down dramatically.  Like hydro, these two renewables have upfront costs but become extremely cheap to run after installation.  I dont know if the Sierra Club articles are available online.  Anyway, the degree of adoption of Wind and Solar is so fast in the US that coal plants are being shuttered permanently, and future nuclear usage is done. 

 

 

BRK has 14% of all Wind energy in the US; Don't know the % of Solar but it is also large. BRK is the front runner and about to break away from the crowd. $100B into S&W over the next decade. If the costs keep coming down, it will be like "just sit there and make money"

 

One of the paradigm shifts that's coming with Wind and Solar is how we think of energy production/transmission/consumption. With solar and wind the day of local production/consumption is coming. No more transmission (atleast over great distances)!

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I read the Sierra Club magazine.  The last issue was on Wind Power, and one of the prior issues was on solar. 

 

The price of both has come down dramatically.  Like hydro, these two renewables have upfront costs but become extremely cheap to run after installation.  I dont know if the Sierra Club articles are available online.  Anyway, the degree of adoption of Wind and Solar is so fast in the US that coal plants are being shuttered permanently, and future nuclear usage is done. 

 

 

BRK has 14% of all Wind energy in the US; Don't know the % of Solar but it is also large. BRK is the front runner and about to break away from the crowd. $100B into S&W over the next decade. If the costs keep coming down, it will be like "just sit there and make money"

 

One of the paradigm shifts that's coming with Wind and Solar is how we think of energy production/transmission/consumption. With solar and wind the day of local production/consumption is coming. No more transmission (atleast over great distances)!

 

Ideally we'll combine wind & solar with (relatively) cheap grid-scale liquid-metal batteries like these where large hydro isn't available to act as a way to store power:

 

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My response is that the market has always provided the incentive to innovate.  If the resources become too scarce then the price will go up and the incentive will be greater.  His one time industrial revolution idea dismisses the notion that a global market will provide incentives to solve problems. 

 

Yeah, let's take Easter Island as an example.

 

http://en.wikipedia.org/wiki/Easter_Island#History

 

A nice forested island.  Humans come in and destroy the trees until it's a barren wasteland.  As they're cutting down the last tree, they're probably saying, "Don't worry, our technology or god will save us." 

 

And in a way, they were right.  That said, they're in an enclosed ecosystem.  So, when they screw it up, they're stuck with what they've created.  But they do figure out a way to survive.  Cannibalism becomes an accepted practice and the population plunges by 80%.

 

So yeah, we can destroy many of the things that we rely on on our survival on the earth, and it's very unlikely to destroy all humans.  The question is, it is worth a small investment now to prevent the possibility of big problems later?  Generally, humanity seems to decide not.  I disagree, but that's largely because I think  picking up nickles in front of steamrollers is a bad idea.

 

I've always found this comic amusing:

 

http://img.izismile.com/img/img4/20110621/640/hilarious_mother_nature_illustration_640_high_02.jpg

 

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You have to remember being a closed system probably without a market economy what incentive/price was placed on the last trees, probably not too high.  In our system the pricing mechanism provides incentives the Easter Island guys never had.

 

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I read the Sierra Club magazine.  The last issue was on Wind Power, and one of the prior issues was on solar. 

 

The price of both has come down dramatically.  Like hydro, these two renewables have upfront costs but become extremely cheap to run after installation.  I dont know if the Sierra Club articles are available online.  Anyway, the degree of adoption of Wind and Solar is so fast in the US that coal plants are being shuttered permanently, and future nuclear usage is done. 

 

 

BRK has 14% of all Wind energy in the US; Don't know the % of Solar but it is also large. BRK is the front runner and about to break away from the crowd. $100B into S&W over the next decade. If the costs keep coming down, it will be like "just sit there and make money"

 

One of the paradigm shifts that's coming with Wind and Solar is how we think of energy production/transmission/consumption. With solar and wind the day of local production/consumption is coming. No more transmission (atleast over great distances)!

 

Ideally we'll combine wind & solar with (relatively) cheap grid-scale liquid-metal batteries like these where large hydro isn't available to act as a way to store power:

 

 

Mid-American was mentioned in the SC articles as being one of the major players.  Obviously this strategy has WEBs blessing. 

 

Re: thinking high technology will save us.  If you ask me the tech. required to produce solar is substantially less than oil drilling.  And certainly, wind has been around a long time. 

 

Re: Easter Island: Alot is unknown about what happened there.  I dont think it makes for a good analogy.  Larger islands throughout the world did quite fine, such as Hawaii.

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A great question?

 

It's very interesting - I've thought about this subject a lot.  There are actually two questions:

 

1) Are we running out of resources? (Grantham's first assertion)

2) Inclusive of but not limited to #1, where are resource prices going?

 

In regard to #1, I am not sold.  I find it an inconvenient piece of information that the commodity price turning point that Grantham illustrates is in the late age of central banking (largely the last ten years, where central banks have gradually waged a greater and greater war on real yield) and with the advent of the financialization of those products (resource ETF's being an obvious example but really just the tip of the iceberg).  I think it is more likely that what we have seen is a one-time adjustment in price as these products are accumulated by intermediaries that can now get their hands on them in order to hedge, store value, or speculate (or all three).

 

The alternative - that we are suddenly (and simultaneously) running out of a broad range of basic resources - seems unlikely, although I cannot dismiss the possibility.

 

I have no opinion on #2.

 

1000% in the Grantham camp. With respect to Prem he knows nothing about resource supply and demand fundamentals and has done no work on trying to understand the various disequillibriums. Grantham is not only well versed but an authority when it comes to such fundamental analysis.

 

Prem could be right about prices should a scarcity of resources require prudent central banking to be implemented creating severe deflation (and reigning in on prices) but to anybody that thinks finite metallic resource production - is not in an asymptotic decline - albeit on a 100 year scale - they have not done the work.

 

Phosphate

Potash

Copper

Zinc

Gold

Silver

Palladium

Platinum

Niobium

Nickel

Rare Earth's

Lead

Tin

Tungsten

 

All of the above must rise in real-terms given they have clear supply and demand disequillibriums and cannot be synthetically manufactured by man.

 

 

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You are correct until alternatives can be developed and given the history of markets I would not bet against them.  We have already found fuel substitutes for wood and coal and as these resources increase in real terms the economics of alternatives becomes more compelling.

 

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Imagine that our planet contained a lot more cheap oil than what is the actual case and that global warming is a direct cause of CO2 from humans. Add that a few more degrees is all it takes to mess with ocean currents, make melt ice caps releasing tons of methane trapped eventually killing most if not all due to unbearable temperatures and the destruction of the atmosphere. Do you think that Moore's law would have kicked in on time to make wind and solar affordable to save the planet?

 

Honestly, I don't even know if it is not too late or not already despite remarkable progress in just a decade. People talk about the planet and the next generation, but the only reason why solar and wind are making progress is because of money. If oil had remained at $20 a barrel for 5 more decades, don't you think that the result would be dramatically different? We get into the alternative histories as discussed by Taleb.

 

By the way, where are the space stations to protect us against an asteroid that will hit us one day for sure? Why is progress so slow? Oh yes, and who is going to make money with that project?

 

Cardboard

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Imagine that our planet contained a lot more cheap oil than what is the actual case and that global warming is a direct cause of CO2 from humans. Add that a few more degrees is all it takes to mess with ocean currents, make melt ice caps releasing tons of methane trapped eventually killing most if not all due to unbearable temperatures and the destruction of the atmosphere. Do you think that Moore's law would have kicked in on time to make wind and solar affordable to save the planet?

 

Honestly, I don't even know if it is not too late or not already despite remarkable progress in just a decade. People talk about the planet and the next generation, but the only reason why solar and wind are making progress is because of money. If oil had remained at $20 a barrel for 5 more decades, don't you think that the result would be dramatically different? We get into the alternative histories as discussed by Taleb.

 

By the way, where are the space stations to protect us against an asteroid that will hit us one day for sure? Why is progress so slow? Oh yes, and who is going to make money with that project?

 

Cardboard

 

The problem with solving alternative energy and global warming is it's perceived to be not in my generation's backyard.  NIM"G"BY

 

Jack Welch said something to the effect that "10 years ago Al Gore made a prediction that doesn't show up yet".

 

What a douchebag.  What happens in 100 years, 500 years, 1000 years, 10,000 years???

 

Planetary genocide.  All for saving a buck.

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