Grantham: ‘Putin’s Invasion’ Another Resource Wake Up Call

When last I checked in on Jeremy Grantham, he was busy explaining that the S&P was headed for a large correction, where “large” was defined in Sendak-ian terms.

The “wild rumpus,” a reference to the most famous quote from Sendak’s most famous work, was about to start, Grantham declared, in a late January note. In case the note itself wasn’t sufficient to convey the message, he told Bloomberg’s Erik Schatzker all about it. US equities, Grantham suggested, were poised to fall as much as 45%.

It was another in a series of bombastic calls from Grantham who, having exhausted his superlatives Rolodex after calling stocks a “fully-fledged humdinger” bubble, fell back on children’s picture books to make his point (figure below).

Stocks did indeed suffer a correction shortly after Grantham’s warning, but suffice to say the S&P didn’t quite make it all the way to his “target” of roughly 2,500 (it wasn’t an official target, of course).

To be fair, stocks probably should’ve sold off more. Probably not 45%, but if equities were going to suffer another 2008-style meltdown, Q1 2022 was surely the moment. Even after months of de-rating in the frothiest corners of the market, valuations were still stretched to historical extremes, the Fed telegraphed its intent to embark on the most aggressive tightening expedition since Paul Volcker to rein in generationally high inflation and Russia invaded Ukraine, sparking the worst security crisis in Europe since Volcker was 18 years old.

Grantham was almost right this time. Don’t wait on the punchline. There isn’t one. The stars aligned. The S&P could’ve easily dropped 30% within weeks of Grantham’s January note. Alas, stocks closed out the first quarter with a flows-driven squeeze, leaving the index within shouting distance of the highs, even as the situation in Ukraine deteriorated.

That brings us to Grantham’s latest, and I must say, it’s good. For the first time in… well, quite a while, I enjoyed a Jeremy Grantham note. Admittedly, my laudatory assessment is mostly explainable by way of confirmation bias, to which I’m not entirely immune. Grantham’s piece, called “Putin’s Invasion Reminds Us That We Live in a Finite World,” centered on the energy transition, scarcity and the folly inherent in assuming perpetual economic growth in a world that only has so much to give.

Late in 2021, I mentioned that transitioning away from fossil fuels may well entail splurging on them in the short-term, as well as making huge outlays for metals and other commodities. It was hardly a novel observation, but it’s nevertheless important. Grantham’s exposition was more concise and more elegant than mine. “And now, as we are faced with the urgent, even existential need to decarbonize the economy, we should realize a major and unexpected irony,” he wrote, noting that,

Large-scale deployment of windmills, solar farms, and transmission lines will be spectacularly resource intensive. It is for precisely those metals which are most constrained that the coming demand expansion will be the most unprecedented. The electric vehicle (EV) industry, for example, is likely to consume 15 times the current annual global lithium supply by 2050! And the energy situation is just as bad and even more underappreciated. Nearly all of the investment to generate 30 or 40 years of power from a wind or solar farm is up front – whether measured in money, resources, or energy. Even basic measures like insulating homes require real investment first with their payoff later. Perhaps the last great irony of the fossil fuel era will be that going off fossil fuels in the long run will require using one more spurt of fossil fuels in the short run.

That likely means more volatility. Due precisely to the irony Grantham identified, commodities were virtually guaranteed to become more volatile. Russia’s invasion of Ukraine was thus (expensive) gas on the fire.

Grantham also touched on food prices, citing the FAO gauge updated in these pages each month, as well as the prospect of an acute squeeze in Egypt, discussed here just two weeks ago in “We’re Probably Not Going To Make It.”

“This war will increase the pressure on raw materials. We notice fuel the most, but food may be the most dangerous to global stability,” Grantham wrote, noting that the price of wheat, corn, vegetable oil and fertilizer are all rising sharply from levels that, in some cases, already counted as records (figure on the left, below).

“Ukraine and Russia together make up over a quarter of global wheat exports, and the harvesting of Ukraine’s wheat in two months is obviously at extreme risk,” Grantham went on to say, calling Egypt “particularly dependent.” The figure on the right (above) illustrates the problem. Social unrest in the developing world is a foregone conclusion. Note that the death toll from fuel protests in Peru hit five this week.

As for oil prices, he was keen to remind readers that “in the West, historically, major spikes in the price of oil like today’s have always preceded or triggered recession.”

Grantham called the quest to extract ever more growth from a finite world “impossible.” He used an astounding, and simultaneously amusing, statistic to make the point. “Had the Egypt of the Pharaohs grown its assets by 1% a year — a derisory growth rate to us — they would, over the 3,000 years of their civilization, have compounded by 9.2 trillion times!”, Grantham exclaimed.

On Thursday morning, I wrote that when it comes to policymaking, insanity often takes precedence because it can be synonymous with expediency, whereas sanity is generally associated with policy proposals conducive to long-term stability. “Just ask the energy transition that isn’t going to be finished in time to save your grandchildren,” I quipped, in the same linked article.

Here again, Grantham said it better, and at least on the future of humanity, he’s more optimistic than I am. “Our species, so far, has shown itself reluctant to address very long-term issues, such as climate damage and sustainability, and maybe it always will be reluctant,” he sighed, before striking a more upbeat tone. “But we are also a remarkably inventive species, and this may be our saving grace.”

If we can innovate, Grantham said, “we might survive to tell the tale.” Might.