Jeremy Grantham has managed to find a way to combine his fascination with long-long-term investment themes, commodities and bearishness: In his latest quarterly letter to clients, the chairman of global asset manager GMO LLC is arguing that the days of 3 per cent economic growth in the United States are over, as rising commodity prices and poor demographics cut into the country’s gross domestic product.
“The U.S. GDP growth rate that we have become accustomed to for over a 100 years – in excess of 3 per cent a year – is not just hiding behind temporary setbacks,” he said. “It is gone forever.”
The way he see it, GDP should grow by an average of about 1.4 per cent a year from here on out, and just 0.9 per cent after taking inflation into account. After 2030, it gets worse: Growth will slow to an average of just 0.4 per cent after inflation.
Part of the problem is due to a demographic shift, which will see the U.S. population grow at less than half a per cent, down from steady growth of 1.5 per cent since the 1970s. To make matters even worse, hours worked on a per-person basis are also heading down.
Meanwhile, resource costs as a share of the overall economy are heading higher, as commodity prices rise. Mr. Grantham points out that costs have been rising, at a conservative estimate, by 7 per cent a year since 2000.
“The price rise might even accelerate as cheap resources diminish,” he said. “If resources increase their costs at 9 per cent a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse!”
Of course, this line of thinking runs counter to the way the U.S. Federal Reserve sees things. The Fed has launched extraordinary stimulus in recent years in an attempt to get the economy purring again. If economic growth moves more in line with the way Mr. Grantham forecasts, this stimulus might not be retracted any time soon.
“Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait,” he said.
If you think the rest of the world is any better, you might want to temper this optimism. Yes, Mr. Grantham believes global growth will be considerably stronger, but it will sag under the same forces. Growth of 4.5 per cent at its peak in 2006 and 2007 is likely to slow to about 3 per cent by 2030 – then to as low as 2 per cent by 2050.
For now, Mr. Grantham says that the investment implications for such a forecast are “complicated” – the details of which will come with his next update. However, in GMO’s last asset class forecast, released at the end of September, it held little enthusiasm for U.S. large-cap stocks, U.S. small-cap stocks or pretty much any government bonds over the next seven years. It did, however, see decent gains for timber, emerging market stocks, international stocks and U.S. quality stocks, though investment gains are likely to lag the long-term historical average for U.S. equities.