Monday, March 24, 2008

WSJ: New Limits to Growth Revive Malthusian Fears


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Thanks to a reader for pointing this WSJ article out - I actually spoke of this exact subject Saturday in depth [Alert: Commodities are Dead] (tongue in cheek of course), and I've been writing about a "World of Shortages" thesis since the beginning of the blog; nice to see it on the front page of the Wall Street Journal. Because as you all know by now, nothing exists in NYC investment world until it hits the front page of Barron's or Wall Street Journal. Now of course this weekend's Barrons calling the bottom in financials is getting all the interest, because that is based on "hope" :) and we love hope on Wall Street. Luckily this blog is based on despair so I'll focus on this article instead (hah). Nothing "new" in this article but it's a nice summary of many of my thoughts.

My World of Shortages theme has in fact been an investing thesis of mine for a few years and will be for many years (decades) going forward. (although in the "long long run" I do expect technical innovation in many fields to help offset some of the shortages). Too many humans want to live like Americans... or at least like Brazilians or Italians (no one can quite consume like an American). And now more and more people have the means or are on the path to doing so within the next 3-10 years. I wrote last year in the blog, that it was the first year where more humans on this Earth resided in urban environments instead of rural. That trend should only continue slowly but surely. Unfortunately, even at current population levels, unless we continue having the same % of people living in morbidly poor conditions, the Earth will struggle to handle things. Human prosperity is ironically, not a good thing for Earth's natural resources. So we will compete, as peoples and nations for these resources - I still think water one day will be what oil is today. If you don't believe traditional wars will break out over these resource acquisitions (which is what most wars are in our history are based on - acquisition of property or resources) - then "economic" wars might be more up your alley. Essentially countries will be at odds with each other over these resources, and on a more granual level, the individual people of the US of A will be 'fighting' (economically) with people in many other countries for said resources. And with our structrual imbalances and reliance on other country's generosity in continuously buying our debt to keep us sustained, we don't appear to be heading into this multi decade "economic" war from a place of strength. More importantly, regardless of nationality, the "lower" and "middle" class across the globe will be competing with each other (on price) for these resources. Somehow I believe the upper crust in each country will somehow survive; I expect economic disparity to continue to grow within the vast majority of countries, continuing a trend of the past 10-15 years. And this will lead to more social strife within the countries. I believe this is already happening in the US....but its a slow erosion. When you cannot feed your family, you tend to get desperate. But I am open to (and hoping) I am completely wrong on this specific thesis.

But for our investing focus the game is to find the coming shortages, understand the powerful macro trends these shortages will generate, and get in before the herd. Eventually the masses will "discover it" (probably from a Wall Street Journal rticle), jump in with their leveraged unregulated pools of capital, drive the price up too far, cause havoc and volatility of unheard magnitude (if you only saw how boring fertilizer stocks used to trade), and corrections will happen along the way. CNBC will tout "the move" is over - and then we'll start on an new leg up a few weeks/months later. And so we should repeat for many many many years. But again, Commodities are Dead - Fox Business and CNBC told me so.

  • Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth's resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel growth. Today the old fears are back.

  • Although a Malthusian catastrophe is not at hand, the resource constraints foreseen by the Club of Rome are more evident today than at any time since the 1972 publication of the think tank's famous book, "The Limits of Growth." Steady increases in the prices for oil, wheat, copper and other commodities -- some of which have set record highs this month -- are signs of a lasting shift in demand as yet unmatched by rising supply.

  • As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.

  • The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue.

  • "We're living in an era where the technologies that have empowered high living standards and 80-year life expectancies in the rich world are now for almost everybody," says economist Jeffrey Sachs, director of Columbia University's Earth Institute, which focuses on sustainable development with an emphasis on the world's poor. "What this means is that not only do we have a very large amount of economic activity right now, but we have pent-up potential for vast increases [in economic activity] as well." The world cannot sustain that level of growth, he contends, without new technologies.

  • Today's dire predictions could prove just as misguided as yesteryear's. "Clearly we'll have more and more problems, as more and more [people] are going to be richer and richer, using more and more stuff," says Bjorn Lomborg, a Danish statistician who argues that the global-warming problem is overblown. "But smartness will outweigh the extra resource use." (Sure he is from Denmark where everyone is happy, and the gulf between rich and poor is tiny - I mean those darn socialist northern Europeans - always finding the silver lining. p.s. can I eat or put smartness in my car?) [Feb 18: Economic Woes Reveal a Long-Felt Unease & Denmark is the Happiest Place on Earth?]

  • Some constraints might disappear with greater global cooperation. (right? like the Kyoto treaty for example where the most powerful country on the globe avoided like the plague) :) Where some countries face scarcity, others have bountiful supplies of resources. New seed varieties and better irrigation techniques could open up arid regions to cultivation that today are only suitable as hardscrabble pasture; technological breakthroughs, like cheaper desalination or efficient ways to transmit electricity from unpopulated areas rich with sunlight or wind, could brighten the outlook.

  • In the past, economic forces spurred solutions. Scarcity of resource led to higher prices, and higher prices eventually led to conservation and innovation. Whale oil was a popular source of lighting in the 19th century. Prices soared in the middle of the century, and people sought other ways to fuel lamps. In 1846, Abraham Gesner began developing kerosene, a cleaner-burning alternative. By the end of the century, whale oil cost less than it did in 1831. (I do believe this will happen in the 'long run' but a long period of struggle and pain before)

  • A similar pattern could unfold again. But economic forces alone may not be able to fix the problems this time around. Societies as different as the U.S. and China face stiff political resistance to boosting water prices to encourage efficient use, particularly from farmers. When resources such as water are shared across borders, establishing a pricing framework can be thorny. And in many developing nations, food-subsidy programs make it less likely that rising prices will spur change.

  • "If our patterns of living, our patterns of consumption are imitated, as others are striving to do, the world probably is not viable." - Nobel laureate Joseph Stiglitz

  • One danger is that governments, rather than searching for global solutions to resource constraints, will concentrate on grabbing share. (Bingo - humans are about self preservation! Keep your DNA pool alive - bottom line. Nations won't act too differently) China has been funding development in Africa, a move some U.S. officials see as a way for it to gain access to timber, oil and other resources. India, once a staunch supporter of the democracy movement in military-run Myanmar, has inked trade agreements with the natural-resource rich country. The U.S., European Union, Russia and China are all vying for the favor of natural-gas-abundant countries in politically unstable Central Asia.

  • Competition for resources can get ugly. A record drought in the Southeast intensified a dispute between Alabama, Georgia and Florida over water from a federal reservoir outside Atlanta. A long-running fight over rights to the Cauvery River between the Indian states of Karnataka and Tamil Nadu led to 25 deaths in 1991.

  • Nagpur in central India once was known as one of the greenest metropolises in the country. Over the past decade, Nagpur, now one of at least 40 Indian cities with more than a million people, has grown to roughly 2.5 million from 1.7 million. Local roads have turned into a mess of honking cars, motorbikes and wandering livestock under a thick soup of foul air.

  • In 2005, China had 15 passenger cars for every 1,000 people, close to the 13 cars per 1,000 that Japan had in 1963. Today, Japan has 447 passenger cars per 1,000 residents, 57 million in all. If China ever reaches that point, it would have 572 million cars -- 70 million shy of the number of cars in the entire world today.

  • China consumes 7.9 million barrels of oil a day. The U.S., with less than one quarter as many people, consumes 20.7 million barrels. "Demand will be going up, but it will be constrained by supply," ConocoPhillips Chief Executive Officer James Mulva has told analysts. "I don't think we are going to see the supply going over 100 million barrels a day, and the reason is: Where is all that going to come from?"

  • There are no substitutes for water, no easy alternatives to simple conservation. Despite advances, desalination remains costly and energy intensive. Throughout the world, water is often priced too low. Farmers, the biggest users, pay less than others, if they pay at all.

  • In California, the subsidized rates for farmers have become a contentious political issue. Chinese farmers receive water at next to no cost, accounting for 65% of all water used in the country. Parched northern China has been drawing down groundwater supplies. In Beijing, water tables have dropped hundreds of feet. In nearby Hebei province, once large Baiyangdian Lake has shrunk, and survives mainly because the government has diverted water into it from the Yellow River.

  • China's farmers need water because China needs food. Production of rice, wheat and corn topped out at 441.4 million tons in 1998 and hasn't hit that level since. The farmland squeeze is forcing difficult choices. After disastrous floods in 1998, China started paying some farmers to abandon marginal farmland and plant trees. That "grain-to-green" program was intended to reverse the deforestation and erosion that exacerbated the floods. Last August, the government stopped expanding the program, citing the need for farmland and the cost.

  • A growing taste for meat and other higher-protein food in the developing world is boosting demand and prices for feed grains. "There are literally hundreds of millions of people...who are making the shift to protein, and competition for food world-wide is a new reality," says William Doyle, chief executive officer of fertilizer-maker Potash Corp. of Saskatchewan.

  • It takes nearly 10 pounds of grain to produce one pound of pork -- the staple meat in China -- and more than double that to produce a pound of beef, according to Vaclav Smil, a University of Manitoba geographer who studies food, energy and environment trends. The number of calories in the Chinese diet from meat and other animal products has more than doubled since 1990, according to the U.N. Food and Agriculture Organization. But China still lags Taiwan when it comes to per-capita pork consumption. Matching Taiwan would increase China's annual pork consumption by 11 billion pounds -- as much pork as Americans eat in six or seven months.

  • In years past, the U.S., Europe and Japan have proven adept at adjusting to resource constraints. But history is littered with examples of societies believed to have suffered Malthusian crises: the Mayans of Central America, the Anasazi of the U.S. Southwest, and the people of Easter Island. Those societies, of course, lacked modern science and technology. Still, their inability to overcome resource challenges demonstrates the perils of blithely believing things will work out, says economist James Brander at the University of British Columbia, who has studied Easter Island.

Actually a very in depth article and one worth the full read. You can dispute it or say everything will take care of itself in the end; maybe. But it summarizes many of my views, and each time I hear this garbage about the end of commodities due to hedge funds leaving the field like the locusts they are, I have to just smirk. But if CNBC says so...

So if oil is $65, $85, $105, or $125 in 2 weeks or 2 months - the manic depressive market will react violently one way or the other - but their timeline is minutes, days, hours in most cases. If you look past the trees, the forest looks far more alarming...

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