The Man Who Called the Financial Crisis Has Another Warning for Investors

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For more than 15 years, Jeremy Grantham, co-founder of the Boston-based asset-management firm GMO—and credited with predicting the 2000 and 2008 downturns—has spoken out about the perils of the changing climate and what it means for life on Earth.

Now the world is paying attention. The World Economic Forum has determined that the top five risks are climate-change related, with extreme weather as the No. 1 global risk. And the Task Force on Climate-Related Financial Disclosures (TCFD) announced Wednesday that its program has been endorsed by more than 1,000 organizations, comprising central banks, credit-rating firms, companies, and investors.

Recently, Barron’s caught up with Grantham, 81, at the Cayman Alternative Investment Summit. A condensed and edited version of our conversation follows.

 

Barron’s: You’ve spent the past 10 years trying to raise consciousness about climate change. Now that it’s all anybody at the World Economic Forum can talk about and 75% of Americans finally believe that it’s real, you must feel gratified.

Grantham: The last two years have been very encouraging. The previous eight were a nightmare. I used to talk about climate change, and my clients would roll their eyes and ask why I was wasting their time. But now everyone is at least talking about it. The problem is, it’s all talk. Last year more carbon-dioxide molecules went into the air than any single year in history. We must try harder.

People worry about Miami or Boston being underwater, but what are the real challenges resulting from climate change?

Miami underwater is not a bad proposition, as far as I’m concerned [laughs]. The real problem is in agriculture, increased temperature, and increased water where you haven’t needed it. And hot weather and fires. Rising water levels are much more dangerous in terms of the loss of the great rice-producing deltas: the Nile, the Mekong, the Ganges, et cetera represent something like 20% to 25% of all the rice grown in the world. And they will be covered up for sure by 2100.

I like to show a slide of global insured losses from wildfire. The loss from 2017 was bigger by itself than any previous decade in global fire damage. If that wasn’t enough, 2018 was equally big, and 2019 isn’t on the books but the global harm got serious very quickly.

You are also worried about chemical toxicity and just published a paper about this. Why?

People are totally unaware of toxicity. It’s growing much faster than climate change. The sperm count is easy to measure and rather personal for a man. In 1945, the sperm concentration was roughly 120 units. Today it’s 40. The quote I used at the beginning of my piece is Paul McCartney’s “Suddenly, I’m not half the man I used to be.” Actually, it’s about a third of the man. It’s dropping at about 1.9% a year and showing no signs of decelerating.

We were drawn into this through our study of insects, which are also getting wiped out. Bumblebees everywhere are in ragged disarray. The same is happening to humans. Endocrine disruptions are [being caused] by plastics, but most particularly from pesticides. They’re designed to kill funguses, insects, plants. It’s not surprising that they’re particularly active.

Studies with women suggest it’s had a terrible effect on the ability to produce a live birth. Men who consume fruits and vegetables with fewer pesticides have double the sperm count as men consuming food with higher toxicity.

You notice how quickly people got exercised about plastics in Europe, and how quickly the price of Bayer fell [after lawsuits alleged that its Monsanto unit’s Roundup weedkiller caused] a few cases of a rather esoteric cancer, non-Hodgkin’s lymphoma. Imagine what will happen when the world realizes [about] these chemicals. Already, more than 15% of young couples need help [conceiving]. In 15 years, it will be 30%. And in 15 or 20 years after that, only a handful won’t need help.

This is an incredible crisis and bears heavily on the attractiveness of chemical companies. Ten years ago, I said watch your tails in oil. Everyone rolled their eyes. Well, in that time period, that one industry is up just over 5%, and the S&P 500 has tripled. This is an incredible loss of value.

Let’s return to climate change. How far can we go toward solving this problem without political leadership in the U.S.?

America thinks it’s the center of the universe. If the rest of the world really pulled its weight, we can make considerable progress. But of course it’s very damaging not to have American leadership [in solving climate change], which we’ve never had on this issue. Half [of the Democratic candidates] are pretty good, and the other half would be real leaders, so this is an amazing change from any previous lineup of possible presidential candidates.

Who are you supporting?

Mike Bloomberg was a classmate at business school, and Tom Steyer is a buddy and colleague in climate work. They’re both very, very good on climate. So either of them would do very nicely. I’m also a great fan of interfering with corporate power. I think corporate power is weakening the U.S. capitalist system in particular, as well as the democratic system. And the people who look at that as No. 1 on the agenda are, of course Bernie Sanders, Tom Steyer, and Elizabeth Warren. That for me is an important issue.

How do you model for climate change when forecasting future returns? Which asset classes will perform worst?

We have a climate change guy [at GMO] whose ambition in life is purely to make money by understanding these permanent changes quicker than anyone else. ESG [environmental, social and governance investing] is great, by the way. Nothing wrong with S and G, as I like to say. But E is about survival. S and G is about good behavior. One should really focus on E, rather than ESG in my opinion.

Obviously, chemicals, oils, fossil fuels in general are looking pointless on a long horizon. Decarbonizing the system is a massive move that permeates every industry in the end. And we will do it, by the way. Technology will make it relatively easy. We will have plenty of cheap green energy in 50 years. We will have nothing but wonderful electric cars that don’t break down, unbelievably efficient. My Tesla Model 3 proves it. We will find new organic materials. We will concentrate on aluminum and iron, which are plentiful, and decarbonize how we make steel and cement, and use building materials like new generation wood for building an increasing percentage of structures.

The problem is, when? If we proceed at the current pace, we will be OK in terms of technology, but enormous, irretrievable damage will happen to biodiversity. We have no idea what happens when you wipe out insects, by the way. The greater the uncertainty, the greater the risk when you’re dealing with existential threats, as we are.

GMO manages billions of dollars. Have you considered taking a page from [BlackRock CEO] Larry Fink’s book and starting to divest from hydrocarbons?

Let me just say about Larry Fink—that’s a big dog, and it has a very loud bark. And now let’s see if it can sharpen its teeth. Because its green voting on the big index funds is pretty much dead last. They could do better. GMO could do better. You just have to use as much influence as you can. Obviously the client, in the end, has the right to make their own decisions, and institutional managers have to do what they’re told. But I’ve tried very hard over the last 15 years to inculcate to our clients that this will be an enormous issue, and they should change their portfolios accordingly.

Will we see mean reversion in oil stocks?

There is of course a chance of a very spectacular advance. Having said that, if you look out 10 years, this is a dreadful industry. The oil industry isn’t rolling with the punches, in case you haven’t noticed. The oil industry is constantly putting out estimates that understate the greening of the economy, and taking a very, very bullish view of what will happen to oil. The capex budget for the next 12 years for the largest oil companies is substantially larger than the last 12 years.

Every year we produce about 1% more than the oil that we have in the ground through increased technology. We don’t need to discover another barrel, and we can’t afford to burn what we have. An enormous amount of stranded assets will be revealed. So be very careful. That’s not to say they won’t go up 50% or even 100%. But it will be only temporary. You have to be quick on your feet. You have to be a trader. It’s not what we do.

 

What are some promising climate-change solutions you’ve invested in?

Let me just say, Americans as a whole are too protective of the giant companies. The companies that are really working have all sprung out of venture capital in the last two decades. Venture capital is the one place where America has been exceptional. The Grantham Foundation has an objective in 10 years to be 70% in VC, which would make us unique. We’re currently about 60%, having climbed steadily over 10 years. Half of that is earmarked for green [investments], or 35% of $1.1 billion. Green VC takes that subset of the economy that’s guaranteed to be growing the fastest. It’s like comparing the growth of the top line of electric cars to the growth of top-line revenue of diesel and gasoline.

It doesn’t mean you’re making money, by the way. There’s no quicker way to lose money than betting blindly on a rapidly growing industry. But we do a lot of so-called mission-driven investing, and far from thinking that we are compromising with return, in this case, green investing is the best return from a subset of the entire world of the investment business.

Any other words of advice for investors?

People listen but don’t really take it in. If that continues, climate change is going to trample through your portfolio and kick its ass. And you have to care about it, because it’s not just an issue for your miserable portfolio. It’s an issue for your grandchildren. Capitalism has a way of taking perfectly reasonable human beings who play at the weekend with their grandchildren, who are occasionally altruistic, and turning them during the workweek into Milton Friedman zombies working to maximize short-term profit. If you said, “My only objective as a human being is to maximize my own advantages,” that’s a workable definition of sociopath. And yet that is what the corporations do. And we treat them as damned human beings. It’s remarkable. So wake up.

[Hydrockers]

Single line pls

[shaw183]

Just now, Hydrockers said:

Single line pls

emchesina market padeyam ani antundu bro

[afdb002]

14 minutes ago, Spartan said:

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For more than 15 years, Jeremy Grantham, co-founder of the Boston-based asset-management firm GMO—and credited with predicting the 2000 and 2008 downturns—has spoken out about the perils of the changing climate and what it means for life on Earth.

Now the world is paying attention. The World Economic Forum has determined that the top five risks are climate-change related, with extreme weather as the No. 1 global risk. And the Task Force on Climate-Related Financial Disclosures (TCFD) announced Wednesday that its program has been endorsed by more than 1,000 organizations, comprising central banks, credit-rating firms, companies, and investors.

Recently, Barron’s caught up with Grantham, 81, at the Cayman Alternative Investment Summit. A condensed and edited version of our conversation follows.

 

Barron’s: You’ve spent the past 10 years trying to raise consciousness about climate change. Now that it’s all anybody at the World Economic Forum can talk about and 75% of Americans finally believe that it’s real, you must feel gratified.

Grantham: The last two years have been very encouraging. The previous eight were a nightmare. I used to talk about climate change, and my clients would roll their eyes and ask why I was wasting their time. But now everyone is at least talking about it. The problem is, it’s all talk. Last year more carbon-dioxide molecules went into the air than any single year in history. We must try harder.

People worry about Miami or Boston being underwater, but what are the real challenges resulting from climate change?

Miami underwater is not a bad proposition, as far as I’m concerned [laughs]. The real problem is in agriculture, increased temperature, and increased water where you haven’t needed it. And hot weather and fires. Rising water levels are much more dangerous in terms of the loss of the great rice-producing deltas: the Nile, the Mekong, the Ganges, et cetera represent something like 20% to 25% of all the rice grown in the world. And they will be covered up for sure by 2100.

I like to show a slide of global insured losses from wildfire. The loss from 2017 was bigger by itself than any previous decade in global fire damage. If that wasn’t enough, 2018 was equally big, and 2019 isn’t on the books but the global harm got serious very quickly.

You are also worried about chemical toxicity and just published a paper about this. Why?

People are totally unaware of toxicity. It’s growing much faster than climate change. The sperm count is easy to measure and rather personal for a man. In 1945, the sperm concentration was roughly 120 units. Today it’s 40. The quote I used at the beginning of my piece is Paul McCartney’s “Suddenly, I’m not half the man I used to be.” Actually, it’s about a third of the man. It’s dropping at about 1.9% a year and showing no signs of decelerating.

We were drawn into this through our study of insects, which are also getting wiped out. Bumblebees everywhere are in ragged disarray. The same is happening to humans. Endocrine disruptions are [being caused] by plastics, but most particularly from pesticides. They’re designed to kill funguses, insects, plants. It’s not surprising that they’re particularly active.

Studies with women suggest it’s had a terrible effect on the ability to produce a live birth. Men who consume fruits and vegetables with fewer pesticides have double the sperm count as men consuming food with higher toxicity.

You notice how quickly people got exercised about plastics in Europe, and how quickly the price of Bayer fell [after lawsuits alleged that its Monsanto unit’s Roundup weedkiller caused] a few cases of a rather esoteric cancer, non-Hodgkin’s lymphoma. Imagine what will happen when the world realizes [about] these chemicals. Already, more than 15% of young couples need help [conceiving]. In 15 years, it will be 30%. And in 15 or 20 years after that, only a handful won’t need help.

This is an incredible crisis and bears heavily on the attractiveness of chemical companies. Ten years ago, I said watch your tails in oil. Everyone rolled their eyes. Well, in that time period, that one industry is up just over 5%, and the S&P 500 has tripled. This is an incredible loss of value.

Let’s return to climate change. How far can we go toward solving this problem without political leadership in the U.S.?

America thinks it’s the center of the universe. If the rest of the world really pulled its weight, we can make considerable progress. But of course it’s very damaging not to have American leadership [in solving climate change], which we’ve never had on this issue. Half [of the Democratic candidates] are pretty good, and the other half would be real leaders, so this is an amazing change from any previous lineup of possible presidential candidates.

Who are you supporting?

Mike Bloomberg was a classmate at business school, and Tom Steyer is a buddy and colleague in climate work. They’re both very, very good on climate. So either of them would do very nicely. I’m also a great fan of interfering with corporate power. I think corporate power is weakening the U.S. capitalist system in particular, as well as the democratic system. And the people who look at that as No. 1 on the agenda are, of course Bernie Sanders, Tom Steyer, and Elizabeth Warren. That for me is an important issue.

How do you model for climate change when forecasting future returns? Which asset classes will perform worst?

We have a climate change guy [at GMO] whose ambition in life is purely to make money by understanding these permanent changes quicker than anyone else. ESG [environmental, social and governance investing] is great, by the way. Nothing wrong with S and G, as I like to say. But E is about survival. S and G is about good behavior. One should really focus on E, rather than ESG in my opinion.

Obviously, chemicals, oils, fossil fuels in general are looking pointless on a long horizon. Decarbonizing the system is a massive move that permeates every industry in the end. And we will do it, by the way. Technology will make it relatively easy. We will have plenty of cheap green energy in 50 years. We will have nothing but wonderful electric cars that don’t break down, unbelievably efficient. My Tesla Model 3 proves it. We will find new organic materials. We will concentrate on aluminum and iron, which are plentiful, and decarbonize how we make steel and cement, and use building materials like new generation wood for building an increasing percentage of structures.

The problem is, when? If we proceed at the current pace, we will be OK in terms of technology, but enormous, irretrievable damage will happen to biodiversity. We have no idea what happens when you wipe out insects, by the way. The greater the uncertainty, the greater the risk when you’re dealing with existential threats, as we are.

GMO manages billions of dollars. Have you considered taking a page from [BlackRock CEO] Larry Fink’s book and starting to divest from hydrocarbons?

Let me just say about Larry Fink—that’s a big dog, and it has a very loud bark. And now let’s see if it can sharpen its teeth. Because its green voting on the big index funds is pretty much dead last. They could do better. GMO could do better. You just have to use as much influence as you can. Obviously the client, in the end, has the right to make their own decisions, and institutional managers have to do what they’re told. But I’ve tried very hard over the last 15 years to inculcate to our clients that this will be an enormous issue, and they should change their portfolios accordingly.

Will we see mean reversion in oil stocks?

There is of course a chance of a very spectacular advance. Having said that, if you look out 10 years, this is a dreadful industry. The oil industry isn’t rolling with the punches, in case you haven’t noticed. The oil industry is constantly putting out estimates that understate the greening of the economy, and taking a very, very bullish view of what will happen to oil. The capex budget for the next 12 years for the largest oil companies is substantially larger than the last 12 years.

Every year we produce about 1% more than the oil that we have in the ground through increased technology. We don’t need to discover another barrel, and we can’t afford to burn what we have. An enormous amount of stranded assets will be revealed. So be very careful. That’s not to say they won’t go up 50% or even 100%. But it will be only temporary. You have to be quick on your feet. You have to be a trader. It’s not what we do.

 

What are some promising climate-change solutions you’ve invested in?

Let me just say, Americans as a whole are too protective of the giant companies. The companies that are really working have all sprung out of venture capital in the last two decades. Venture capital is the one place where America has been exceptional. The Grantham Foundation has an objective in 10 years to be 70% in VC, which would make us unique. We’re currently about 60%, having climbed steadily over 10 years. Half of that is earmarked for green [investments], or 35% of $1.1 billion. Green VC takes that subset of the economy that’s guaranteed to be growing the fastest. It’s like comparing the growth of the top line of electric cars to the growth of top-line revenue of diesel and gasoline.

It doesn’t mean you’re making money, by the way. There’s no quicker way to lose money than betting blindly on a rapidly growing industry. But we do a lot of so-called mission-driven investing, and far from thinking that we are compromising with return, in this case, green investing is the best return from a subset of the entire world of the investment business.

Any other words of advice for investors?

People listen but don’t really take it in. If that continues, climate change is going to trample through your portfolio and kick its ass. And you have to care about it, because it’s not just an issue for your miserable portfolio. It’s an issue for your grandchildren. Capitalism has a way of taking perfectly reasonable human beings who play at the weekend with their grandchildren, who are occasionally altruistic, and turning them during the workweek into Milton Friedman zombies working to maximize short-term profit. If you said, “My only objective as a human being is to maximize my own advantages,” that’s a workable definition of sociopath. And yet that is what the corporations do. And we treat them as damned human beings. It’s remarkable. So wake up.

[r2d2]