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Legendary Investor Warns of No Safety Margin from This Collapse

Andy Crowder

For his ability to move markets and shape ideas and policies, Bloomberg added GMO’s Jeremy Grantham to its 50 Most Influential list. Grantham predicted bubbles in Japanese stocks in 1989 and U.S. stocks in 2000, and risk assets in 2007.

Now he has a new prediction.

Forbes recently caught up with the famed investor. Apparently, the first words out of his mouth were, “I think next year will be a dangerous year.”

Grantham listed a few of the worries he has heading into 2013.

One concern on his list is China. He believes the country will continue to slow next year.

The U.S. fiscal cliff also worries him. But he doesn’t believe that’s the only problem with America. Grantham expects U.S. GDP will slow more than expected as Europe and China begin to contract.

Additionally, Grantham notes that returns during the first year of the presidential term are often low. The Fed and government often try to get things in order during the first year, resulting in low returns. There will be no shortage of work to accomplish with the fiscal cliff looming.

Grantham elaborates, “History is quite clear. There has been, on average, no money made in year one and two after a Presidential election going back to 1932, after you adjust for inflation. All the money is made in year three with an adequate return in year four.” His explanation for the gains in the last two years is that year three will typically offer stimulus and year four is the beneficiary of loose policy during year three.

In addition to the budget crisis, he thinks that the Fed may surprise investors. Everyone is under the impression that interest rates will be low for many years. Grantham notes that when everyone passionately believes in a single outcome, an opposite result tends to unfold.

A global slowdown, fiscal cliff, Fed surprise and generally low returns during year one of a president’s term may make it a rough year for investors. However, he fears one thing more than the rest combined.

Grantham fears many things heading into next year, but commodity scarcity tops his list.

The prices of raw materials are accelerating higher. Nearly every commodity has tripled in value since 2002. Though the ascent has been parabolic, Grantham doesn’t believe it’s a bubble … and that’s what worries him. He believes that commodity prices are going higher because we’re running out.

He claims the biggest danger to our society will be food prices and food costs. He also noted that growth in the productivity of grains has fallen to 1.2% per year. This rate exactly matches population growth, leaving society with no safety margin.

However, the rise in food costs and decline in crop growth isn’t Grantham’s biggest long-term worry.

Grantham is distressed most about a coming shortage of two fertilizers: phosphorus and potassium. Fertilizer supplies are dwindling rapidly. And farmers are more reliant than ever on fertilizer to replenish crop soil.

Potassium and phosphorus are necessary to grow crops and livestock. Moreover, phosphorus and potassium occur exclusively in nature. We cannot manufacture them. Once the supply is gone, it’s gone forever.

It’s clear we need these commodities in order to survive. And we appear to have no replacements. Despite Grantham’s more than $99 billion in assets, he can’t get an answer from anyone about what happens when we run out. He claims to have received only one conclusion – if we don’t reduce our usage over the next 20 to 40 years, we’ll starve.

This is nothing new, though. Grantham has been concerned about food scarcity for years, so it’s logical that he’s bullish on investments in natural resources. He advises targeting a 30% allocation to resources, with 15% in forestry, 5% in efficiency investments and 10% in “stuff in the ground.”

Some of his prominent stakes at GMO include Exxon Mobile (NYSE: XOM), Vale S.A. (NYSE: VALE) and Canadian Natural Resource (NYSE: CNQ). Additionally, my premiere stock service, Top Stock Insights, recently added a natural three natural resource companies … one of which is a nat gas stock that may be more than 40% undervalued if Grantham’s scenario plays out.
 

Author owns no holdings in companies mentioned above.