Jeremy Grantham was so, so wrong.
In GMO’s quarterly letter, the famed investor admitted that he simply whiffed on the latest commodity bubble popping.
“Every major bull event is called a paradigm shift but they almost never exist,” wrote Grantham.
“Almost never. But not never, ever.”
Basically, Grantham admits that he expected the new, high price of commodities represented a paradigm shift for the industry based on scarcity and demand from China.
Instead, the commodity bubble was just another mispriced asset wearing the clothes of a purported new paradigm. And so it popped.
Here is how Grantham outlines his biggest errors:
- Oil: In 2005, Grantham said that there was a paradigm shift in oil, calling for “peak oil.” The idea was that the resource was drying up and OPEC controlled the supply. A strong cartel, diminishing supply, and increasing demand from emerging markets would all contribute to skyrocketing oil prices for decades. In early 2016, oil dipped to under $30 a barrel for the first time in over a decade.
- China: Similarly, Grantham projected that the prices of other commodities would rise dramatically due to diminished supply and the monumental rise of demand in China. Despite warnings that a China commodity demand slowdown could hurt his prediction some, Grantham said he did not expect the total plateau that has occurred.
- Grains: Grantham also said that long-term shifts in weather patterns would make grain hard to come by and drive up the price of foods. While droughts did cause prices to increase after his prediction in 2011, they have since dropped again.
Grantham did conclude, however, that there are still reason to believe that all three of his predictions could still come true in the long-term.
For now, however, Grantham owned up to his mistakes.
“There are very, very few paradigm shifts compared to natural investment bubbles that fully break,” wrote Grantham. “I, more than most investors, should have known. Even some of the rare, extraordinary outliers can prove to be mean-reverting bubbles eventually.”
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