Markets in everything and the fiduciary trap

Investment manager Jeremy Grantham’s latest quarterly newsletter is even more noteworthy than usual. It begins on a note of concern bordering on panic that I’ve never seen in an investment letter, and sustains that tone throughout:

We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.

The rest of the letter includes page after page of substantiating material, addressing everything from the effects of declining water stocks to the geopolitical implications of chronic food emergencies.

Given that, Grantham’s investment conclusion might seem surprising:

The one-line summary is this: I am very bearish on the problems we humans face and, sadly, very bullish on resources. Not surprising, I am even more convinced than I was a year ago of the inevitability of rising resource prices (and, unfortunately, associated societal and international instability). Therefore I am more confident in my suggested investment battle plan of a year ago. For any responsible investment group with a 10-year horizon or longer, one should move steadily to adopt a major holding of resource-related investments. For my Foundation (i.e., personally as opposed to institutionally where, reasonably enough, we cannot impose 10-year plus horizons on our clients) I had adopted 30% in resources as my eventual target and was slowly averaging in, nervous of near-term substantial price declines, but even more nervous of completely missing my own point. In my Foundation, I have currently reached about the two-thirds point of 20%.

This to me is the  central problem with allowing investment activity into markets for necessary goods. The sterile economic arguments that these investments allow the information signals in markets to be more accurate fall flat when the new participants are less informed (does Grantham really know more about wheat than a farmer in Kansas?), and become toxic when food markets are overwhelmed by short-term speculative activity.

Still worse, once we have a viable and easily accessed financial market in a good, it becomes a breach of fiduciary duty for a manager not to invest in it. Someone like Grantham, who is tasked with investing across major asset classes, essentially has little choice in fulfilling his mandate as a fiduciary but to invest wherever he can.

Put another way, once a market is financialized, it is almost impossible to de-financialize it.

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