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we have a market today which feels superficially like 2000 and I think it's going to play out initially like 2000 and then unfortunately it's going to phase As He suggests into the 70s where the deflationary effects on the economy and the stock market will result in a world rather like the 70s where all assets are simply much lower price than they are today a word on on inflation too I completely agree the array on on short-term problems which I I would summarize as mandatory and and general Federal Reserve over stimulus for 30 35 years the war and covid all of those three influences guaranteeing that we have uh relatively intractable problem in the short intermediate term but what worries me is the longer term Arguments for inflation which is one we are running out of people in China where the 500 million extra Farmers precipitated globalization they have now had diminishing cohorts of 20 year olds for 20 years and they are guaranteed since they're alive now we know the baby cohorts are dropping like a stone they are simply going to have a shortage of Labor as is the developed world together that is not a trivial block the developed World Plus China all of them will be squeezed for labor after the Bubonic plague they had a hundred year honeymoon period in which wages went up so much it wasn't reached for another several hundred years in the industrial revolution and we are entering a period where labor is simply scarce which feels to me inflationary and at the same time we have a scarcity beginning in resources and we keep an original unusual index a GMO it's 36 equal weighted important the most important Commodities so it's not dominated by oil and it showed a declining pattern for 102 years from 1900 to 2002 and yes it was interrupted by World War one and World War II and OPEC why wouldn't it be but it wanted to go down it went down 70 it took the index down to 30.
today 120 two years later the index is down 10 percent it has gone to 90. the average important commodity has just spent the last 20 years going from 30 to 90. it has tripled the reason is of course the growth of China but I believe very passionately looking at the data that it also represents the intrinsic scarcity the war between deeper wells worse iron ore Etc the best go first the struggle is always between technology which for a hundred years got ahead of scarcity it was two paces down for deeper and three and a half Paces up for technology and now we've reached a phase where we've gone through that stuff and now we have two paces up for technology and three Paces down for scarcity we the data is screaming at us now for 20 years that we're beginning to run out it doesn't and a war of course and covered we're so fragile all you have to do is cough now and it ricochets around the world in price spikes and and and and and and shortages and bottlenecks and that is the world we better get used to living in we're going to have a world of increasing number of bottlenecks and shortages and the same applies to food the UN food index is higher today than any time in its history of the last 50 years since it started okay so you you have price pressure on raw materials Metals food you have price pressure long term on labor this surely feels like a new era in which uh inflation will be part of the background music just like it was in the 20th century and perhaps more so the risks of a debt bubble breaking and the rest of an equity bubble breaking have simply not been understood by our Federal Reserve since Paul Bowker they are incredibly naive they haven't even got a clue they're not even interested in the idea the idea bernanke's saying oh the U.S housing markets always has never declined it merely reflects a strong U.S economy Alan Greenspan encouraging etc etc right through until today they don't realize that they're playing with such fire my second point high levels of debt are are just far too often seriously dangerous and should be in general discouraged actively that should be one of the responsibilities of top management including the FED itself and let me just give you an example why why do you like low rates because it encourages death why do you like more debt because it encourages growth that's the idea so let me give you the ultimate statistical test of that we start in 1985.
and we have been modestly increasing the debt to GDP ratio all that together uh just drifting slightly up due to technology and then the technology I mean the introduction of more and more sophisticated financial instruments but not Rising dramatically and then in 85 it kills to a 45 degree angle and shoots across any page and goes from about 1.1 times GDP to well over three so in that little window of 35 years we triple the debt to GDP ratio it's a big chunk of time is the biggest most important economy on the planet a pretty good test so what happens to growth it inflicts downwards and from 85 we grow more slowly Grant you there are many other factors that work as a complicated picture but there is little room in that equation for the idea that law that creates more growth it is not proven in the data it is held to be the case it is an assumption like most of modern economics but it is not proven by the data I would suggest that there is no evidence at all to increase levels of macro debt to GDP have anything to do with growth they have everything to do with higher risk from time to time they made me think that when we're selling our resource portfolio we we have a wonderful exhibit that looks at the correlation between all the major sectors utilities consumption and so on consumer goods and there's only one where as the time period lengthens the correlation drops and that is a resource and resources drops to such good effect that based on the last 80 years of data every rolling 10-year period that the 10-year correlation is negative so if you believe um in inflation you know that resources do very well you also know that in the long run it's strongly negative it's negatively correlated modestly with the rest of the portfolio as we're seeing today when they do well it puts a burden on the rest of the economy and they do bad so there is a very strong case here for a resource portfolio on resources just a point that um the last time we had a a Super Bubble in Commodities there were very large new mines waiting to come online what has happened since the 2011 crunch when China slowed down in its heavy industrializer and the growth rate on on of for iron ore and coal drops from double digit to zero dead flat for three years in a row by breaking the back of the of the resource industry they have not done any capex it takes 5 to 15 years to bring on a mine they have not been doing this there are no great reserves of lithium Cobalt copper nickel even iron all to come online this time and everybody knows it if you look at the need for these particularly green Metals Greening metals there are it doesn't compute there are no backup resources and that applies right across the length and breadth of resources they have not been capexing even in oil and gas for for the last 10 years to a remarkable degree
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