Grantham: "Entering Dangerous Food Crisis"; Profit Margins Weakening Put Stocks at Risk

Corn Harvest in Iowa (Wikimedia Commons)
In GMO's Q2 2012 Quarterly Letter, Jeremy Grantham, co-founder of the $105 billion investment firm GMO LLC, warned that we are "entering a long-term and politically dangerous food crisis" that could last for decades. And towards the end of the note he mentioned that corporate profit margins weakening could be a warning sign for stocks (hat tip PragCap).

First, here are Jeremy Grantham's thoughts on the "chronic global food crisis" and how to position investment portfolios for this long-term, unfortunate trend.

"1. Last year we reported the data that showed that we are 10 years into a paradigm shift or phase change from falling resource prices into quite rapidly rising real prices.

2. It now appears that we are also about five years into a chronic global food crisis that is unlikely to fade for many decades, at least until the global population has considerably declined from its likely peak of over nine billion in 2050."

He believes investors should be overweight resource stocks, but mentioned it would come at a cost to his overall portfolio since a food crisis and high commodity prices would be a huge tax on households, companies that use resources, and the overall economy (GDP growth). Like when oil spiked to $147 in 2008 two months before the credit market and economy crashed.

"My personal, somewhat arbitrary breakdown of a targeted 30% is to have 15% in forestry and farms, 10% in “stuff in the ground,” and 5% in resource efficiency plays."

"I more convinced than a year ago that sensible long-term investors’ 7- to 10-year horizons should overweight resources (30% is about two times market weight), but I am now also convinced that rising resource prices will worsen the prospects for the balance of the portfolio, by both squeezing profit margins and reducing overall growth."

And finally, here are Jeremy Grantham's views on the stock market. Like John Hussman (Hussman Funds), Grantham thinks that profit margins weakening from record levels could be a risk for the stock market.

"One slight change, though, is that fantastic (almost unbelievable) profit margin and earnings gains have finally weakened a little. They, together with Bernanke’s super low rates, have been the twin pillars of the market and not bad ones at all: here we are up 8% for the year in a thoroughly unsettling financial and economic world. With margins weakening, one of the twin pillars is looking shaky and price declines look more likely than before.”

Read the report here. I remember blogging about his big call on resources last year: Jeremy Grantham: "Days of Abundant Resources and Falling Prices Are Over Forever" (see the chart he provided).

Related: Jim Rogers, chairman of Rogers Holdings, and Frank Holmes, CEO and CIO of U.S. Global Investors, are very bullish on commodities as well. Here are a few guest posts from Frank Holmes' blog: What the Next Decade Holds for CommoditiesHow to Look Past Negativity to See Opportunity. And in an interview recently with OilPrice.com, Jim Rogers said he was "more optimistic about agricultural than anything else." Read the full interview: Oil, Gold, Asia & the Best Investment in the World Right Now - An Interview with Jim Rogers.

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