Unlimited Possibilities

By John Lumbard, CFA.

In 1972 the Club of Rome, a global think tank formed by “scientists, economists, heads of state, UN bureaucrats, high-level politicians and government officials” caused an international sensation with the publication of The Limits to Growth, which predicted that population growth and economic growth would exhaust all the world’s resources and overwhelm our ability to dispose of waste and pollution.

That was more than 40 years ago, and it hasn’t happened. And in that time we’ve seen any number of scares (“we’re running out of oil, water, copper, food, arable land, rare earths . . . ”) that also failed to come true.  When whale oil became scarce we discovered oil that was literally seeping out of the ground;  and as demand grew, prices rose enough to justify drilling deeper, on land and in the sea, wringing oil out of rocks that once seemed unyielding.

The textbook you used in Economics 101 told you exactly what would happen to the supply and demand for oil and natural gas. The price of natural gas soared in 2005, kicking off a new round of experimentation in our massive shale reserves.  Oil prices spiked to $135 in 2008;  and in response our gasoline consumption declined sharply.  Oil production began to soar.

The food shortages of the 1800s gave way to an endless string of achievements in mechanization, fertilizer, breeding, and other techniques that spectacularly increased both yield per acre and yield per worker. Densely-populated Europe recently surpassed the U.S. to become the world’s largest agricultural exporter—although a glut of American wheat and corn could change that in a hurry.  Water?  The world used half as much water in 2000 as experts had predicted in the 1960s and 1970s.  Scarcity caused farmers to use water more efficiently, and now we can look forward to desalinization.  44% of the world’s population lives within 150 km. of the sea.

Even the threat of population growth has faded. A quick look at the table provided by the World Bank shows that there are fewer nations with 3%-plus population growth than there are whose populations are actually shrinking.  Many developed countries are worried that they won’t have enough workers, savings, or tax revenue to care for the elderly of the future.


“Almost every global environmental scare of the past half century proved exaggerated, including the population “bomb,” pesticides, acid rain, the ozone hole, falling sperm counts, genetically engineered crops and killer bees. In every case, institutional scientists gained a lot of funding from the scare and then quietly converged on the view that the problem was much more moderate than the extreme voices had argued.”

— Matt Ridley, a member of the British House of Lords, and author of The Rational Optimist


Yes, there’s plenty to worry about in the world. Terrorism is growing in Iraq and Syria, and there’s trouble in Ukraine (and in “the Ukraine”, which still sounds better to our ears).  China’s territorial disputes with Japan and Vietnam have been sharpened by a massive buildup of naval forces across the region.  Many of Europe’s economies are in trouble again (“Italy, the third-largest Eurozone economy, has returned to recession and remains saddled with a debt equal to 136 percent of GDP” says ­The NY Times).

The U.S. economy is just fine, thank you.

The Goldilocks Economy

We still believe that this economic cycle will last another two years, and probably three. There’s little inflation, despite the soon-to-end binge of money-printing, and little reckless lending or borrowing.  We don’t have too many homes, cars, or factories, so there’s more building ahead.  The oil and gas boom is quietly filling the pockets of dirt-poor farmers and ranchers, and causing a boom in infrastructure and in industries that benefit from low gas prices.  Anybody who heats a home or office with natural gas has extra cash to spend on cars, boats, and granite countertops.

Stocks are still cheap. It’s still easy to find good companies that sell at 12 times their earnings.  That’s an “earnings yield” of more than 8%, at a time when U.S. Treasury bonds sell at 3% or less.  The dividend yield on the S&P 500 is still almost 2%!  We’re not giving up our suggestion that this long bull market—from 2009 to 2016, or even longer—might eventually become a bubble.



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