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Geologist Takes Grantham to the Woodshed

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December 04, 2012 – Comments (0)

Board: Macro Economics

Author: ADrumlinDaisy

OT CONTENT ALERT: 66% of this post is OT by actual word count.
EXPLANATION: Life lessons for my kids, by gentle osmosis
SUGGESTION: Just read the material after the row of asterisks
COMMENT: Thank you to YodaOrange for consistently fascinating and valuable contributions

Here in West Virginia, the typical fight is a healthy cardiovascular exercise where everyone works up a good sweat and no one is hurt, e.g.:

Clem: “Oh, yeah?”
Gib: “Yeah!”
Clem: “Says who?”
Gib: “Says ME!”

Gib then pushes Clem, who responds with a wild roundhouse swing that misses Gib by about thirty feet, causing Clem to stumble into Larry, who pushes him into Jimmy, and they all fall down and wrestle around for ten or twenty seconds until, everybody being in the approximate physical condition of Jabba the Hut, the action stops and everyone wheezes and laughs and orders beers all around and brags about how he whomped the other guy. So overall it is a positive, team-building experience.

It is different in Britain, as far as I can tell. The style there seems to run more in the direction of the pointed barb and vitriol.

You may recall that Legendary Investor Jeremy Grantham (my personal hero, because he is an environmentalist with a British accent) has predicted that many resources will become scarce in coming years, with two consequences; (i) said resources will become more expensive; and (ii) widespread suffering will result from the scarcity. Grantham identifies potash and phosphate as special cases because they will run out and cannot be replaced.

We now have a response from a fellow named Tim Worstall, who is apparently also British (since he spells “ton” as “tonne,” which is of course a complete waste of two perfectly good letters). Here is the link:

http://www.forbes.com/sites/timworstall/2012/11/16/what-jere...

You can tell right from the start that Worstall is licking his chops:

Oh dearie me, oh my.

I have to stop right here for just a minute, because I know what you are thinking. You are thinking, “Yuck, did a grown man actually say that? Someone should paste this guy right in the kisser just on general principles.”

Now if this guy were from West Virginia, you would be absolutely correct, but these British guys are different. Trust me, I know. They look like beanpoles, they have worse teeth than we do here in West Virginia (and that is saying something), and they sound like complete wimpy-boys. But if you try to poke this guy in the nose, odds are that he will turn out to be the former three-time bare-knuckle champion of East Wentsworth, or a Gold Glove welterweight from Lower Prince’s Abbey, or some such thing.

How do I know this? Let’s just leave it at this. Many years ago, I was standing at a bar in Avalon, on the beautiful island of Catalina, gussied up in my very best shore clothes, including a beautiful orange tie with swirly green bloopy fish on it, when I heard a sissy British voice say, “Hey, mate, I wouldn’t wear that tie to a dog fight.”

I looked over and saw a little guy with really bad teeth, so I just clobbered him right behind the ear, and honestly, that should have been that. But he got right back up and whappity-whap-whap it seemed like about five guys hit me at once, but it was just this one wimpy guy. And when I hit the deck he stepped right back and let me get up, which I kind of admired as I proceeded to do so. And we danced around for a while, me landing one blow in ten, until finally I said, “Seriously, bub, you are looking a bit peaked. Do you need a break?”

And he laughed and said, “Whatever you say, mate.”

I bought him a beer as an apology for wearing out his knuckles that way, and we got to talking, and I learned a lesson or two about these British guys.

So before you are tempted to teach Worstall the rules of manly etiquette, it might behoove you to Google him just in case.

But I digress.

Worstall continues:

This is just a horrible mistake by Jeremy Grantham here. I agree that he’s a vastly better investor than I am, no doubt hugely more intelligent as well. But this really is a basic, schoolboy error.

So we can speculate here that Worstall does not like Grantham. Why? I have no idea – maybe it is because Worstall is a highly intelligent geologist who feels that it is a very unfair world where he is worth thousands while Grantham is worth hundreds of millions, maybe more.

Oh gee, I need to digress one more time here, which I really regret, but this reminds me of something I want to tell my kids . . . .

After spending about ten years as a lawyer and learning that I really did not like lawyers, including the lawyer that was wearing my shoes, I went back to school to get a Ph.D. in theoretical particle physics. And I became very impressed with a math professor who got his Ph.D. in theoretical physics from Cal Tech and then went on to specialize in all kinds of advanced physics-related math (group theory, differential geometry, etc.).

So my friend and I would go over to this guy’s office and just hang out, talking math and physics. For example, I would say, “Can you prove the Virial Theorem off the top of your head?” and he would respond, “Classical or quantum mechanical?” and then prove both right there, without even blinking. How cool is that?

It was amazing; he knew so many interesting things – so many very deep, very important things. I wondered what it would be like to have my head filled with great ideas like that – how wonderful it would be to spend my time thinking about great concepts.

And then one day, as we were sitting there, his fellow professor walked in and they started talking about a new professor and the office the new guy was getting:

Cal Tech Prof: “I hear they are giving him Alistair’s old office!”
Other Prof: “Yes, which is ridiculous, because that office has two and a half windows!
CT Prof: “Really!!! He is only four years out of his post-doc, and from Iowa, for God’s sake!”
OP: “And you and I both have two-window offices, and we are already here, and have seniority!
CT Prof: “So you are saying he is getting a larger office than we have . . . .”
OP: “AND his office looks out at the quad!”
CT Prof: “This is outrageous! How does he rate an extra half-window and a southern view?”
Etc., etc., blah, blah, blah . . . . .

I could not believe my ears. These two brilliant men, living the life I so much desired, so fortunate to be blessed with great minds and the opportunity to use them to think about anything they wished – they were sitting there talking about how many windows they had, obsessively, childishly, petulantly. And I realized that everyone has feet of clay, in one way or another . . . .

OK, I apologize once again. Now, let us dive right into the meat of this post, which is important, because Worstall goes on to make some very good, very interesting points – the kind of things that are not only useful, but fun to know.

* * * * * * * * * * * * * * * * * *

He tells us:

1. Ore. There are traces of every metal in every patch of dirt. Ore is simply dirt where we know how to extract the metals: and also the value of the metals is higher than the cost of extraction. Ore is an economic concept, not a natural world one . . . what is dirt and what is ore is a constantly changing spectrum. For . . . the technology of extraction changes over time.

2. Reserves. Reserves are the ore, we know where it is, we know we can extract it at current prices, with current techniques, and make a profit doing so. Further, we have also tested and proven all of this to the satisfaction of the stock market listing rules . . . [reserves] are a both legal and economic concept . . . .

3. Establishing Reserves. You’ll not be surprised to learn that drilling and sampling and sending odd hairy geologists over the hill with little hammers is expensive. So we only do this [to establish reserves] with the stuff we’re likely to dig up in the next few decades. I do not know about you, but this sentence really makes me want to be a geologist – an odd hairy man with a little hammer, sort of like Gimli son of Gloin.

4. Known Unknowns -- Resources. Beyond reserves, we have “resources,” reserves –in-waiting. We’ve only bothered to stake out this side of the hill and in a couple of decades we’ll do the same to the other side. We know it’s there, we’ve just not bothered to prove it yet.

5. Unknown Knowns – More Resources. We do know roughly what the geology of many places is. But we’ve sent very few hairy odd men with hammers over it. . . . We’re sure there’s lots out there. Not sure quite where, in what quantities, quite how we’d get it out. . . . OK, admit it – by now, regardless of your gender at the moment, you also want to be a hairy odd man with a hammer going over the hill.

6. Unknown Unknowns – Total Global Supply. For potassium and phosphorus, for example, the actual amount . . . that the planet itself contains [is considerable] . . . . Phosphorus being some 0.1% of the lithosphere . . . . Potassium perhaps 2.5%. Given that the lithosphere weighs something like 300 billion, billion, tonnes, I have a very strong feeling that that’s enough for us to be going on with. And here I note that a tonne is about 10% larger than a “ton,” and, more impressively, a British “billion” is 1,000 times as large as our American billion.

7. The Point Being . . . that Grantham discusses scarcity in terms of “reserves,” when in fact the more relevant concept is “resources” or, for the very long run, total global supply. Current resource levels are 250 billion tons (I have no idea why Worstall switches spelling of “tonnes” here) of potash against an annual requirement of 33 million tonnes and 300 billion tons of phosphate rock against an annual requirement of 190 million tonnes. I.e., we have resources sufficient to supply current requirements for 7,000 and 1,500 years, respectively.

And, of course, the barbed British conclusion:

Grantham may indeed know how to make money. But I really would suggest a technical dictionary the next time he wants to talk about mine reserves and the availability of resources. For this is just an awful, schoolboy type, error of his.

I have to say that, despite being a Grantham admirer, I find this discussion compelling.

Rich

A Drumlin Daisy 

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