The Cornucopian bet or How it is important to choose your time horizon when choosing an asset and computing performance!

Bonjour, 

A bit more history. This time, we will talk about the Cornucopian bet.

Cornuwhat you will say.

Let us set the context.

In the 1970’s, the Club de Rome was being very active. This is a circle of economists who were convinced that the world resources were finite and that growth will revert to 0% very soon. One of the argument was that raw material prices would soon increase so much that they would stifle activity.

One such economist, Paul Ehrlich became famous with his book: The Population Bomb, where he predicted that hundreds of millions would experience famine regularly. While he was right on this point, he failed to predict the large rise in global population and waistlines.

On the other side were the Cornucopians. They thought that human genius would prevail and that the more population and strain on resources, the more ingenious innovation would come. You could say that fracking is one result of ingenuity in the energy space. A few years back, we could not have accessed these oil and gas reserves. 

One representative was Julian Simon, also a key member of the Cato Institute, a staunch defender of free economics and human-led growth.

The Cato Institute versus Club de Rome.

This is the kind of rivalry was akin to a Mohamed Ali vs Joe Frazier but the punches thrown were mostly under the form of academic papers and conferences.

Now this rivalry was famous for the bet: the Simon-Ehrlich wager.

Ehrlich bet Smith that the real price of 5 metals would rise over the next decade while Simon took the opposite stance.

The five metals were chromium, copper, nickel, tin and tungsten.

The outcome

Guess what: Simon won, as metal prices fell in real terms the following decade.

In this decade, the world population grew by 800m people and yet metal prices went  lower.

3 out of 5 metals saw nominal price falls while all 5 metals saw real price falls.

The outcome today would be far different!

If the bet would have been conducted until 2011, 4 out of 5 metals would have seen both nominal and real price gains. Only tin, a relatively minor metal, would have seen a real price fall.

If the bet had included other commodities such as oil, uranium, aluminium or gold, Simon would have lost by a lot!

So it all depends on the timeframe! Take your profits when needed I say.