We Study Billionaires - The Investor’s Podcast Network - TIP371: The Top of the Cycle w/ Jeremy Grantham

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have a very special guest, and that is billionaire Jeremy Grantham, the co-founder and long-term investment strategist at GMO, one of the world's most well-respected asset management firms. Jeremy is an investing legend and studied market historian, who successfully identified and sidestepped the major corrections such as the Japanese market in 1989, the tech bubble of 2000, the global financial crisis of 2008, and even called the bottom in 2008. In this episode, we discuss how Jeremy identifies market bubbles and how to prepare for a correction,

Starting point is 00:00:35 how the Fed talks a big game but doesn't have a great track record of avoiding major market declines, green venture capital and the opportunities it presents, and much, much more. Jeremy was very generous with this time and I very much enjoyed our conversation. With over 50 years of experience in investing in markets, Jeremy's perspective is steeped in wisdom and logic. So with that, please enjoy my discussion with Jeremy Grantham. Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:10 We keep you informed and prepared for the unexpected. Welcome to the Investors Podcast. I'm your host, Trey Lockerbie, and today I am so excited and honored to have with me, Mr. Jeremy Grantham. Jeremy, welcome to the show. Hi, it's a pleasure to be here. One of the reasons I am so excited to speak with you, Jeremy, is because not only are you a legend in the space and a studied historian on markets, but because you also, as you've somewhat humorously put it, no longer have career risk. So I know our audience will love hearing your very candid viewpoints on where we are in this cycle. And speaking of cycles, you've gone on record stating that we are at the peak of one of the largest market cycles or bubbles. in history. So I'd love if you would tell us a bit about how you go about identifying a bubble

Starting point is 00:02:12 and how you've come to that conclusion. I wouldn't say necessarily that we're at the peak. I think it's clear that we're deep into bubble territory. Bubbles are characterized typically at the end of the long bull market by a period where they accelerate and they start to rise at two or three times the average speed of the ball market, which they did last year, of course. And the Russell 2000 actually went up an amazing 50% in three months, ending in early February this year, which compares very favorably to the 50% rally in 99 of the super tech bubble, and the NASDAQ went up 50% in six months. So this was bigger and better. And of course, they're always extremely overpriced by average historical standards. And this one, there are a few

Starting point is 00:03:09 people who would still argue that 2000 was higher, but most of the data suggests that this is the new American record for highest priced stocks in history. And then there's the most important thing of all, which is crazy behavior, a kind of meme stock, high participation by individuals, which has kind of tripled in 18 months to an abnormally high level, enormous trading volume in penny stocks, enormous trading volume in options, and huge margin levels, peak, peak borrowing of all kinds, and the news is on the front page.

Starting point is 00:03:47 The news is not on the financial page, the market, big market events are on the front page. This is all characteristic of the handful of great bubbles that we've had. in 1929 in America, maybe in 1972, certainly 2000, and in the housing market, certainly at 2007-8. In Japan, 1989 was the biggest and the best of all the major markets, and even bigger and better in their real estate market. So we've checked off all the boxes. Now the question is how high is high. Very hard to tell always where the peak will be. what you do know is that how high the peak is has no bearing at all on what the fair value is.

Starting point is 00:04:35 So let us assume that the fair value on the S&P is, let us say, 2400. Whether it stops at 4,300 or 5300 doesn't change that. What it does change is the amount of pain that you get to go back to fair value and below. The case in point would be Japan. Japan had never sold over 25 times earnings in 19. 87, 88, 98, 1989, until it went through 25 and went all the way up, we were told at the time to 65 times in. And the price you paid for that is that they're still not back to the same price they were in 1989. And their real estate market, which was even a bigger bubble than the

Starting point is 00:05:18 stock market. In fact, I believe the biggest bubble in history bigger than the South Sea bubble and the tourists. The land under the Empress Palace really was worth the entire state of California. And the price they paid was that their land is still not back to 1989 levels. So 32 years later, they're still down. And that's how you get a major drag on the economy. Because when you mark down housing and land, it's an even bigger and more dangerous business than the stock market. And if you do it at the same time as the stock market, then you have an enormous loss of perceived value. And that is a big, big drag on the economy which the Japanese have had to absorb. And it took them perhaps 20 years to do that. So you profoundly do not wish for a super high level to your

Starting point is 00:06:07 bubble. And you profoundly do not wish for more than one asset class to be bubbling at the same time. And Japan made that terrible mistake and paid a very high price to have real estate and stocks at the same time. We paid somewhat the same price in 2007 because we had the first really interesting housing bubble in American history. We had never had one before. And it was the kind that was so extreme, it would only occur every hundred years or so. And we worked out that if it went back down to trend, it would cost seven trillion dollars. And it did go back perfectly. It was a very well-behaved bubble. It went smoothly back at the same speed that it had gone up, three years up, three years down. And then for good measure, as is usually the case, it went below the old

Starting point is 00:06:56 trend-line value and added another couple of trillion dollars of pain by the housing market going even lower. And that housing market was so big and profound and so accompanied by financial instruments of the notorious subprime variety that it took the stock market down with it and caused obviously of financial crisis. And the stock market threw in another $7 trillion of loss of value. So you had a double whammy there, which would guarantee a tougher recession from the negative income effect, at which we had. 2000 is a very interesting contrast because 2000 was a much higher equity bubble than 2008. But the real estate market was cheap, actually very cheap. The REITs were selling cheaper than the value of their properties. And the properties themselves were cheaper than the cost of

Starting point is 00:07:48 building them. And the yield on the REIT portfolio at the very top of the market was 9.1%. Secondly, bonds were cheap. Bonds were incredibly cheap. And the new inflation protected bond called the tip had just been introduced. And it yielded 4.3%. Just imagine that. 4.3% guaranteed protected against inflation, guaranteed good money by the government. And the regular bond market was very cheap. So bonds were cheap, real estate was very cheap, and only the stock market was expensive. And it broke beautifully, of course, relatively well behaved. The NASDAQ went down 82%. The S&P went down 50% from that 2000 tech bubble. But the recession was not that big a deal because housing was not involved and bonds were not involved. This is the only time in history where we have,

Starting point is 00:08:41 have a bubble in the bond market everywhere in the world. We have the lowest rates in 4,000 years, according to Jim Grah. And 25% of all government money, you actually pay the governments around the world to take your money. They don't pay you. You pay them. And there's no historical precedent. And that's typically slightly bigger market cap, the bond market, than the equity market. But then the equity market, we have probably the highest price U.S. equity market ever, and if not the highest, a very close rival to 2000. And then if that wasn't enough, we have coming up on the rails at incredible speed the U.S. housing market.

Starting point is 00:09:24 It's up over 20% in 12 months. It's the biggest move in the history. It's bigger than 07. And it's taken the median house price to a higher multiple of family income. than even 2007. And that's all over the world. The stock market is not that expensive around the world. It's really, clearly a bubble in the U.S., but outside the U.S., it's merely overpriced. But the housing market, in most markets that are interesting, are extremely bubbly everywhere, and in most cases, even higher than the Bostons in San Francisco. So if you go to Vancouver or Toronto,

Starting point is 00:10:03 or Sydney or Auckland or Paris or London or Hong Kong or Singapore or Shanghai, they're all higher multiples of family income than we have. So that is a real danger on a global basis. So we're doing all of these together. And if you insist on being comprehensive, then you have the commodities market. The commodities market is kind of the fourth great asset class. And the Goldman Sachs commodity index of non-energy, just to separate half the market value is energy. But the other half includes all the foods, all the metals, and that is back to the 2011 high. And 2011 was deemed to be one of those cosmic long-term super cycles of commodity prices. And so that is a push on the income of everybody in the world, high metals prices, high food prices, actually incredibly

Starting point is 00:10:57 unfortunate growing weather this year just to rub it in, push prices even higher. So that will be stressing the income of ordinary people into the next year or so. You've kind of highlighted there is what people are calling the everything bubble, which I think makes it quite different from the previous bubbles we've had. You correctly predicted the market tops of Japan in the late 1980s, the tech bubble of 2000, the housing bubble of 2008, the housing bubble of 2008 and now even the bottom of the market in 2009 when people were just starting to capitulate. So I guess what I'm curious about, I'm reminded of that Hyman-Miski quote about stability drives and I think of it almost like you're playing the game of Jenga and you stack this thing

Starting point is 00:11:43 pretty high and people start pulling out their profits. I guess if we're using that analogy, what is the indicator to you that would suggest that we have actually reached, in fact, the peak? Let me say that we typically identified a bubble zone. Often it went on quite a lot longer, but it always fell below the point where we had suggested it was entering bubble territory. So once it broke through the peak, the 1929 peak of 21 times earnings, we started to be bearish in 1997, but only a little bearish. And then as the PEs rose and rose from 21 times, to eventually 35. We became more and more bearish until we were screaming bearish and still

Starting point is 00:12:30 the market went up for another year. So we were pretty early. In the housing bubble, we did much, much better. We basically walked people through the last year or 18 months pointing out how dangerous the subprime and so on and the housing market and how much damage it would do. We pretty well got that one right. And of course, we got extremely lucky on reinvesting when terrified, which was posted the the market hit the low in March of 2009. And here we are. I thought we entered bubble territory about last June, about a year ago. And I've made it quite clear what I consider a definition of success. And that is only that sooner or later you will have made money to have sidestepped the bubble phase. So I am suggesting that the last 20 or 30 percent of the market will be

Starting point is 00:13:21 retraced with interest. And I would expect that the fair value of this market would require the market to approximately half. And I would be surprised if it did much less than that. And if it goes up another 20%, it will have to get rid of that as well, as a bonus. You can very seldom identify the pin that pops it. 1929, no one's agreed yet what the pin was. And they say about 1929 that quote, selling came in from the country, which means that the initial selling pressure was from the Midwest, not from Boston and Philadelphia and New York. What was going on was probably that the economy, which had been unbelievably strong, was turning down. But because of the lags in the data, the city slickers didn't know it. But the guys out in Chicago who actually had businesses and

Starting point is 00:14:13 farms and cattle and so on, they knew that things had turned down. And they decided sitting around and the club at lunch, that they better take a few profits. And so selling came in from the country. And the bubbles tend to peak at absolute optimism when the economy looks perfect and you're extrapolating it forever. And that's the definition of a bubble. And they have to be facilitated by friendly monetary conditions. And when you've had a wonderful economy and friendly monetary conditions, you pretty well always had a bubble. They're not that common. And here we are again. But we feel the economy looks wonderful. If we extrapolate it forever, it means it's worth a huge price. Of course, it never does last forever. But if it did, it would be worth a huge price. And that's

Starting point is 00:15:02 the mechanics that is going on. And then you can say what might rattle the cage. Well, I think unexpected COVID problems on a global basis and in the U.S. might rattle the cage, unexpected inflation that doesn't go away in a hurry and then starts to run into longer term inflationary pressures, which we could discuss, that might rattle the cage. And the biggest cage rattleer of all is everything else you haven't thought about that could go wrong. And my guess is that's probably the cause in the end of most of the bubbles deflating. The mechanics of a bubble is you have maximum borrowing, maximum enthusiasm. And then the following day, you're still enthusiastic, but not quite as enthusiastic as yesterday. A week later, you're not quite as enthusiastic as last week

Starting point is 00:15:54 and last month. And gradually, the enthusiasm level drops off a bit. You have no more money to borrow. You're fully borrowed, and the buying pressure gradually slows down, and that's it. And there is a very interesting warning signal that has only happened a few times. And that is, in a bull market, the risky stocks go up a lot more than the blue chips. In 1928, the junkie low-priced index went up over 80 percent, and the S&P went up, let's say, about 40. That's what you expect. But in In 1929, as we approached the cliff edge, the low-priced index began to go down, even though it had a beta of two. That is to say, you would typically expect it to go up or down twice the market.

Starting point is 00:16:43 And here you had to market the S&P going up another 40% prior to the crash, but the low-priced index was down for the year. The day before the crash, it was not just down. It was quite badly down, over 30% for the year, which is remarkable. And nothing like that happens again until. until 1972 going into the nifty 50 market, which was a huge break, by the way, 62% in real terms. It's still the biggest break since the Great Depression. And during 1972, the S&P is up about 17%.

Starting point is 00:17:14 And the average big board stock is down 18. That's a 35 point spread, which isn't bad. And the average stock is a higher risk, higher volatile, should have been going up more, but it didn't. And as I said, nothing on the upside happened like that between. 1929, 1972. Of course, the risky stuff goes down more in the bear market, but in a bull market, always goes up more. And then there was a six-month window related to the Iraq War, which will call a draw, and that brings us to 2000. In 2000, March, they start to take out the internet stocks,

Starting point is 00:17:51 the pet.coms, and they shoot them, and they drop like stones. A month or two later, they're shooting the junior growth, and then a month or two later, the middle growth. And finally, By mid to late summer, they're really shooting even the Cisco's, which were giant companies. And they took the whole 30% of the market, which was TMT, they called it, tech, media, telecom. And it was down 50% by September. It had been murdered. But the S&P was unchanged, which meant that the other 70%, the Coca-Cola's and the rest of the boys, the IBMs, were up about 17% on Apple to balance the books. So what had happened is that the confidence termites, I think of them.

Starting point is 00:18:34 They had started at the most crazy pet.com and worked their way down through the Cisco's, which were pretty outrageously, you know, 80 times earnings. And then finally, they arrived at the broad market and the entire market rolled over and fell 50% in two years. So nothing like that happens again until now. But what's happening now? And it may be a false alarm. It may be a head fake. But Russell 2000, which, as I said, put in this 50% rally in three months ending on or around February the 9th.

Starting point is 00:19:08 It's down since February the 9th. And this month, it's nine percentage points behind the S&P 500. So the S&P 500, the Blue Chip Index, has been picking up splendid bull market, everything intact. But the Russell 2000 has just lost 9% on a relative basis and is down from February the 9th. Now, last year, the Russell 2000, which is the 2000 stocks after the biggest 1,000 taken out, it was huge. It was far and away the best index, followed by the NASDAQ, which has some blue chips in, followed by the Standard & Poor's.

Starting point is 00:19:44 This year, the Standard and Pause suddenly, year to date, comfortably in first place, let's say up 10%, a NASDAQ up 5%. I'm sorry, I'm getting my numbers wrong. But the Russell is now up about 10% for the year. Having being the strongest index, it's now the weakest. And the NASDAQ is five points higher than the Russell, and the S&P is three or four points higher than the NASDAQ. A lot of it has happened in the last year.

Starting point is 00:20:15 And then when you look at the super crazies, you find that the SPAC index is down 25%. The number of SPAC selling below 10 is way down. The most ambitious back of all is the one that I bought nine years ago, QuantumScape, and that came at 10 and went to 130 at the end of last year, and we weren't allowed to sell for six months, and today is 24, which is a whole lot less than 130. And QuantumScape had a market cap of 55 billion at 130. It's a brilliant research lab, but it has no product, really, for three or four years. And yet it was selling for more than GM market cap or more than Panasonic in terms of batteries.

Starting point is 00:21:01 So nothing like that ever occurred in 1929. Nothing like that occurred in 2000 that pet.coms were worth scores of millions or a couple of hundred millions. This is 55 billion we're talking about for a company that has no earnings for three or four years, no sales for three or four years. They're quite remarkable. And all the facts, as I said, have gotten weaker. The meme stocks are down maybe 40, 50% from the spiky tops, AMC, GameStop, and others.

Starting point is 00:21:34 And Tesla is down from 900 to 640. It's a big decline. So I would say the termites are doing a pretty good job, that they are starting at the crazies and nibbling away. Not that Tesla isn't a brilliant company. It is. But they're nibbling away at the ones that have the most confidence. And on some grounds could be argued as the most extreme overpricing. Tesla having just gone up eight times in a year on a sales gain of 35 percent is a pretty

Starting point is 00:22:03 good demonstration of super confidence. And so I would say there's a decent chance that this process that we saw before the other great bubbles in American history is on its way. They all lasted a few months, nine months in 1929, almost a year in 72. seven months in 2000. And here we are maybe five months into the game, six months. So it wouldn't be amazing to me as a historian if this thing lasted until the end of the year. And it wouldn't be amazing if it started to keel over in a month or two. It's lasted longer than I thought last June or last fall for two reasons. I don't think anyone expected quite the success of the vaccination.

Starting point is 00:22:49 that had never been one this successful as the RNA ones, and the Moderna and the Pfizer. So that was one reason, and the other reason was, I don't think anyone expected the sheer scale of the bailouts. These are the biggest bailouts as a fraction of GDP, not only in the history of our country, but in the history of any country. This is a far greater stimulus program, both from the Fed and the government that we have ever seen with money supply. spiking at 25% increase. With the government buying 40 billion a month of mortgages, even when the real estate market is up over 20% in a year to the highest level ever recorded, these are fairly crazy or reckless or unusual features. And we didn't anticipate either. And they're going to tend to send the market higher and longer. But as I said before, it doesn't change the fair value,

Starting point is 00:23:44 It doesn't change the eventual outcome. See, and that's where I'm so curious about your prediction, because if we go and look at something like the Buffett Indicator, which has been suggesting that the market has been significantly overvalued for a very long time, years now, I would have maybe been right there with you, you know, March of 2020 thinking, okay, this COVID, this global pandemic is the perfect pin to this bubble. But it wasn't a bubble in March of 2000. I see.

Starting point is 00:24:13 It was a boring, boring market. I wrote a paper two years before that saying, brace yourself for a possible meltup. The market was just beginning to show some speculation and was just beginning to accelerate. And for about six weeks, I looked like I was clairvoyant. It shot up in the January. And then it lost interest and fizzled. And the market came down a bit and the economy was mediocre. And it dribbled up. We had 11 years of standard issue, ordinary, yon, bull market until the spring of last year, as the stimulus kicks in and suddenly phase one, you recapture all the losses from the two-month bear market, very sharp bear market, infinitely short.

Starting point is 00:25:07 And then very quickly, within two or three, four months, you're at new highs on many stock market issues and then pretty soon in many economic issues you are. And from then on it flies. And after we get to new highs, that's when the Russell 2000 went up 50% in three months. And that's the real indicator. When you get a vertical level of takeoff in NASDAQ and the Russell and so on and the S&P chugging along very handsomely to brand new prices. that had been totally lacking for 11 years. And I had never been, I had debated people that it wasn't a bubble, actually, and wrote it up, that it never had the excitement level, anything like 1929 and 2000, but now it does. I would say with room to spare that this is the

Starting point is 00:25:55 craziest market with the meme stocks and Bitcoin. This is the craziest market. Anyone, including me, has lived through. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year,

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Starting point is 00:30:07 That's Shopify.com slash WSB. All right. Back to the show. So I'm wondering back in 2020 if the words from Jerome Powell were of any significance to you, I think he, I'm paraphrasing, but something to the effect of having an unlimited supply of ammunition, meaning new money. that the Fed could print to essentially reflate this bubble and keep it going more or less indefinitely. Do you think that impacts the 50 plus percent decline we might be forecasting?

Starting point is 00:30:38 No, I think Powell belongs to the Greenspan, Benanke, Yellen, little cult. They all fit together. They all realized that lower rates and moral hazard pushed up the price of assets. They all realize that assets going up generates a positive income effect. It simply does. You spend a couple of percent of what you unexpectedly gained. You count on gaining a bit, but if you gain five bits, then you spend a little bit of the extra the following year. So it has a very positive income effect. The same happens with housing. If housing goes roaring up, you remortgage, you make a trip to Spain, you put your kid through school, you know, you do all those good things. And on the downside, you do completely the reverse.

Starting point is 00:31:27 Anyway, so Greenspan and the boys and the girl took considerable satisfaction in the positive effect they had on pushing up asset prices. Lower rates and moral hazard will raise the price of assets, which they did all over the world. And no one was a bigger friend of the stock market than Greenspan. And he did race to the rescue when it finally lost air. And it only, the S&P went down 50% from a very high level, but it only hit long-term trend. This was the first bust in history that didn't go crashing below trend and stay there for 10 or 15 years.

Starting point is 00:32:04 So he did have an effect. What he wasn't able to do is he didn't start the NASDAQ from dropping 82%. And if you're interested in Amazon, it dropped 92%. It had been the star of 2000. Still dropped 92% before making everybody rich. but who I wonder held under the psychological damage of 92% decline. And the S&P went down 50%. And then you fast forward to Benanki.

Starting point is 00:32:29 Benanki completely didn't see the housing bubble and the risk it posed. He said the US housing market, the merely reflects the strong US economy, the US housing market has never declined. It never had declined because it had never had a bubble before. Every time there's been a bubble there, it has always declined. And Hyman-Minsky lives. You create a situation like that. eventually a blow up of its own weight, burst of its own weight. Anyway, he was convinced it wouldn't

Starting point is 00:32:57 collapse, and of course it did. And the housing market went all the way back to trend and below, which was a dreadful hit. And it created so much chaos. It carried the stock market down with it, again, 50% on the S&P, almost exactly, at the first decimal point. These are not small declines. And yet they occurred in the face of passion, at defenders and promoters of moral hazard and I'll come to your rescue and we'll make money cheap as it takes. And that took us through Yellen and then into power. Same story. They all talk a wonderful game about they'll be the friend of the asset class, asset class pricing, that friend of the stock market. And yet it didn't stop two of the greatest wipeouts in American history. The most

Starting point is 00:33:44 impressive thing here is not that they do the same thing over and over again as if they have somehow no memory. It's the faith that financial community has in them despite the fact that they have been let down badly twice. These were not insignificant setbacks. The tech crash was brutal. Amazon down in 92. Every growth tech stock was down 70 or so, it seemed. The housing bust was merciless. The stock market declined. of 07 was really painful. And yet, it's as if it never happened. Oh, Powell says this, Powell says that. The Fed has money. The Fed is going to be our friend. Hey, Greenspan was our friend, the Nanking was our friend, and we got croaked, guys. What is it matter with you? Why do you think?

Starting point is 00:34:32 The Federal Reserve simply does not understand the risks of asset price bubbles and asset price collapses. It is clear from the data they don't get it. Greenspan could never make up his mind whether the market was overpriced, irrational expectations, or whether, in fact, it was fine. Yellen couldn't. The Nanking couldn't see a housing bubble that was a three sigma hundred-year event. Where were his statisticians? The answer is the Federal Reserve statisticians do not do asset bubbles. They are, in that respect, utterly clueless. And we apparently never see that. We are willing to look through the crash of 2000, the housing crash, really dangerous affair. They didn't do their duty. They didn't head it off. They didn't raise the limits for mortgages. They didn't warn anybody.

Starting point is 00:35:28 They allowed it to happen. And yes, they were pretty good in the decline. They were pretty good at applying bandages and stimulus and support for the wounded, but they sure as hell should not have allowed that housing bubble to occur. They don't get it. They don't see the risks and they don't see them now. And so this time, we don't just have a housing bubble. We have a housing bubble, a stock market bubble, a commodity bubble, and above all, an interest rate bubble. This is going to be the biggest write down. The next time we're pessimistic, we have more potential to mark down asset prices than we have ever had in history anyway. So when you refer to everything being in a bubble, I recently heard someone say that if

Starting point is 00:36:12 everything is in a bubble, then it's the currency that's in a bubble. And I know you've gone on record stating that you're not so much on the fringe of thinking that the US dollar might be in jeopardy, but when you start to see people like Stan Drucken Miller and a few others who have come out recently gone on record saying that the Fed is, you endangering the US dollars global reserve status. Do you start to take notice? Do you start to shift your thinking at all? Or are you not seeing similar outcomes that they might be projecting? These are very smart people. They've spent a lot more, a larger percentage of their time, agonizing about credit, bonds, and currency than I have. What I can see is that we have never had

Starting point is 00:36:59 this kind of money supply. We have never had this kind of debt everywhere, as we have. And it's easy for me to believe that it may have consequences. So Summers argument that, yeah, we might muddle through, but this could be very dangerous in terms of inflation. I think, yeah, well, he got that one right. He fought desperately hard to have subprime instruments unregulated. He waged war against Brooksley Bourne, who was trying to exercise her right. to control subprime instruments. He and Greenspan and Leavitt of the SEC kind of called up and abused her. And then when she wouldn't back off, they took it to Congress and got the law changed so that we could not regulate subprime. What a brilliant idea. It nearly brought the entire economy to its needs.

Starting point is 00:37:47 And who holds Summers Leavitt and Greenspan on this account? They're all kind of forgiven. I call them the Teflon man. It doesn't matter what they do, they're somehow forgiven. But that was in my book, one of the more dangerous financial management crimes of the modern era. But in any case, you can't get everything wrong. And I think the idea that Summers is warning us that it could be very dangerous and that inflation could be worse than expected. And that will have, of course, effects on the currency, effects on everything, affects eventually perhaps on credit. And the rate at which money supply has been generated is off the scale. No other country has done this. And the rate at which our debt ratios have gone through. I am not an expert, but I can see that this is all new. I can see

Starting point is 00:38:34 that many new extremes are coexisting. It's like there be monsters. There are potential monsters all over the place of a kind that we have not dealt with very often. And in such numbers, we have never dealt with. So the ability of things to go bump in the night, of things to go wrong, It is obvious to an amateur in these areas that the risks have gone through the route. That's kind of my question, because I'm reminded of a quote by Keynes, who said it's better to be roughly right than precisely wrong. So if we're extrapolated this out, as you say, is it time to move to cash, meaning being roughly right, even if this market might drag on for months or a year beyond where we are now, rather than be precisely wrong and get caught up in the

Starting point is 00:39:22 decline. And are you factoring, like you said, the debasement of that M2 money supply into the choice of going into cash? No, I am not. I am leaving currency worries to other people. I have enough to worry about. With every real asset category badly overpriced, that is quite enough for me to worry about. And history is quite complicated enough anyway without attempting to think about every aspect of the system. So I will leave that to that. What is slightly unusual about this bubble on a global basis is that, yes, real estate has bubbled everywhere and often worse than the US. Yes, commodities are everywhere. Yes, bonds are everywhere. Overpriced and interest rates are negligible everywhere. But on the stock market side, outside the US,

Starting point is 00:40:17 most of the markets are merely overpriced. And that is a very far cry from being a candidate for the most overpriced market in American history. And so the answer is, if you avoided the U.S. equity market and in a sense took refuge in a merely overpriced balance of the world, particularly emerging markets, you will almost certainly make some money. I would say you will almost certainly make less than you would like, and you will almost certainly make less than a long-term trend. but you will almost certainly make some money. And that is more than I can say for the bond market. And there's more than I can say for the housing market.

Starting point is 00:40:56 My guess is you will lose money in those assets and you will lose a ton of money, I suspect, in the U.S. equity market. So you have one place where you would find moderate refuge. There is another area, and that is for the last 11 years, we have had a massive shift in terms of growth versus low growth or value. And high growth stocks, which had a long history, the first 45 years of my career, value barely steadily beat growth. In the last 11 years, growth crushed value. And the ratio is about as extreme as it has ever been. So my guess is that will be a relative refuge.

Starting point is 00:41:37 And the two parts, where the two circles overlap, where you could get low growth or value in the non-U.S. markets, particularly emerging, I would suggest you could do even better than I suggested in the aggregate markets overseas. The value component of the aggregate markets overseas, you could probably come close to normal return, which is a hell of a lot better. But if you can stand the psychological shock of being paid in negative, number for cash, I would find some way of keeping 20 or 30% liquidity to take advantage of the eventual markdown of assets of all kinds. If you can stand more than that, I would carry more. It's very hard psychologically, and people don't do it. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why Vantza is a game-changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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Starting point is 00:45:54 You called them one decision stocks, I think. meaning you find these companies that you just buy and hold forever and that's the one decision you make Coca-Cola, et cetera. This is not my language, you understand. I am quoting the language of the era. Right. They were called one-decision stocks. And the great banks, the New York banks, own the pension fund business in those days

Starting point is 00:46:16 and the rich family business. And that's what they owned. They figured all they had to do, Zone Coca-Cola, IBM, Eastman, Kodak, Xerox, and the drug companies and everything would work out fine. I'm curious if you've seen any stocks as of late that might fit that description, the one decision type of stock. You mentioned quantum scape earlier going from 130 back to 24. Is that now at a value that is appealing to you and something that you think could be a good hold for a long period to come? It's really over my pay grade. I'm happy to say I paid two and a half for it eight years ago as a relatively early stage venture capital. We did it because

Starting point is 00:46:56 it's such an important idea to have an improved version of a battery for an automobile. And if it works, it will be very important. But as I said, three or four years from now, the scale of the market will be enormous. The competition is enormous. And perhaps there will be one winner, perhaps there'll be seven winners. I think somewhere around these prices, it might be a decent hold, but it would not be amazing if one day its true value was 100 or its true value was nil. It is a great idea, especially when we talk about the effects of climate change, which you've been a big proponent of raising awareness for for a long time.

Starting point is 00:47:38 You spend most of your time in Green Venture. I'm curious, what about climate change impacts your investment decision? Are you led to innovations when it comes to energy, when it comes to extrapolating CO2 out of the air, nitrogen effects. I'm just curious, what is your circle of competence when it comes to climate change investing? Let me say this is personal. This is for the Grantham Foundation. Our job description is to help decarbonize the world. And we do that through grant making and we do it through investing a very large chunk of our capital in aggressive, early stage, green venture capital, ideas that will, if they work, be really important at decarbonizing.

Starting point is 00:48:26 And we have built a team of half a dozen people who more or less full time look at green opportunities. We've been doing this for a few years. And our general battle plan is extremely aggressive. We think venture capital is the best part of global capitalism. Far and away, the best part of American capitalism, which I think is otherwise a little fat and happy monopolistic, too many stock buybacks, not enough capex. But BC is the last best exceptionalism in America. It's what we do best. It's the largest by far. It's the best by far. We raise money. We take risks better than other people. We forgive people for failure, give them a second chance. The very best and brightest now all want to go into VC or starting their own business, whereas they used to want to ride it.

Starting point is 00:49:16 algorithms for Goldman Sachs or be consultants for McKinsey. And that's the way they should. It's much more important that we get new ventures right. And in green venture capital, they could save our bacon. And there are armies of terrific ideas coming out of the great research universities. And the US, again, has a death grip on the great research universities. There's a few in England. But other than that, it's US. So what a wicked advantage. So we aim to To be 70, 75% of our entire foundation in relatively early stage VC, 20 points in the very best of the rest, all non-green activities, but the very best ones. And 50 to 55% in green, of which half we invest through professional pools of venture capital, and half we invest with our own team directly.

Starting point is 00:50:10 That's the battle plan. And some parts of it are pretty well complete. But in any case, the total we have today is about 75% in venture capital. You were also a pioneer on the idea of index funds. And given that index funds have grown at an accelerative rate exponentially even over the last 10 to 15 years, I'm just curious, has it changed your opinion? Or do you think that the common man, obviously not spending time in the markets, is best off, even with the 50% decline coming, just dollar cost averaging into something like an index fund

Starting point is 00:50:44 over time. Yeah, it's psychologically very difficult to cope with getting out of a bull market and getting back into a bear market. In both cases, your brain or your body is screaming at you. Moving out of a situation where you keep making money is beyond most people. And then as it starts to drop, it becomes painful the other way. It's very difficult. buying and holding a index fund is kind of the default simple position for the long term.

Starting point is 00:51:13 And one thing that I realized 1971 was that the people who play the game, the cosmic poker game, me against you, picking stocks, are always going to sum to the market minus the cost of playing the game. In the poker analogy, it's table stakes you pay a buck and a half for sitting in your seat. And it costs about one and a half percent one way or another to play the game. management fees, custody charges, friction, brokerage costs, commissions. And the guys at the bar who are watching the poker game, who are the indexes, are going to sum to the market. So the players, however clever in their entirety, are going to sum to market minus one and a

Starting point is 00:51:53 half. And the guys at the bar are going to sum to the market. So the players are, by definition, guaranteed, no hope in total they're going to underperform the indexes. And that was always, for me, a sufficient reason. And we call it the zero-sum game. Investment management does not produce widgets. It, in fact, choose up some of the widgets in management fee to run the game.

Starting point is 00:52:18 And that indexing would therefore always be a very plausible alternative. The competition, by the way, we're recommending indexing because they said the market was efficient. That was, is nonsense today, but it was glorious nonsense in 1971. But apparently they believed it. And they got Nobel prizes for believing it. It's just the craziest belief that one could ever hope to meet. And given the bubbles and the way they keep rolling through history since 1971, you'd think the point might have been well made, but it isn't. They think it's all efficient and the market goes up and down in some way, magically defining in a logical

Starting point is 00:52:55 way, the stock prices, as if we were not completely psychological creatures are driven by fear and greed, which of course we are. So they said the market's efficient, therefore, indexing. And if the market were efficient, indexing would be, of course, the correct answer. And we said nonsense, but it's a zero-sum game. And if you have a lot of money, you should take the cheap way out, and in the long run, you'll win. And that's a completely sufficient reason. It also happens to be accurate. And so now, 50 years later, the efficient market guys also throw in the zero-sum game argument I noticed, having their Nobel Prize is safely tucked away, but they completely denied that at the time.

Starting point is 00:53:37 You mentioned it's not for everybody to see a market decline, and we are driven by fear and greed, which is why I'd be remiss if I didn't ask you this question about, you mentioned the late 1990s where you had pulled out of the market, and a lot of your clients had, were pulling their money out of your fund. I think the fund decreased about 50% during that time. What was it like? I mean, personally, watching that, I mean, that's got to just really pull at you emotionally to be so steady in your feet and in your principles and be right.

Starting point is 00:54:07 But what was it like living through that? Well, there are a few interesting tidbits, and that is the clients who fired us moved their money into growth stocks, and therefore, when the market broke, they lost a whole lot more money than we did. And so one question is how many came back, and the answer is none. So let's imagine we lost 40 or 50% of our clients. Not one single one came back because we were right and they were wrong. And we saved a ton of money on the round trip.

Starting point is 00:54:38 So we missed going up another 25%. We went up. Let's say we went up 25 and Fred, the aggressive competitor was up 60 and the market was up 50. So we were 20, I think, 20, 22% behind for the duration, which is a killer in a the ball market. And then we saved, we made money in a 50% decline. We made money in 2000, 2001, 2002. And in the first two years, we made fairly decent money. So we made a ton on the round trip. But nobody came back. Secondly, when they fired us, they fired us with hostility. Unlike all the firing before or since, where you're fired for being out of date, old-fashioned,

Starting point is 00:55:22 inappropriate, or just not fitting their portfolio this week. We were, were fired as if we meant to cost them money. They were angry with us. The tone suggested it was completely deliberate undermining of their wealth. And that was a shock. That was a terrible shock. And it was also a shock to find how many of the elite committees believed in Alan Green's fan golden new era that would last forever and would sail off into the setting sun. They had not done that in Japan. In Japan, we lost no business. We were terribly early. we underperformed Japan and then we got it all back with interest. We lost no business because they could see clearly that was the crazy Japanese. But when it was here, they participated. They believed,

Starting point is 00:56:08 or some of them on the committee, believed in the golden new era. And that was a bit of a heartbreaker for me. I hadn't realized that would happen. And they just said we had completely lost our way and we're missing the point of the new tech. So that, yeah, that was extremely painful and surprising. And then, of course, when everything collapsed and we made money, the people who had not had us thought, well, there are our kind of guys. If I'd been there, I would have hung tough. And so they threw their money at us, and we quadrupled in three years. We did a lot more than quadruple, actually. We octupled in four years. Ah, the good old days. What an incredible story. And I just think this is an important, timely, sobering reminder of learning from history and not expecting things to go on forever.

Starting point is 00:57:01 So before I let you go, Jeremy, I just want to give you an opportunity to tell people about your foundation and anything else you'd like to share any other resources and maybe any other words of wisdom for especially investors who are just getting started. If I was coming into the investment business, I'd want to go for reasons that it must be apparent by now into the venture capital business. And I would hope that some of them would value doing something extremely useful and therefore would go into the green end of the venture capital business. Our foundation, I believe, is looking at the only free lunch I've ever seen in my life.

Starting point is 00:57:36 And that is when we invest in a hundred important green venture capital deals, some of them fail, some of them will work. But the money will come back with a profit. And then we will recycle it into another layer of terrific. ideas and then recycle it again and again. You can imagine that a dollar invested in that recycling pool will have more positive effect, even than a dollar of grant. We try and make our grants as focused as we can, but it's pretty hard competition to compete with that. And the philanthropic world does not realize what an advantage they have in this, particularly in the green area, where

Starting point is 00:58:16 green venture capital is a good candidate, I think, going forward for the highest, potential return of any area, of even the venture capital market. Why? Because in the last year or two, we are seeing fairly rapid waking up on a global basis of countries and their policies and their regulations and their money flow to get behind decarbonizing the system, taking out fossil fuels, putting in wind, solar storage, and so on. And it's going to cost trillions of dollars, But it's going to save our bacon. It's going to save many trillions of dollars. The cost of not doing it is outrageously high. And the opportunities from doing it are enormous. And the side benefits, you're going to be able to walk through downtown Manhattan and all the vehicles will be electric.

Starting point is 00:59:07 And the particular matter that comes from diesel in particular will not be killing you. I mean, it does a terrible job on your brain. It does a terrible job on your general health and your fertility, for have the sake. And all that will go. You know, Bond Street in London is the worst poisonous street in Europe. And it will all be electric. And our health will be much, much better in 20 years. And that will absolutely happen. It will be an entire side benefit that no one has the brains to put a dollar number on.

Starting point is 00:59:37 But it will be a huge saving to the national health in England and the health system everywhere. So you can drive the well-being of the world more than any. anything else by doing early stage Green BC, and you can simultaneously be a candidate for the highest return subset of the marketplace, and at the same time drive the cause for saving our bacon, saving the planet, if you will, decarbonizing the global economy and do the same simultaneously. That's pretty remarkable. Well, Jeremy, I want to be mindful of your time. I really appreciate you taking the time out of your day to come on the show and talk to us.

Starting point is 01:00:17 This was incredibly insightful, and I agree that the GreenVC is an exciting venture, and I hope we get to talk more about it sometime in the future. So thank you very much for coming on the show. Yeah, me too. It's been a pleasure. All right, everybody, that's all we had for you this week. I really hope you enjoyed this one. If you're loving the show, do us a favor and follow us on your favorite podcast app and maybe even leave us a review. If you're looking for great value picks, I highly encourage you to Google TIP Finance and find all the resources we have for you at the investorspodcast.com. And with that, we'll see you again next time.

Starting point is 01:00:49 Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or re-reportation. Broadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP371: The Top of the Cycle w/ Jeremy Grantham

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