We Study Billionaires - The Investor’s Podcast Network - TIP466: The Bear Has Arrived w/ Jeremy Grantham

Starting point is 00:00:00 You're listening to TIP. We have a very special guest today, and that is investing legend Jeremy Grantham. Jeremy is the co-founder and chief investment strategist of Grantham, Mayo, and Van Otterloo, or more commonly known as GMO. I last spoke with Jeremy almost exactly a year ago on episode 371, and a lot of what he had to say made it on to my top takeaways episode at the end of the year. I highly recommend you revisit our last conversation just to see how prescient his predictions were at the time.

Starting point is 00:00:28 In this episode, I wanted to get Jeremy's thoughts on how the markets have materialized since we last spoke, but I also wanted to dive deeper into his knowledge on climate change and the technology emerging around it. In this episode, you will learn where Jeremy thinks will go from here, why he believes rates will climb higher for longer, how today's market and economy may start to resemble the stagnation of the 1970s and 80s, why important resources are in short supply, the best technologies fighting climate change, the risk in emerging in other markets outside of the U.S., and a whole lot more. Jeremy is one of my all-time favorite guests to have on this show, and I know you'll enjoy it as much as I did. So without further ado, here's my conversation with Jeremy Grantham.

Starting point is 00:01:08 You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Trey Lockerbie, and today I'm so, I'm so. excited because we have this very special guest for you, and that's Mr. Jeremy Grantham. Jeremy, welcome back to the show. Hi. It's a pleasure to be back. Well, it's been almost exactly a year since you and I spoke. And back then, you were ringing this bell that we were nearing a market top. And the signs you saw at the time were this rapid price appreciation, wild behavior and speculation, the meme stocks, et cetera. And you gave this wonderful metaphor that stuck with me

Starting point is 00:02:04 about the stock market having these termites that eat away at these high flying tech stocks first. And that appears to be exactly what we saw happen. So as soon as the Fed came out with their plans to tighten, you saw the tech sector just get crushed immediately. And it's down about 27 or so percent now at the time of this recording. This all seemed to kick off right at the top of the year. So now we're halfway through the year and the S&P is down around 20 percent today. What has surprised you the most about the price action that we've been seeing since the top of the year? I would argue that the termites got into action quite a bit earlier than that. You expect them to go for the juiciest speculative things first.

Starting point is 00:02:48 And the king of the specs, in my opinion, was my own ill-fated quantum scape. That peaked out in December 2020. It was the leader of the gang. It came at 10, like all specs. when shooting up to 132. At 132, it had a market cap of $55 billion, bigger than General Motors, and bigger than SAMHSA. QuantumScape, a very good research lab,

Starting point is 00:03:13 working on a solid-state lithium-ion battery, half the weight and volume, rapid charge, no fire. It would be very nice if it worked out, but back then it still had four years to go before it had any sales or any profits, and it sold for more than General Motors. You have to admit, that is a candid. day for the biggest spec of the cycle. Bigger than anything I can find in 1929 or 2000.

Starting point is 00:03:38 Got to remember in 2000 that the pet.coms were scores of millions or in a few cases, a few hundred millions. This was 55 billion adjusted for inflation, adjusted for anything. That was a monstrous demonstration of the ability of the market to think deep, deep into the future and have positive thoughts. Anyway, that peaked out in December 2020. In January 21, the number of new issues peaked. In February, the outperformance of the new issues peaked out. And in February, also ARC peaked. Ark, a exchange traded fund of about 30 growth stocks that are very early stage growth. Most of them had no earnings. So that was exactly where the termites would be expected to go to work. And then a month or two later, the meme starts with little or no earnings,

Starting point is 00:04:34 like AMC and GameStop. They peaked out. And the whole Russell 2000, although it technically peaked in November, by early February of 21, it was about the same. It plateaued for over 10 months, almost 11 months of 21 before going down. So they had been rolling over. And 40% of the NASDAQ before December 21 were down 50% or more. So anyone who was into deep speculation knew very well that the bubble had started to lose air long before the end of 21. That's one point I'd like to make. Secondly, the first half of this year is about as fast as stock markets ever decline. I remember seeing that the first four months was the fastest decline in the S&P since 1939 when I was one year old and they were preparing for World War I.

Starting point is 00:05:30 So that's a pretty good excuse to go down. And this was the fastest decline. This is about as fast as markets go down. And they always have good rallies. There's nothing as quick and spectacular as a bear market rally. They had won in late 1929 to early 1930, an absolute doozy of 45%. And of course, with historical hindsight,

Starting point is 00:05:52 they signify very little. But at the time, they frightened the pants off the bears. And they give hope that all, all is over, all is forgotten, and it's back to the races. And I suspect we may very well have a pretty decent bear market rally as we sit. I wouldn't be surprised if this went on for at least another month. Interesting. Just on that last point there, is there a certain floor, I know you're a big fan of reversion to the mean, is there a certain floor that we might bounce from or that you're kind of expecting things that capitulate at? In terms of the entire bear market,

Starting point is 00:06:25 It would be unusual for it to bottom out anywhere near this high. I would expect that by the low, that the S&P would have declined by 50% from the peak in real terms. So you do have to adjust the stock market for inflation. And also the trend. The trend in the market is a little over 4% a year. And as time passes, you should put that into the fair value. So a year from now, when the bear market might end, the trend. Trendline value would be almost 3,000 on the S&P.

Starting point is 00:07:00 Of course, there's no rule that says you start at fair value. Typically, in previous big bubbles breaking, they go down below that. They went down below, of course, in the housing bust of 2009. And they went down, and in every great bear market break, they went below trend, except Alan Green Spans' specialty in 2000. In 2000, the S&P was heroically overpriced. It came down 50%. But at 50% decline, it was only fair value.

Starting point is 00:07:27 It only hit the trend and then bounced as the Fed raised to restimulate. The NASDAQ went down 82. And that's a lot of pain. And it's possible that would do that again. But you do have to adjust for inflation. There was very little inflation around in 2000. But this time, with inflation running at 8 or 9, it does move the nominal value of the S&P upwards.

Starting point is 00:07:47 And one shouldn't lose sight of that. I'd like to stay on this idea of fair value for just a second. So I've heard you say that today's market action, look superficially like the dot-com bubble of 2000. But one really interesting thing about that market was that the internet stocks were sometimes hardly even creating revenue, let alone profit, right? So it wasn't terribly difficult to see that these companies had a high cash burn and they were running towards a cliff.

Starting point is 00:08:10 The main companies that survived are all now wildly profitable in some of the best business models the world has ever seen. So given the recent decline in the NASDAQ and, you know, the main liners that are making of 20% of the S&P 500. Do you think any of them are nearing a fair value now? I don't include the classic fangs as being in the super speculative category. I think you could throw Tesla in at its peak. That was super speculative, great company, but a bit of a silly price there.

Starting point is 00:08:44 But the others, like Amazon and so on, they're great companies, but I wouldn't have included them as super specs. and yes, they're down quite a lot. It's hard in a bull market to get your brain around what happens in the bad market. Let me go back to Amazon. Amazon in the 2000 bust didn't just come down as its sales continued to grow. Of course, in those days, it didn't have earnings because it was running on borrowed resources. It didn't have to. It was still growing like the wheat. It came down 92 percent, 92 percent with strongly rising sales, a brilliant, successful new idea that went on to own the world and be worth a fortune. So how is it possible

Starting point is 00:09:27 it came down 90%? 92. So think about that sometimes as you go to bed. And I like to say 80% of the time the market is pretty sensible and doing a possibly good job of estimating value for all the companies. A little under 15% of the time, it gets carried away with optimism. And by the end of that time, has nothing to do with actual earnings. It's all in the head, projecting out hundreds of years into the future, assuming that perfect conditions will stay perfect forever. Every bubble takes place with near perfect conditions and huge profit margins. And the market runs with that and assumes it will stay there forever. And of course, conditions mean revert, profit margins mean revert, and good times become bad times. And that is a problem. And the remaining 5%,

Starting point is 00:10:16 the market gets carried away on the downside and starts to become. completely irrational as it was beginning to be in March of 2009. It was getting pretty silly pessimistic. I wrote a piece, Reinvesting, when terrified, that by sheer luck came out the day the market hit his low. And it said, get a policy, get a plan, presented to your committee or yourself, and start to throw your money back into the market. You feel paralyzed.

Starting point is 00:10:42 Everyone always does. And now's the time to wake out. The market is cheap. And, of course, that happened in 1974 and 82, which were classic lows in the market. market got down to 7 PE. And what I call terminal paralysis sets in where you're so frightened, you can hardly move, you can hardly get to work, forget buy stocks. And that's, of course, as Warren Buffett would have said, that's exactly the time you have to do it. And it's only 5% of the time. They are much quicker than the crazy bull markets. Now, I know you're a huge

Starting point is 00:11:13 skeptic of the Fed. Have the Fed's rate increases and tightening efforts on the market or the market's response surprised you in any way? No, I expect the Fed to be behind the curve, to be deep into optimism. And it doesn't really have a clue about market bubbles and the damage they do when they break. They've been eager now since early Greenspan to encourage full markets because they help the economy. They really do.

Starting point is 00:11:41 And they always forget that the bare markets to go along with them hurt the economy at just the wrong time. So if I'd been asked to bet, would the Fed, get inflation wrong when inflation came along at any time. I would have said, of course, they'll miss it, they'll be late, their responses will be pretty ill-judged. The Fed's record is terrible. What is impressive is how much room they have been cut by the market. I mean, the market is incredibly forgiving to the Fed. The Fed happened for 20 years, 25 years, to benefit from that amazing era as 500 million Chinese erased into the big cities and were plugged from marginal

Starting point is 00:12:19 farming into highly profitable industrial system. And then they joined the World Trade Association and made everybody's stuffed dogs and everybody's iPhones for that matter. And during that phase, 500 million extra Chinese, 200 million Eastern Europeans plugging into away from communism into capitalism. That was a golden era, goldilocks, if ever there was one. And the Fed got to take credit to them. Prime Minister of England once Mr. Wilson, got reelected because England unexpectedly won the World Cup at soccer. And he got credit for it. I mean, the president gets, in the end, credit for everything, good weather.

Starting point is 00:12:59 He takes the shock for inflation. These things are all way bigger than the president of the United States. But the president and the Fed gets to enjoy the environment. So this Fed had a wonderful environment. They did nothing right, but they were seen to be presiding over low inflation and decent growth. The growth rate actually has slowed way down since Greenspan. It was averaging three and a half before Greenspan and averaging two and a half afterwards, and today more like one and a half.

Starting point is 00:13:29 So it's done nothing in terms of increasing the growth rate, but superficially it felt like a golden age because asset prices went up. And asset prices went up because inflation came down and rates were allowed to come down. And in the end, rates were forced down and low rates make leverage cheap. make private equity deals wonderfully easy and profitable, and they push up the price of real estate, and they push up the price of stocks. And that's the way it was. And the Fed gets credit for that and is due none. It's demerit accrues from the fact that it kept on pushing down interest rates far too long and dangerously increasing inequality, which, as I like to say, is the greatest

Starting point is 00:14:14 poison in the system these days. And it does damage the degree of inequality we have in the U.S. Now, it does damage the strength of the economy. And that is probably part of the reason why the growth rate has slowed and continues to slow. So now that inflation has arrived, there's a lot of concern that we're entering into a 1970s or 80s scenario of stagflation. As a historian, could you give our audience an idea of what was happening during that period and how it resembles today? Well, every period is unique.

Starting point is 00:14:44 The 70s had problems with the oil crises. You can call it one giant crisis or you can call it two or three. But in any case, a triple, quadruple, quintuple the price of oil in a hurry. We'd come off 50 years of fairly stable, low prices. And they shot up and stayed up for a long time. And inflicted enormous pain on the system. They lowered the growth rate. Why wouldn't it if you have to pay three, four times for your energy?

Starting point is 00:15:11 And it also, of course, pushes up the price. So there's nothing like an oil price increase to increase inflation. And it did. And this time, if you adjust for the passage of time, the price of oil is not as high, but it's still multiplied recently by three times. And so that is imposing pain on consumption and it's imposing inflationary pressure. We also have, because of the invasion of Ukraine, we have had some extra spikes in the price of food. fertilizer and natural gas, particularly in Europe. Interestingly, they are now almost all of them

Starting point is 00:15:50 lower in price than the day before the invasion. And this is a lovely example of how the stock market works. The stock market is saying, whoops, there's so much damage from commodity price prices, et cetera, et cetera, that we're going to have a recession. But the recession isn't bad news because the recession is going to get the Fed back in our camp of lowering interest rates again and helping stock prices. And we're looking out into the future. And therefore, that's a good news. So the fear of a recession becomes a wishful thinking about future interest rates. And so the market gets a reprieve for a while. It's quite remarkable, but it's fairly typical. And that's what we're having now. And that's why we might have a bit of a rally for a few weeks,

Starting point is 00:16:35 I think. Yes, what we should cover is how dangerous it is to get involved in a bubble that has more than one asset class, equities, growth stocks mainly. And this time we've also moved into housing. Housing was chugging along okay, but last year had the biggest advance, 20% in 2021, that it had ever had in history. And it went up to a higher multiple of family income, a house price divided by family income, higher multiple than the peak of the housing bubble of 2006, which is, it just means there's a lot of value there that can be lost. And it is dependent on interest rate. As you know, when you're paying a mortgage, at the bottom of the mortgage was two and a half, and it went up to 5.7, 5.8.

Starting point is 00:17:19 This is a brutal increase in mortgage. It means a lot of people will not move houses who otherwise would have done, which means a lot of people will not take a new job because they're not prepared to double their mortgage payments. Everyone expanded to pay as much mortgage as they could afford, which meant that they put merciless pressure upwards on housing prices as the mortgage rates came down. So that's the problem. And then you have problems with. that a bubbly commodities market, inflicting pain on consumption. And as if that wasn't enough,

Starting point is 00:17:48 we have the lowest interest rates in 6,000 years, as Jim Graham would say, or Edward Chancellor's written a brilliant new book and the price of time. And of course, with the lowest rates in 6,000 years, you have the highest bond prices. And that's obviously being taken to the cleaners this year too. So you have bonds, housing, stocks, and commodities. The only people who've tried that with Japan in 89, they're still not back to the price of the equity market. They're still not back to the price of the land and the housing market from 89. That's 33 years in county. And we did some of that in the housing bubble where the stock market came down in sympathy.

Starting point is 00:18:25 And that was brutal. They give you much greater pressure on recessionary forces. And we are playing with fire this time, which was not anywhere near as obvious a year ago before that huge move upwards in housing. The interesting thing about the housing part, to me, is that with high inflation and to your point about expecting it to have inflation for the years to come, is that it seems like you'd want to own hard assets. So the demand should be there to keep propping up for the foreseeable future. Yes. In the long run, of course, housing and stocks are very good protectors of steady inflation. The bad news is psychologically, inflation is associated with a negative, with a drop in PE from a

Starting point is 00:19:09 psychological point of view and pressure on profit margins in the short term and then it adjusts, but it's very painful adjusting. And of course, it's associated with a much higher mortgage. But once it's adjusted, then of course, you're in much better shape. The world is much better off with moderately high interest rates. You get money on your savings. People don't speculate as much. They don't leverage as much. The risk in the system declines. And you can afford to buy a house at lower prices and you can afford to buy stocks and build a portfolio. At the moment, at the peak in December, if you're young, you can't get into the game. You can't buy your first house. You can't buy an equity portfolio. The yields are half of what they used to be.

Starting point is 00:19:51 If I could squeeze one last question on that, because you mentioned the comparison to the 1970s and how we might have high inflation for years to come and the Fed might just raise rates into that. But we had a very different debt picture back then. I think the debt to GDP was in the 30s rather than the 130s like it is today. Does that... Yeah, yeah. We've run much greater chance of a financial crunch this time than we did in the 17th, a riskier world, as if we needed that.

Starting point is 00:20:16 So we've just had this supply-side recession due to these COVID interruptions, and you mentioned the war in Ukraine, and there's even labor shortages now. Now that things are kind of bouncing a little bit are coming back, but at higher prices, meaning things that inflation has hit the most, Do you foresee a demand-side recession approaching? Is that sort of the other shoe that's about to drop? I think in the longer term, to get the next few quarters, who knows what happens, really. But in the longer term, we are really running the risk that this is back to the 70s.

Starting point is 00:20:49 We have problems with the availability of plentiful cheap resources, and we have problems with plentiful cheap labor. The birth rate has crunched in every developed country, except. Israel and China. And that's a very, very important segment of the global economy to say the least. And every one of them has a population growth rate lower than replacement level. So in the end, after accumulating lots of older people as a higher, an higher percentage, we start to actually have the population drop. Secondly, we're 10 and 20 years in, depending on the country, into having smaller baby co-hobots.

Starting point is 00:21:30 So we know with absolute certainty since they're alive already, the 20-year-olds arriving in the market list will be fewer and fewer for the next 20 years. And we have not experienced this before. This has happened incredibly fast. China has gone from plenty of babies to a baby crunch almost overnight,

Starting point is 00:21:50 and fertility rate that needs to be 2.1. It's probably running about 1.4. And even in the US, the UK, we're running about 1.7. We've never seen levels like this. So we're going to have a hard time getting enough labor. We're going to accumulate old people who are very resource intensive. They need a lot of medical care. They need a lot of people care.

Starting point is 00:22:11 And we're not going to have all that many people. The supply of people to look after us old fogies is dropping steadily from now on for the rest of your life about for sure. And at the same time, I believe the correct interpret. of the commodity data is that it wasn't only the China shock, the rapid growth rate for 30 years in China, but it was also showing signs that the best and cheapest, most plentiful resources had simply being mined or pumped and that we are running down into the second tier. If you look at the copper oil, for example, king copper is really important to the industrial system. Over 80, 90 years, the amount of copper in a ton of ore has dropped to a third of what it was.

Starting point is 00:22:58 So you're using an awful lot more energy. And the energy also, which used to run for 100 years at $20 a barrel in today's currency, now runs at 100. So you're spending five times the cost of energy to mine one third the quality of copper oil. You better believe technology can't keep up with that. It did for a long time. It did very, very well. But starting about 2002, the price, the real.

Starting point is 00:23:23 price of the typical commodity has gone up a lot. It's basically tripled. In 100 years, it went from starting at 100, it went down to 30, a brilliant help for getting rich. And then from 2002 until today, it's gone from 30 to 90. So over 122 years, commodities are just about flat, adjusted for inflation. And only 20 years ago, they were down at 30 cents on the dollar. This is a huge shift. Hasn't been nearly enough fuss made about it. But it's the direction that is interesting. thing to me. The direction is steadily up. Now there's a lot of volatility in commodities, everybody knows. You produce an extra ton and the price collapses and you're short a ton on the price troubles. But if you look at the trend, the trend has been pretty remorselessly up since 2002.

Starting point is 00:24:09 And my guess is it will continue to rise. And that will pose a real stagnationary pressure for a couple of decades. And that's why I fear this is re-entering the 70s and 80s. If you prefer it, reentering the 20th century once again. So inflation will always be part of the discussion. Sometimes it will be low, sometimes it will be higher, but it will always be on the agenda. The same with stagnation. There will be pressure on growth that we have not had. We have had a glorious honeymoon period for 20 years where raids always came down and where Chinese workers were always available and inflation was a thing of the past and it is no longer a thing of the past. And unless we're lucky and have some sensible behavior from governments around the world, this inflation will go in little waves and will become moderately embedded at best and really embedded at worst.

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Starting point is 00:29:05 That's Shopify. dot com slash WSB. All right, back to the show. So just to talk about the underlying factors with what you're saying there. So the rise in oil and gas prices is obviously the biggest contributor to this inflation rate that we're seeing. And even with food prices, that's sort of the number one contributor, the oil and gas, the energy going into the food and transporting the food. So we just saw our administration tap into their Strategic Petroleum Reserve, the SPR, and it's now at level's not seen in 20 years. So going to your point about these resources, kind of, if we're

Starting point is 00:29:41 entering the second tier, I think you put it. Do you think the U.S. has enough ammunition here to keep the price of oil somewhat stable? Are we going to just keep dwindling in the supply because there's been lack of infrastructure being built? And we just don't have the same kind of growth expected in that sector in particular. What the U.S. government does in oil to make things a little easier for this wartime squeeze is inconsequential for the longer term. It could be quite important in the intermediate term if it tried politically and economically to stimulate fracking. Fracking is the least bad way to have an increase in fossil fuels because fracking comes

Starting point is 00:30:21 on and in the first year you get half the oil. By the end of the second year, it's basically a done deal. So you don't have stranded assets. The trouble about developing traditional oil fields is they hang around forever around your neck, encouraging you to pump when you shouldn't. There's no such danger in fracking. They come on, they deliver the oil when you need it, and then they're out of business. So they are, from a climate point of view, they're just terrible.

Starting point is 00:30:48 But from all things considered point of view, they're the least bad of the fossil fuels for this occasion. I would bring them on for political reasons and to help out with the Ukraine. and Europe, I'd bring them on in the near term and have them run off and naturally get out of the way. All right. So sticking on the idea of these resources and the lack of supply, I know you'd never short an individual stock, but given that there is this growing or lack of supply in the battery materials, you mentioned the lithium and copper, a lot of these metals, are electric vehicles

Starting point is 00:31:22 or car companies producing electric vehicles, maybe such as Tesla or others, are they even in a more precarious position than some other companies? Everything to do with decarbonizing the global economy is exposed to the incredible shortages of the necessary metals. And it really is up to us to redesign our way around these bottlenecks before they get too bad. And that means you absolutely have to replace cobalt and secondly, nickel, as much as you can to run a whole fleet of EVs that will have to scale up 10 and 20 times the current fleet. And we're doing it.

Starting point is 00:32:01 Very quickly, these lithium-ion phosphate batteries will take over. And can we be ingenious enough to improve the extraction process of lithium, to discover more lithium reserves, and better yet to find batteries that don't use lithium? Certainly the large-scale batteries for the grid, you have to get rid of lithium. scale is too big and lithium is simply not in enough supply. And they're working on that. There are dozens of research groups working on large scale battery storage. But even for EVs, it would be brilliant to have a replacement for lithium.

Starting point is 00:32:40 Whether that is possible, I don't know. Is it going to pose a price problem? Almost certainly, yes, from time to time. And as every mining industry goes in lurches, so you go from excess to shortage, excess to shortage. It is terrifying to be short or long. Value managers have always hated commodities for that reason. It feels completely out of their control, and it largely is. They're about as unpredictable as anything on the planet. And if you go short, you die a thousand deaths, and if you go long, it's pretty much as bad. So I certainly don't recommend people to go short the metals.

Starting point is 00:33:17 If you can go long and throw the key away, I think that will do just fine. It does take nerves of steel, and you better have a good look at your notes before you do it. It seems like there's never a free lunch. And even with these companies that are doing great for climate change, whether they're producing electric vehicles or what have you, there's always a other side of the coin. And maybe it's the lithium mining aspect and the implications there. So then you have these ESG policies coming up.

Starting point is 00:33:42 It's been a hot topic as of late, but it's getting a very bad rap, I would say also. As an environmentalist, how effective do you think the ESG policies are as currently written? They're better than nothing. They're better than a kick in the pants. It's a early stage. It's a little amorphous, a little airy, fairy at this stage. I admire that people trying to sort it out. There's a lot of greenwashing involved, of course, like most first stages. In the end, I think it's a helpful effort to encourage people to report their carbon footprints and so on is to encourage them to do something about it. So it isn't brilliant. It could be done better, of course. but yes, it is certainly better than nothing. And I like to say to an audience, if I'm asked to speak on the topic, let me be honest, I'm an e-map. You know, S&G, good behavior is great. What can you say bad about good behavior? E is a question of us about it. So I would hate S&G to get in the way of the environment. Because if we don't get that right, we will spiral out of control. You could say we are showing early signs of doing exactly that. The damage to the environment is happening far faster and more powerfully actually than anyone predicted 20 years ago. And I was talking to these guys 20 years ago. And the scientists were pretty understated, I can tell you. Nine years ago, I got a commentary in nature, which is a miracle

Starting point is 00:35:08 in itself, because it's the most important scientific journal. And the commentary was aimed at the scientists being so wimpy. And it said, you know, be brave, be arrested if necessary. Be honest, you guys. You're being much too conservative. And being conservative in climate change is entirely risky. If conservatism on the part of the scientists caused politicians to underreact, that could be catastrophic. You can't criticize them today. The tone has completely changed. The UN's report, the IPCC, the last one a few months ago, it contains an opening salvo that says, we are losing, we are working in a closing window to basically protect a viable society, a viable habitat.

Starting point is 00:35:52 It's really enough to make your hair curl the implications of their opening statement. The numbers hadn't changed that much, but the language had changed enormously as they begin to pluck up the courage to say it like it is. They were intimidated by politics, and they were intimidated by not wanting to seem to exaggerate and not wanting to get involved in publicity, protect the dignity of science. Well, this is more important than the dignity of science. It's absolutely important that they say what they honestly believe, and most of them do today. But all you have to do is pick up a newspaper, really, to get religion.

Starting point is 00:36:27 And you see the rate at which heavy flooding in particular, heavy flooding was always going to be the most predictable. Every time the temperature notches up a tenth of a degree centigrade, the air takes more water vapor. And the only thing that guarantees, ironically, is not more rain, but it guarantees heavier. downpours and heavy downfalls do damage to farming. They erode the soil. It's only the very heavy downforce that erode the soil. And we are skating on thin ice and no one talks about that. We have eroded 90% of our safety margin. We're now, we have sufficient soil in the great growing areas, but we only have an inch or two extra where we used to have a foot or so extra. So our safety margin has been used up and we're losing it at about 1% a year. So depending

Starting point is 00:37:15 on where you are, we only have 40 to 70 years of good agriculture left if you do it this way. We have to change the way we do agriculture. Heavy tilling allows the soil to blow away, wash away, and carry, incidentally, two-thirds of the fertilizer with it. And if you want to really worry about resources, fertilizer is obviously a finite resource. We mine it. We ship it, we truck it, We scatter it on the farms and it washes away. And it can't be replaced. It's an element. There's no substitute without potassium and phosphate.

Starting point is 00:37:52 You cannot grow any living thing. And we have to learn to allow the bedrock, the underlying bedrock underneath the farmland, supplies enough if you do it right. Obviously, nature managed to grow a pretty lush planet before humans without any fertiliser, without any artificial fertiliser. It can be done. But you can't do it with big acts. Big Ag is enormously destructive of the resources.

Starting point is 00:38:16 And we're just eating our way through. And people say, oh, don't worry, we have 150 years. Hey, dudes, we have 150 years. The trouble is potash is very largely in Belarus and Russia. If that makes you happy, it doesn't make me happy. And half of the African countries are short of potash this year because of the war. And the price has gone through the roof and they can't afford it. And they're going to, in many cases, go short of food and are as we sit already.

Starting point is 00:38:44 And by next year, it will be hell on wheels. So this is not good. And phosphate is 70% in Morocco. 70% of all the world's 150 years of reserves are in Morocco. I tell you one thing. If there's a civil war or something like that or take over in Morocco, you will have the Chinese and the Americans and the EU wanting to interfere immediately. because without them, we simply don't have enough to get through more than a few decades.

Starting point is 00:39:14 You're talking about agriculture there. It's reminding me of just the food supply question in general because our audience listening to you, everyone I think has the intention to do better and to make the planet better over time. And you hear these theories along the way about how much what you eat is a contributing factor to climate change. I'm kind of curious, is that one of the bigger contributions? Is that something people can take home and change in their behavior most immediately? Or what are some of the biggest contributors actually affecting climate change that we should focus on? I think that most easily correctable is methane leakage.

Starting point is 00:39:47 That's just a question of regulation. An awful lot of it comes from fracking and the series of pipes that go all the way from North Dakota to Boston and up to your gas stove. They're leaking all the way. And the pipes in Boston are medieval pracking. So they all leak. And if they leak more than 3%, which almost certainly they do, then natural gas is worse than coal. Because methane, as it leaks, is in the short term 100 times worse than carbon dioxide. So that's probably the thing we could do the most about regulations for tracking, regulations for pipeline leakage and regulations for dumps.

Starting point is 00:40:28 Dumps also produce a lot of methane. And you can use it. You can recover it. Most of that, recovery will make you money. It may not be the highest return on your agenda that year, but it's a positive return. You save it and you sell it. So that should be pretty high up the list. That's number one. Number two, of course, if you eat more grains and less red meat, that has a huge effect. That would be a good second candidate. The trouble with that is expecting humans to change their ways. And if humans were prepared to change their ways, we wouldn't be worried about climate change. We've had the technology to live perfectly decent lives without having generated all the trouble that we have. Our big problem is the gap between what humans are capable of doing and what humans actually do. And to ask them to all transfer away from meat is a big ask. If you could do it, it would be in second place. In real life, you know, it may be fifth or sixth place, you probably have more chance improving shipping and regulating them than you do getting people to eat a lot less red meat. They don't like, humans do not like being told

Starting point is 00:41:37 that kind of thing, even if it's for the public good. And there are people who respond to the public good, the Japanese are brilliant. If you tell the Japanese to use a little less electricity because there's been a crisis, electricity will drop 25% the next day. We know that because it happened and a year later, it will still be down 25%. If you ask Americans, it would be down 6% the next day. And in a month, it would be down 4% and in a year you wouldn't be able to see it. And this has to do with the social contract. How much do you trust your neighbors? How much are you willing to sacrifice for your neighbors? And because of Confucius or because of Buddhism in Asian countries, they tend to be naturally and more respectful of authority of old fogies and of their neighbors. It is just part

Starting point is 00:42:21 of their culture, they have done so much better at COVID. It isn't even funny. In Japan, they had no regulations worth talking about the burden was carried by individuals, and they have had, get this, one-twentieth of the death rate of the U.S., with the oldest population in the world. Amazing. So there are companies that are creating new kinds of red meat or the beyond meats of the world and even Tyson foods. And we've talked about other ways that we could fight climate change. I'm kind of curious, I know you're mostly focused on venture these days, but I'm wondering if which public companies or venture companies that might become public down the road, what do those companies look like? Who are going to be the ones that are most contributing

Starting point is 00:43:01 to actually fight climate change, whether it be ones that are focused on fusion or solar or geothermal or food? I mean, what do you think would be, you know, the most promising technology you've seen to date? I don't want to get into wishful thinking, but basically as a society, we show all of the signs that failing societies in history have shown. And at the top of the list is hubris. Oh, you know, you've been saying bad things for 100 years and he didn't work out. You think the Romans didn't say that 400 years and so on. And some of the civilizations down in Central America were around for 1,000 years.

Starting point is 00:43:40 And, you know, they built water storage. They built aqueducts and they had wonderful armies. But eventually they fall foul up a lot of failings. And we check them all off. We look like a failing civilization, but I'm hoping we have a little escape clause. We have a couple of things going for us that have never worked before. One of them is population. There has never been a gleam in the eye of Malthus and the boys that we would choose,

Starting point is 00:44:07 even as we got wealthier, that we would choose to have fewer children. This is kind of remarkable. And then adding on top of our choice is the fact that the world is getting so toxic that even when you decide to have children, it's now getting to be much harder. One way or the other, we are likely to have over the next couple of hundred years a declining population. And we have some chance that that will be a great help. It isn't a sufficient condition, but it is a necessary condition. The planet, under any circumstances, could not support the 10 billion that one reads about all the time for 100 years.

Starting point is 00:44:44 it can't be done. We would need two and a half to three planets to cope with that. We can perhaps deal with a couple of billion and we might get that quite gracefully. And the other one, of course, is technology. And the rebuttal to the technology argument is that every wave of technology takes more energy back. And it takes more complexity, which is a killer, because complexity itself is a failing characteristic. It takes too much effort, too much manpower, too much energy itself. And if that wasn't enough, it increases your hoodsper, your overconfidence, every wave of scientific progress. And so it can be quite deadly. But this time, we have some open-ended technologies. I call them get out of jail-free curves. And they are, because they're almost

Starting point is 00:45:30 infinite, fusion, geothermal, and brilliantly cheap, effective storage, any one of those three, and we may get out of jail because that's enough cheap energy, green cheap energy, to in the long run take care of poverty if we chose to, for sure, and take care of climate change. The thing about climate change is when we finish, we started 150 years ago with 280 parts per million carbon dioxide in the atmosphere. It's only a little bit, but it's a very powerful commodity. If we had no parts, we would be frozen at minus 20 to 25 degrees centigrade. a frozen ball with just bacteria around if we were lucky. And so it's a very, very potent greenhouse gas. And we started with 280 parts per million. We're up to 420. That's a bigger jump than the

Starting point is 00:46:19 difference between the Ice Age, two miles of ice on Manhattan and the pleasant enough world that we have now. That's a bigger jump. The Ice Age gap was just 100, 120 points and we have just gone up by 160. And we're going to go up to about 525. And we need to go back to 300. So we're, we're we're going to have to get rid of 225 parts of million of carbon dioxide as well as the method. And if you want to think about the carbon dioxide, that is two trillion tons or more. That is the absolute minimum. Two trillion tons absolutely has to be taken out of the atmosphere over the next couple of hundred years. And the Grantham Foundation, that's all we do with our private investments, our venture capital.

Starting point is 00:47:02 We have a team of half a dozen, and all we do is focus on carbon dioxide. extraction biologically and every other method that we can get at. But that needs a huge amount of energy. However you do it, you're going to need a lot of energy. So one of our get out of jail free cards would be very handy indeed. And what are the probabilities? I think there's probably 50-50 that fusion in the next few decades will come out with a viable engineering system, engineering and physics.

Starting point is 00:47:35 The thing that I have doubt about is the cost. They're going to be fairly costly plans. But 50-50 will have the technology and maybe it will be cheap and maybe it will not be cheap enough. Geothermal looks incredibly promising because the fracking industry has gone through the most amazing set of experiments, tens of thousands of wells, pushing, prodding, experimenting, shocking the rock, using extra special mixtures of liquids to pump, down and lateral drilling. It's really been a revolution of engineering talent. And if you could take

Starting point is 00:48:13 all of that, which we can, and apply it to geothermal and then start the same process with geothermal, it would be almost surprising if we couldn't, at least in some parts of the world, have a really economically viable a source of energy. And the heat from the center of the planet here is more or less infinite. So that would do. And the third one would be a brilliant, breakthrough in storage. We've come down to 10 cents on the dollar in the last 15 years. If we could come down once again over the next 20 or 30 years to 10 cents on the dollar, or even 20, we'd probably do it. We wouldn't need fusion or geothermal. Any one of those three will give us a chance of success. The problem is how much of the planet spirals out of control

Starting point is 00:48:58 because of food problems, energy problems, creating failed states of the kind that we begin to see in Africa. And if the temperature alone continues to rise, the whole Indian subcontinent becomes very questionable as to whether you could do regular farming. It has a wonderful share of the world's arable land. If you see one of these maps, which is green for arable, you will see that India is one of the few places where practically the entire subcontinent is green. The The problem is, once you get over 35 degrees centigrade, which is about 95 Fahrenheit, and you get humility with it, and you can't stay out more than a few hours. And they recently had 45 degrees centigrade for three weeks, as you probably read, the hottest they

Starting point is 00:49:43 have ever had. Fortunately, it was dry as could be, and humans can deal with that because we sweat and it reduces our temperature. But if it arrived in the monsoon seats, then people die. They can only be out in the open for three or four hours until their internal organ ceased to function. And this is not good. And furthermore, it is really quite likely that those temperatures will afflict the Indian subcontinent within, if they're lucky, you know, 60, 70, 80 years, and if they're unlucky 30 or 40. So they better start preparing. And that's a pretty tricky job when you talk

Starting point is 00:50:15 about farming because their idea of farming is not an air-condition tract as it is in Minnesota. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Writer spend 82% less time on audits with Vanta.

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Starting point is 00:53:20 is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Yeah, so Elon Musk shares a lot of these opinions you just mentioned around fusion and the scalability or the question around it and how economically viable that is. Also, the fusion thing is interesting because we do have another infinite source of heat and that's the sun and it requires no maintenance. So solar would be the most obvious thing. According to Elon Musk, you only need 100 miles by 100 miles in like some corner of Texas, right, of solar to power the entire U.S. But to your point about storage, that's the the biggest bottleneck. I mean, similar, that's why oil is so great. It's so easily transferable. Incidentally, I have to interject here that it sounds as if he actually stole that one from me.

Starting point is 00:54:25 He very well could have. 100 miles by 100 miles. I use Utah because I drove around looking for a state park that was about that size and couldn't find it. So if you think of 10,000 square miles and you think of a square mile outside Boston or maybe four of them, you think, oh my God, that's epic. And 10,000 of them seems impossible. But when you think of 100 miles by 100 miles in Utah, this seems eminently doable. If the Chinese put themselves to it, which they will probably, they will do 100 miles by 100 miles. And they are scaling up. Oh, boy, is China taking control of these important industries? And we are kind of allowing them to get a really big jump start.

Starting point is 00:55:08 They have 5 to 600,000 electric buses and we have 1,500. They make over half the electric. cars? When was the last great technology where the US lacked the change? You know, we're buying five or six percent this year of electric vehicles. They're buying 20, Europe's approaching 20, Norway's 70. And why are we so far behind on something that's important? We usually lead the chart. It's inexplicable. Anyway, everything that matters, wind and high-tech transmission lines, my God, we have really many people. We have three or four separate transmission lines. We couldn't send electricity into Texas. They have their own grid when they had that terrible freeze-up and everyone was in danger

Starting point is 00:55:51 of dying of cold. We couldn't send them any of our electricity because there's no grid. And what grid there is is antique and ill-kept-up. And China has thousands of miles of high-tech, ultra-high voltage DC lines. And they also control the manufacturer of solar panels, the manufacturer of the materials are going to solar panels, the refining of lithium, the refining of cobalt. If you make an enemy of China, you should be well advised to make sure that you can get by without their goodies. I'm not sure that we have done that. Well, I love what you said earlier about if you were in charge, you would

Starting point is 00:56:29 make some effort to boost the gas in the interim, because it's interesting how we politicize these things. It becomes binary, where we have to be pro-green or not pro-green. And when I mentioned the 100 miles by 100 miles to your quote there, it gives people hope. It makes it more achievable or people can kind of start to wrap their heads around it, which is it makes it not such a, you know, steep mountain to climb. I'm also bullish on the fusion side of things and nuclear side of things and the EU parliament actually just labeled or the pushing to label gas and nuclear investments as quote unquote green. Do you think this is sort of a lead domino in some way to help get the U.S. to get similar regulations involved? Is this a sign of better things to come

Starting point is 00:57:08 on that side of the argument? Well, some of this is wartime-related, so you have to make exceptions. They're really in a squeeze, and to coal gas, green is a desperate and inaccurate. When in real life, it's often worse than coal. But they're in a crisis. So you've got to, in a sense, cut them some slack for a little while. I'm hoping that this wall will, yes, it will be a step backwards for coal and so on. But it will be a giant step forward because the message about the Ukraine is never, ever be this dependent on Russia again, which means never be dependent on natural gas again, which means get your nuclear and a bubble, wind and solar going at warp speed.

Starting point is 00:57:53 And they will. So this will have moved the agenda considerably forward on a 20-year horizon and considerably backwards on a two-year horizon. But that's life. You have to make those compromises. But to think positive thoughts since you started on that. So we have the, I'm putting my thumb up here, we have the get out of jail free cards, nuclear, and you could include fission if we got religion and did it right. And so on.

Starting point is 00:58:19 We have the three great kind of infinite sources of energy. That's very optimistic. And secondly, seeing through my eyes in the VC world, the green VC world, there is an enormous number of brilliant companies working on a thing. thousand different improvements to the green tech world. And I've got to say, they're highly motivated. They're not just capitalists. I am almost shocked that they're either Oscar winning performers, all of them, or they genuinely care about helping the green business. As do a lot of young people these days, they really put more of a premium suddenly on doing something useful. And so it's very

Starting point is 00:59:00 agreeable working with these people. And they're the best that money combined. a lot of them are imported, if you will, from foreign countries. It's surprising how many successful VC enterprises are run by immigrants and first, second generation immigrants too. So it's a pleasure working with them. It's a pleasure dealing with really bright people who are working for the cause. They are much more cooperative than normal. Of course, they're competitive as well, and they all want to make a fortune, which is great.

Starting point is 00:59:29 That's how the best part of capitalism. But they are more cooperative than any other branch of capitalism that you will find. And we, being in the philanthropy business, we of course see that very clearly. Anyway, there's an enormous amount of terrific work going on. And America is so good at it with the biggest, the best. We have the great research universities. The last time I saw a list of 20, we had 15 and the Brits had three. That's practically a death grip.

Starting point is 00:59:57 And they are so important for green tech. So important for venture capital in general, but much more for green tech than most, because that's all based on pure science. Some of the social apps are just based on a smart idea, but almost everything in green tech gets its start in pure scientific research. And the willingness of Americans to spin out and become capitalist research engineers is profound. And it is spreading. It used to be almost unheard of in England and now an imperial college in L.R. where there's a real buzz going on. And I am told in Europe, I haven't seen it for myself, the rest of Europe, I should say.

Starting point is 01:00:37 Thankfully, the U.S. seems to be leading the charge on that front, but I know that you estimate the U.S. on, we're just talking rates of return. We should have a much more underwhelming performance for years to come in the markets versus, say, emerging markets. And you had this great interview recently with Ray Dalio, and Ray obviously believes that we're entering into this new world order. And he expects a lot of internal conflict to start arising in the years ahead. But it's coming, I think, maybe sooner than expected. We're currently seeing, you know, as of today, we're seeing bank runs in China. We're seeing riots and protests in Sri Lanka. We're seeing Italy protests, Albania, even Germany,

Starting point is 01:01:16 because of lack of food and high inflation. Given this macro picture and these current events, how are you currently thinking about the risks in emerging markets? Yeah, no. The risks of destabilizing the whole global system have risen and continue to rise. It is quite scary. But the risks are in the developed world, too, as you were implying it. But the speed with which Sri Lanka went from ho-ho, you know, boring, jogging along OK to complete chaos. I mean, that is, that is shocking, isn't it? The whole system, it took about less than two years to go from to an outsider anyway looking pretty stable to looking out of control. It doesn't take much. And when you mess with food, you know, the Tahrir Square days of the Arab Spring, they chanted bread, freedom, dignity, bread, freedom, dignity. But bread was first. And that was just based on a temporary 150% increase in the price of wheat.

Starting point is 01:02:13 Well, we just had another one that was 150% increase in the price of wheat. And there's likely to be pretty powerful repercussions around the whole of Africa and the Middle East. and who knows where. The thing about these pressure points is often unexpected like Sri Lanka, things you didn't have on your radar screen suddenly blow up. So these are tricky times for emerging and they are tricky times for developed. You know, bad things can happen anywhere in the US. You'd have to say our democracy looks to be in the worst shape for 80, 100 years or more

Starting point is 01:02:48 through my eyes with attempts to overthrow democracy as far as one can tell. And some very suddenly right-wing countries, Hungary, so on, it's dangerous times without a war. And ironically, the war may improve some things, but it certainly increases the aggregate risk of some terrible mistake being made. So whether that's materially worse in emerging or not, I don't know. In the end, resources will become more important. As I like to say, it doesn't take much for the four loaves of bread for a haircut. to become four haircuts for a low for bread. In the end, a loaf of bread is more important than a haircut. And they have a lot of the world's resources out there in the emerging world. And maybe that

Starting point is 01:03:34 will turn out to be a Trump card. One quote I've heard you throw out there about the environment is that the issue is essentially we are compounding on an infinite planet. And a lot of these issues we're seeing out in the world today, I can just hear the Bitcoin maximalists in our audience, pounding the table that we are trying to compound with an infinite currency. And if we talk about things like methane being the biggest contributor to climate change, there's already some promising tech out there about Bitcoin consuming the excess methane, you know, that's offshooting on some plants and repurposing it into green energy just to simply mine more Bitcoin. And I've actually heard you mention Bitcoin a little bit more as of late in some interviews. And Gary Gensler even

Starting point is 01:04:16 just said that Bitcoin is the only crypto he would define as a, commodity. So I'm just kind of curious, with all of this floating around and given your bullishness on commodities in general, are you also potentially bullish on Bitcoin? No. No, blockchain is going to have legs, as they say in variety. It'll be around for decades. And it'll be put to users that make money. There'll be little services that will do currency exchange and so on and it will be cheap and so on. And that's just capitalism. That will work. And it will work the same old way. You'll make profits. and dividends and so on. But Bitcoin is not that. A Bitcoin is not a good reserve of value,

Starting point is 01:04:56 as we've seen. It's traded like a spec. It's lost two-thirds of its value very quickly. What kind of store of value is that? It's terrible for a currency exchange. It's expensive to transact. But worst of all, it is deadly to the environment. It's incredibly energy-intensive to give you what? To give you a speculative instrument to wager on. That's it. That's someone else will pay even more. But the fact that it takes our precious energy and has a carbon footprint is the worst crime of all. And the sooner it goes away, the better. So even if it were used to, say, close a wealth inequality gap, which I've heard you say is, you know, the ultimate evil in the world today, I'm just wondering if there's any other tools that come

Starting point is 01:05:40 to mind that would be able to do such a thing. No, as a speculative instrument, it's made a lot of money for a couple of hundred people who got in early with a lot. Most of the other people playing it have now lost money. We know that. It's the same old, same old. The rich get richer and the poor get poorer. So any attempt to spin this as an equalizer is just that. It's pure spin. This is like going short. You know, you have to leave it to the pros. While we're winding down here, I have some other questions around the birth rate that you mentioned earlier because I do see that is a very big threat. And right now we currently have two job openings for every one person in the U.S. And I'm kind of more curious about what is causing that if it's just COVID overhang,

Starting point is 01:06:23 if it's having an aging population, the declining birth rate is a confluence of everything. And just your general thoughts on why we're seeing wealthier people have less kids over time. Do you have any theory behind that based on maybe other times in history? No, I think it's a major surprise. You could flip that around and say, It was a major surprise that people chose to have big families. They're expensive. They take all your time and energy. They take all your money, fuel holidays to Borneo.

Starting point is 01:06:52 I mean, and as the cost of education has gone through the roof, in real terms, adjusted for inflation, the cost of education has risen remorselessly. It now costs, if you have three or four children, you need a million dollars of after-tax money to get them through colleges and etc. And you could say it was amazing. we had so many children for so long. It's easy to sympathize with taking the easy way of having one or two children or no children, and particularly if you're a woman just getting on with your life and not having to drag a man and do children around. So I have no real understanding of why

Starting point is 01:07:29 it came on so quickly in the last 40 years. And there is a lot of short-term stuff here with COVID, but it's as if COVID borders the time to reflect on what we were getting from our job. And a lot of crummy jobs didn't seem worth the effort. And so people were quicker to resign. And we still haven't reached the utilization rate. I'm sorry, what is it called? The percentage of people working is way down from 2000. In 2000, we had about as high a participation rate as anyone on the planet.

Starting point is 01:08:01 And since then, ours has come down. The Italians and so on have gone up. And we have one of the lower participation rate, which is really the definition of unemployment. How many people do you have? What fraction are working? And the rest are, in a sense, unemployed. And we do not equal the EU. The way we stay at the unemployment rate, we're always very proud. But we have more people not working than Europe. And they seem to have found a new willingness to resign if the job is crummy and they're not paid enough. And they have been treated diabolically badly since that 1975. If you look at the increase for an hour worked, it's up 10 or 15%. adjusted for inflation in 45 years. And in France, it's up 150%. And if you read Business Week, as I like to say, it would have appeared over that 45 years that we had done nothing but kicked French bottoms because of Eurosclerosis, French incompetence, bureaucrats, etc., etc. They take too much time off. They have long holidays. But when they work, they're very productive and they get

Starting point is 01:09:04 paid a ton more money than they used to, and we do not. Even the lowly Brits are up 60%. The Japanese are up over 100. How is it that our average hour worked in manufacturing has done so badly? And it's because we have had decent aggregate productivity, but all of those games have flowed to the top 10%, a lot of it to the top 1%, etc. And a lot of that to the top 0.1s. And in a way, I speak as to 0.1%. And it's had its advantages.

Starting point is 01:09:32 It's funded at the Grantham Foundation. And that in itself, I warmly recommend to old fogies that you have a sense of purpose. And a green agenda is a terrific sense of purpose. And as I have explained, incredibly entertaining and stimulating as well. And the very best corner of the American capitalist system, which is otherwise looking a little, as I say, fat and happy. I mean, they're not doing the same entrepreneurial stuff that they did in the 60s. In the 60s, everybody was out for market share, always opening a new factory, which as a portfolio manager, was very irritating. It's just as things got tied.

Starting point is 01:10:06 they would all, all five companies in the paper business would all open new mills at the same time and ruin the profits. Now they don't. Now they sit on the expansion. They expand very reluctantly and they concentrate on profits. They keep the staff lean and mean. It's brilliant for the management who have their stock options and the buyback program, but it's bad for growth. And so the profit margins in the last, in Goldilocks era, profit margins have been 30, 40% about the previous 100 years. Brilliant for management and brilliant for stockholders. And fairly rotten for the economy where the growth has steadily slowed down. Yeah, and the compensation differential is greater than ever.

Starting point is 01:10:52 I think in the Henry Ford era, you've said that it was 40 to 1 as far as management to lowest paid employee. Now it's in the 300 or 400 range somewhere of that sort. Yeah, it depends. how you calculated that 1965 it was 40 to 1, which seems like a lot, doesn't it? 40 times the average worker in your plan. And in Japan, it was about 40 to 1. Today, it's still about 40 to 1 in Japan. They have no rules. It's just the social contract. They thought it was unseemly to increase it much more from 40 to 1. And we've increased it 300 to 1. And it's basically get as much as you can. Milton Friedman is basically advocated to sociopathic capitalism, which is your only responsibility

Starting point is 01:11:31 is to maximize profits, which is interpreted as maximizing short-term profits, which is, we think, my colleague James Montier, attempts to prove that this is really bad for business, and I believe in. It's just not a good business policy to maximize short-term profits, or even short-to-intermediate-term profits. You should try and maximize very long-term profits, and very few companies do that for the time being. And if a human being adopted that policy, I am only interested what's in it for me. We call them a sociopath. That's it. So we have sociopathic capitalism for the time being. And back in the 60s, we did not. They did pension plans that were very generous. They didn't have to. They were inventing them in the 60s and 70s,

Starting point is 01:12:11 and very good they were too. And they shared the money around. And the growth rate of the economy is much more vigorous. The whole system was functioning much better than it does today. Having said that, we do have an unfair share of the great new enterprises. And they all sprung out of our venture capital industry. Every one of the fangs is seen through my eyes a newbie. When we We were starting GMO. We hired away employee number 26 from Microsoft. Customs apportioners, then me. And only Microsoft and Apple are about as old as we are. And the rest are teenagers, I mean, they're kids. And yet, they're some of the greatest companies in the world. And yes, they have benefited from total lack of Justice Department effort on monopoly. They're all

Starting point is 01:12:53 instant monopolies. And in every industry, the concentration has gone up and the monopoly factor has gone now. And the profit margins confirm that. Profit margins are way off to scale high compared to the rest of the world and compared to American history prior to 2000. So we have very abnormally high profit margins, rather disappointing growth and abnormally high P.E. This is known as double jeopardy because we know what explains PEEs, by the way, we have a wonderful model that's 25 years old and has a correlation coefficient that's so high I wouldn't believe it if I haven't done it, participated in the process. And it says that the P.E.s are not a function of predicting the way we've been told for 100 years, that they're a coincident indicator of what makes portfolio managers feel

Starting point is 01:13:38 comfortable. Inflation is number one. If you have low inflation, you have a high P.E. If you have high inflation for five years, you have a miserable P.E. And the second one is profit margin. If you have a high profit margins, you have a high P.E., a low profit margin. It's a low P.E. and way, way down in third place is the volatility of growth. Growth doesn't count. The bouncing around of growth is what makes people feel comfortable or uncomfortable. They'd rather have 2-2-2-2% than 6 minus 2. Even if that averaged 3, they'd prefer the stable 2.

Starting point is 01:14:12 That's what the model says. And what the model says today is the model is calling for 20, which is very high, 20 on a shillopee, and the actual price today is 30 on the show of PE down from 38. And 30 is very, very high. It's in the top couple of percent of all time. So we're still very, very exposed. And the model has been falling like stone because every month of unexpected inflation is cranking the PE down. So this decline has not even closed the gap.

Starting point is 01:14:42 The model has been falling as fast as the market has been falling. So we still have this one third gap. And secondly, as the Goldman's side, Saxes and Morgan Stanley's begin to say, the second shoe is going to drop, which is profits. So you have even a mild recession, you get a big whack from profit margin, and the P.E. goes down, but also the earnings you're multiplying it goes down. So it is quite likely and plausible that the PEs will continue to drop, and the earnings will drop in a recession.

Starting point is 01:15:12 Well, given your focus on green energy, we've covered a lot of ground here between, you know, reasons to be hopeful, reasons to be concerned. I'd like to wrap up the conversation on the hopeful side. And I'd like to give you the opportunity to speak to our audience about where they can focus their energies if they're just entering the workforce. Your focus is heavily on green energy and green VC and tech. What are the ways you recommend people entering the workforce focus on so that they do have that purpose you were speaking about? Well, it is particularly hard time to get into green tech because the bubble breaking has hurt on a short term basis has hurt venture capital, of course. and they're not looking to increase their staff, which is most unfortunate.

Starting point is 01:15:52 But in the long run, that would be at the top of my list. Venture capital in general would be second. It's quite unlike the rest of capitalism. It's brilliant new ideas. It's generating growth. It's more exciting. And in the end, more rewarding. So I would do that.

Starting point is 01:16:08 In third place, just make sure that you're joining a firm that's pretty enlightened because enlightenment on the green front is going to decide very much. very much who the winners and losers are. History is full of examples where a big trend comes in. Some companies fight it tooth and nail, and it often cost them their existence. And some companies grit their teeth and say, oh, well, it's inconvenient, but what the hell it's coming, let's get on board and run as hard as we can. And they're the successful. Be careful about it. Everyone's greenwashing these days. But you can probably tell who is reasonably sincere. And there's quite a lot of companies, I would say, a quarter of them, are really quite interesting.

Starting point is 01:16:47 in setting a good example. It may be for their clients, it may be for the general public, but who cares if you do the right thing, I'm not going to examine too closely your motives. Anyway, so make sure you're with one of those firms and you'll be fine. And then in your private lives, vote green, hustle green, do whatever you can, eat a little less red meat, get an electric vehicle, and take for the upper middle class, the most painful of all, take a fewer jet flights until one day, perhaps, they have a green version. Well, Jeremy, I can't thank you enough for coming back on the show. It's been a year since we last

Starting point is 01:17:27 spoken. And if you're listening to this and you enjoyed the episode, I highly recommend you go back to episode 371 and listen to Jeremy and his thoughts at that time because so much of what he's talking about is transpiring as we're speaking today. And Jeremy, I'd love it if we could circle back maybe another year from now and think about what's happened. It'll not be boring and it's interesting times we're living in. So thank you for taking some of your very valuable time and sharing it with us today. You're entirely welcome. All right, everybody.

Starting point is 01:17:56 That's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerbie. And don't forget to check out all of the amazing resources we've built for you at the investors podcast.com. You can also simply Google TIP finance and it should pop right up.

Starting point is 01:18:15 And with that, we'll see you again next time. 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.

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We Study Billionaires - The Investor’s Podcast Network - TIP466: The Bear Has Arrived w/ Jeremy Grantham

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