We Study Billionaires - The Investor’s Podcast Network - TIP542: The Crisis is Bigger Than Banks w/ Jeremy Grantham

Starting point is 00:00:00 You're listening to TIP. Today, we welcome back a very special guest, and that is billionaire and legendary investor, Mr. Jeremy Grantham. I have been continuously amazed at how accurate Jeremy has been predicting future events over the last couple of years that we've been chatting. But it should be no surprise as he's been one of the few who have accurately predicted nearly every single bubble bursting throughout his career. In this episode, you will learn Jeremy's general thoughts on recent bank failures and the Fed

Starting point is 00:00:29 policy, a look at history, how long bear markets typically last, and why that data is probably very irrelevant for the situation we're in currently. How Apple and Microsoft are eating the S&P 500, the bigger issues that are really concerning Jeremy, and a lot more. With all the noise, I mean news going on constantly, it can be challenging to keep an eye on the bigger picture. Well, that's exactly what makes Jeremy so great. While I was focused in on banking issues, Jeremy takes us 40,000 feet above to refocus on some of the world's largest issues, which I have to admit are more concerning. When Jeremy Grantham sounds an alarm, it's important we all pay attention. So with that, please enjoy this conversation with the one and only Jeremy Grantham.

Starting point is 00:01:15 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 Lockerby, and as I said at the top, I'm here with Jeremy Grantham. Jeremy, we're so excited to have you back on the show. Thank you so much for coming back on. It's a pleasure. Good to be here.

Starting point is 00:01:48 Well, I was really excited to talk to you because this bubble that we've been talking about and you've been really opining on since, oh gosh, maybe two years ago when we first started talking and all your predictions have just been coming true to this unbelievable degree. And I wanted to kind of gauge where you think we are now because at the same time as we're seeing big things happening and banking in a lot of other areas, the market is only down 16, 17%. So there's a lot to kind of gauge as to how far along into this thing we are. So I also have noticed that a lot of market participants are really haunted by 2008 in the GFC. And they're often quick to point out events that resemble that collapse, especially over the last few years. And since we just had the, the second largest bank failure in U.S. history, it's feeling eerily similar to 2008, almost in a new way. What are your general views about the recent banking crisis and what can history tell us of the events unfolding in the banking system and, I guess, the overall markets today?

Starting point is 00:02:51 I was reminded of the old aphorism that the Fed keeps on tightening until something breaks and in a situation like this. And it reminded me of a conclusion that I had come to on the study of the great bubbles to the handful of the five or six, including Japan, in the last 100 years, because it seems to be the same. When you come down from a high, the ultimate sugar high of a super bubble, almost infinite optimism, a belief that good things will go on forever, that record profit margins, et cetera, et cetera. And it's always, the bubbles always form at the end of a long, heroic economy and everything, in the garden is perfect, and it always has taken cooperation on the part of the Fed and the

Starting point is 00:03:35 administration. So everything is perfect. And then when something pricks that confidence and it begins to leak out, there is a long way down to go from the peak of optimism to at least mild panic, if not severe panic. It's a long drop. And at the top, people have always, in their competence, have always expanded their debt levels. So there are a lot of, always at on near the all-time peak in 1929 or 2000, the housing bubble and so on, and in Japan in 89. And as they were this time, this time you had record levels of debt to GDP all over the world, but certainly including the US. And so as things unravel, of course, the pressure, the combination of declining confidence and peak debt is a very bad one. My question really

Starting point is 00:04:26 is, does it take the Fed, or would it find the weak spot anyway? sooner or later. And maybe the Fed raising rates accelerates the breaking point. And I think of it as like water behind a dam. You're never going to be able to predict which brick goes first. In fact, you should expect the unexpected. By its very nature, it's a complicated financial system, a complicated economic system, and you build up the pressure and you build up the pressure as your confidence comes down and the debt begins to hurt, and particularly if the Fed is raising rates, and then something blows. And each time, it seemed to be unexpected. Who imagined Bear Stearns would go, hey, the Bear, as we used to call them, they were the guys that always inflicted the nasty paper on other people.

Starting point is 00:05:11 And when the music stopped, they always had a, they always had one of the jets. So when Bear Stearns went in 07, it was a major surprise. And Silicon Valley, until you think about it and look at the balance sheet, it did appear to strike the world as a complete surprise. And maybe that is my point. from 60,000 feet is that is the nature of the beast. You should expect that the first thing that goes will generally speaking be a surprise and then how it cascades is virtually unknowable. But let it be said, after the handful of the great bubbles, there has always been a recession. If people behave well, the leaders are sensible. It's a mild recession. 2000 was about as mild as it comes. If they behave very badly and get unlucky like 1929, you get a depression. If they

Starting point is 00:06:02 behave badly and refused to regulate subprime instruments in the housing bubble, where Larry Summers and the boys lent on Brooks LeBourg, who had the legal right to control subprime, regulate it. On the ground, you didn't need regulate banks. They were, by their nature, capable of self-regulation. This was the Federal Reserve Leavitt at the SEC and Larry Summers. wrestling to make sure that they were not regulated. I love to bring that up because I call those guys the Teflon men. It doesn't seem to stick with them. They brought the system to its knees on the mistaken belief that capitalism could self-regulate. And what a horror show it was. And anyway, here we are back again, and we're going to find out how good the regulations have been since the

Starting point is 00:06:49 housing bust. How effective the wheezzling of the corporations was to push it back. We all know now how Silicon Valley CEO personally lobbied, joined the lobby really to roll back the regulation so that they could be unregulated on the supposition once again. Somehow that capitalism is responsible enough to regulate itself. Well, it just ain't so. And capitalism needs a policeman at the corner of Broaden Wall, as FDR said. And in recent times, some of the policemen have been taking time off or being regulated off their beat. I just pulled up a chart here. And for those who are only listening to this, what it's showing is called past bubbles

Starting point is 00:07:29 suggest this should take a while or it could take a while. And what it says is basically the percentage from peak to trough and the trading days. So if we count sort of January 1st of 22 is the pop of this bubble because that's where the markets really started to turn, that would suggest that we're at about roughly 300 trading days or so. If you count holidays in there, it's probably give or take, around 300. days since the pop. And this is showing that the only other times something's taken over 300 days would be 2007, 1968, 1973, and 2000. So for those who are listening, 2007 took 350 days,

Starting point is 00:08:05 Peaked atroft, 68, a little bit more, 1973, about 450. And 2000 was the longest. It took about a little over 650. Does this mean anything, right? Because with the idea that history doesn't repeat itself, but it does rhyme, would this be any indicator? in your mind that we are, say, somewhat towards the end or more like halfway? People make a big mistake to average bull markets and bear markets. This is not about that. This is about something quite singular and different that happens on rare occasions in the great bubbles.

Starting point is 00:08:39 The two and a half sigma ultimate euphoria episodes, it's like a phase change. People go from fairly sensible behavior in an ordinary bull market to absolutely. crazy as it could be in these great bubbles. And throw the rest of the data away and look at the bubbles and the data is clear. First of all, they're always easy to spot and it is always claimed that they are not, but they stand out in terms of the data on the market like a Himalayan peak out of the plane. Two and a half standard deviation events of the kind that occur every 50 to 100 years. These are not hard to spot. 1929, you had to try to miss it. Two thousand Lord knows you had to try. It went to 35 times earnings, beating everyone on the head with a hammer.

Starting point is 00:09:24 The housing bubble was even bigger than that. The U.S. housing bubble in 06, that was a three-sigma. That was literally over a hundred year event. It had never happened before. Most unlikely it took the undivided attention of Greenspan and Bananke, pushing and pushing interest rates down to finally get the entire U.S. housing market to go into warp drives simultaneously. Famously, it had been diversified before that. It would bubble in Florida, crash in Chicago and so on. So it never happened until it got their undivided attention. And so just concentrate on these few. They always have a recession, and when they want to take their time, they really take their time. Most of the decline in these great bear markets only happens after the first interest rate cut. So you tell me when the first

Starting point is 00:10:12 interest rate cut is, and I will tell you when the second half of the pain is going to start. And it It would be unlikely from a historical point of view that this would not run, this financial and stock market event would not run deep into next year. And that's what it looks like. It's not hurrying. But let me bring up another point on your chart. We have forgotten to inflation adjust because we haven't had inflation for 20 years. In the old days, all data like this, everything you read in the economists, et cetera,

Starting point is 00:10:42 was always inflation adjusted. We have had, for example, over 10% inflation. The market isn't down 15%. The market is down 25. In the housing bubble, there was no inflation. In 2000, there was no inflation. You can't compare this one with 10% inflation with that one that had a couple. And 25% is a pretty decent down payment on this bare market, I would say. The passage of time against the market that has a trend line and in an economy that has inflation, the passage of time is pretty painful. If you even stay flat, you are losing money at a decent speed. And people are have forgotten that. One question that comes to my mind when you mentioned the longevity that we might be looking at here is just the actions of the last week or so because what I see happening is the banking sector almost tightening for the Fed to some degree. You had Powell this week actually just come out and say they don't really expect to keep hiking rates because they're seeing obviously some instability. But what's also interesting is that banks are choosing to use the Fed's

Starting point is 00:11:44 discount window to a degree that's even more than 2008. So they're just recently have gone to the Fed for about 150 billion compared to only 12 billion for this new BTFP, otherwise known as bank term funding program that was just introduced. And the reason I guess that's interesting to me is because the BTFP is a better deal for banks. It takes a certain kind of collateral, but they're getting more money for that collateral, whereas they're going to the discount window and selling a bunch of assets they have at a discount. And I guess what that tells me is that the banks are needing that cash and are willing to take a haircut because they're in a more desperate place than we thought.

Starting point is 00:12:24 And that just leads me to believe that tightening is going to continue on the lending terms, which might exacerbate a recession a little bit quicker. Is there anything to that, in your opinion, as far as outside elements that might progress this thing forward in a more aggressive fashion? The blunt truth here is I don't really care. I try and concentrate on what I consider the realities, which are profits and growth. And I assume that if you're patient, that the paper side of it will wash through the system. And we had a very obvious first phase of the bubble. We pricked the confidence. It's easy. All you have to do is shake that complete and absolute euphoria. We did that. It popped nicely. Then you have a classic bear market rally. And we, We knew from the beginning, didn't we, that we would have more by the dip this time than almost ever before because of the trillion dollars plus lurking around in the piggy bank from COVID stimulus. And from the behavior of the meme stops, we knew this was not going to melt away too quickly. And so we had the spectacular rally and we may very well have more.

Starting point is 00:13:32 And then you get into the third phase, and that is the fundamentals. And that's the difficult one. How long and how painful will the actual reality, the adjustment phase be? How badly will the economy slow down? How badly will profit margins shrink? Let me point out the most genteel one was 2000. We had a very mild recession. We've never had anything like a soft landing, but that was the closest.

Starting point is 00:13:57 That was the least hard landing. And what happened? NASDAQ went down 82%. S&P went down 50%. Real estate was cheap. It was not involved. The bond market was cheap. It was not involved. Everything that was favorable could be favorable. And still it droned on for three years and the NASDAQ went down 82%. That is what I'm interested in. Profit margins got hammered and the growth rate slowed down moderately. In the housing bubble, the GDP slowed down even more. Profits basically disappeared completely.

Starting point is 00:14:28 In 1929, of course, was even worse. So we're going to have an unknowable bad time. It will depend on how effective, the administration is, and so on. But the truth is, we come into this with very high profit margins. We come into it with a form of capitalism that was raising prices for the first time ahead of the workers so that in unexpected inflation, very quickly profit margins went up and real wages went down. This is not what happened in the 70s, I can assure you, profit margins went down and real wages went up. But this is a corporate system that we could talk about, which is really quite interesting. The American corporate system has developed a style that makes it almost possible to break the law legally. The way to make a lot of money is to get on the telephone,

Starting point is 00:15:14 call up your competitors, and withhold production. The bad news is if they catch you, you go to jail. And what we have today, increasingly now for 20 years, is a style of capitalism where the stockholders are leaning on the corporations to take it easy on capital. Why? I mean, basically, it generates an economy of mild shortage all the time. You want to make money, that is the world to live in. So mild shortage all the time, pressure on the workers, in the good old days, they always built an extra plant. It was the bane of stock analysts like me in the 60s and 70s. Whenever things started to improve, eight paper companies would all start to build a giant plant at the same time. And they would crash the prices. It was great for.

Starting point is 00:16:00 jobs, great for GDP growth, pretty good for productivity, terrible for stockholders. And now we don't. The CAPX has dropped as a fraction of the total pretty steadily for 20 years. The degree of concentration or monopoly, if you prefer, has risen pretty steadily for 20 years. And it's all legal because it's the stockholders breathing down your neck saying, dudes, buy your stockback, don't build a risky new plant. It might work well. It might be mistimed. You know, any case, it's risky. Better to wait and see which of the hundreds of VC firms work out well and then grab one or two of the best ones. It's a capital transaction, doesn't go into the income statement, all that dangerous volatility that you used to have associated with your own

Starting point is 00:16:46 endeavors. You can now smooth out and wait to see who wins. In any case, so the profit margins have risen steadily. And even in adversity, they are good. Even in COVID, they're good. Even as the economy slows down, even as inflation unexpectedly bursts on the scene. You suddenly find yourself, oh, what a surprise in a world of mild shortage. Any surprise, and we are short capacity. And this is wonderful for profits, terrible for the economy, terrible for equality and the wage rates of the workers, who basically are still stuck back in the level of hourly rate adjusted inflation of 1975 to 1980. That is not an exaggeration. Check it out. And yet we have grown as fast as other countries about, say France, I'd like to say whose bottoms we have been apparently

Starting point is 00:17:34 kicking for the last 40 years, if you read Business Week, because of Eurosclerosis, because of too much government control. Their average hourly hour worked has increased its remuneration by 160%. In Japan, by just shy of 100, the dopey Brits by 60 or 70%, and the hard-driving capitalists in the US less than 10. I mean, basically, our workers have been royally screwed, have not participated in the substantial productivity since the mid-1970s. And the main culprit is now completely legal. That is the stockholders bullying management into doing what management always wants to do anyway, which is live in a world where you control everything, you buy your own stockback. And Warren Buffett has said some very

Starting point is 00:18:20 interesting things about stock buybacks recently, like anyone who suggested any damage done as a enumerate or a villain, of course, he did say all buybacks. Anyone who says all buybacks are damaging. Of course, that word all can be used to make, there's always some exception. There's always some part of anything that is useful. But what stock buybacks do is facilitates this world that I'm talking about. You don't want to do any capex. You want to live in a world of shortage. So you just buy your stockback instead of building a new plan. And let me just point one thing out to people who think it's identical to a dividend. When you pay a dividend, you distribute it evenly between your most enthusiastic stockholders and the one who's disgusted with you and is about to sell you on Monday morning.

Starting point is 00:19:03 A stock buyback does not do that. The stock buyback says, who is the least enthusiastic about my stock? Here's the pseudo-dividend. You hand him cash and you take his eager stock. You are constantly retiring the least enthusiastic shareholders. And if you think that that does not remorselessly push up the price of stocks, you are, not exactly enumerate, but unimaginative. Of course it does. Secondly, it was illegal for the first 15 years of my career and forever before that since FDR because they argued that the insiders and the company knew everything. And going out into the market and buying from the uninformed was stock manipulation. How ridiculous. How ridiculous to think that the corporate insiders know more than you do as an institution buying from the outside?

Starting point is 00:19:53 Of course they know more. Of course it is facilitating stock manipulation. And in my opinion, of course it should be illegal. People say, well, it's the same as dividends. Well, in that case, whoopee, pay a dividend. And nothing has changed. You pay out a dividend, I'm happy. And apparently you're happy. And Warren will have to pay some taxes. I'm sorry about that. But it is much healthier in the long run for the total economy to have corporations paying simple dividends. And then some of the incentive to buy stockback rather than build a new factory disappears, and there will be a little bit more growth in CAPEX, which is really done badly. GDP growth has slowed, you know, in the US for the last 30 years as this new fashion came in. Productivity has irregularly,

Starting point is 00:20:41 but obviously slowed down. The state of US capitalism is not that healthy, I believe, with the exception of the VC industry, which is still pretty good. 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 Fjillo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is.

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Starting point is 00:24:51 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. What you're talking about, I've seen mostly in things like oil producing companies, and there's definitely a lack of supply there. And so much that we've, I think we've liquidated probably half or so of our SPR, you know, at this point.

Starting point is 00:25:15 So a ridiculous amount, Munger has said spinning. $1 over intrinsic value on a buyback is immoral. And I know that that much at least is true. And I tend to be in the same camp as you. And I've brought this up with multiple people on the show, like Michael Mobeson and others. And this is such an interesting debate. I guess my question is, if this economy where we're kind of always living in scarcity to some degree, why would we have not seen inflation sooner than we have now? I came across the expression this morning, greedflation. We've had inflation in profits and not so much in wages. And yet we've managed to create the impression that somehow we should be terrified of wage inflation.

Starting point is 00:25:57 And we haven't complained as corporations rose their prices so quickly into all the problems of COVID and the war. I agree that something you said earlier also reminded me of this idea that it's like capitalism on the way up and socialism on the way down. It seems to be this backstop that is just continuously solidified. itself. And I'll tell you what I'm scared about. Janet Yellen was giving a testimony to Congress, and there was this really interesting exchange between her and Senator Lankford of Oklahoma. And he pressed her on this idea that if the regional banks aren't fully insured, that would incentivize this migration to all the larger banks that aren't insured because they're too big to fail. And that would essentially create four too big to fail banks and make them even larger

Starting point is 00:26:42 than they are today. And my fear is that that kind of gets us on this path of nationalizing. banking if I'm going to the extreme, but at the same time, you're seeing new papers coming out about the government's central bank digital currency and all these things that were kind of align with this motive of nationalizing that banking system. So it's starting to feel like a runaway train to me. Does this give you any concern as far as just the hegemony of the dollar or just the overall overreach of the government when it's entering into capitalism more and more? Most of that is over my pay grade. That's easy. My attitude really is leave as much as you can to capitalism. It does a million things really very well, balancing supply

Starting point is 00:27:21 demand better than maybe, interestingly, artificial intelligence in 10 years will be so clever that it will enable a state controlled authority to balance supply and demand, but at least in the past it was hopelessly inadequate and capitalism was much better. The trouble with capitalism is it can't spell the word altruism. It's really not part of its language. It's not designed to do that. It's not designed to look out for the long-term well-being of society of humans. So toxic waste, get away with what you can, climate change, obfuscate as the oil companies provably did, try and confuse people so that you can pump out more CO2, more fossil fuels for longer. The oil companies probably cost us 10 or 15 years that we may or may not be able to afford.

Starting point is 00:28:09 It's going to be a very closely run race. And they may have cost us in the, the long run a stable society. It will be revealed to my children and grandchildren, but it won't be that long in the future. So you've got this efficient profit maximizing machine, capitalism. And Shumpeter used to worry back in the 40s and 50s that the trouble with capitalism was too damn successful, that it would become more powerful. It would become political. It would be able to influence the economy to change in a way that was beneficial for itself. And so there I was looking around in the last week and I came across a study of small versus large companies in the US. And in 1990, the companies under one billion made 8% return on sales and the ones

Starting point is 00:28:55 over 10 billion, the big companies made 12. 8 to 12. That's exactly what I would expect. They make 50% more than the little guys. And 2021, the guys who used to make 8, now make 4. And the guys who used to make 12, now make 18. This was in the economists. They usually get it right. I hope they adjusted for inflation. Not entirely certain. But in any case, there's plenty of room in that data. An 8 to 12 relationship is more or less how you expect the benefit of large scale. 4 to 18 is what you expect to see when the system is being run for the benefit of large corporations. And I believe American capitalism is just that. It's run the benefit of large corporations. And Citizens United has a lot to answer for.

Starting point is 00:29:38 The idea that somehow spending the stockholders money to influence politics is a measure of free speech is up there with several other rather loony conclusions that the Supreme Court has come to in recent years. And it makes me rather sad for the well-being of small companies. And do you know that today we have half the number of people in companies one or two years old that we had in the 70s? So we are not, broadly speaking, as ambitious and enterprising as we used to be. Because the big companies, basically, have so much power that they create an unlevel playing field. This is what we have to worry about. Of course, it's been wonderful for profits in the recent years.

Starting point is 00:30:21 And there is no question that the fangs have gone out there and created great companies, some of the greatest new, quick companies in the history of capitalism. Monoplies or near monopolies, all of them and hugely profitable, and by and large, brilliant. And that accounts for 80, 90% of all of the superiority between the U.S. system in the last 20 years and the rest of the developed world. So, yes, the balance has done okay. And the balance is also more monopolistic than it used to be in a higher concentration in almost every industry.

Starting point is 00:30:54 But the findings of being superstars, let me just add that every one of them came out of the VC industry. The VC industry is dismissed sometimes as being small. Well, it's small in one sense. In another sense, it created the fangs which are the great monsters of the Western world. And it did so pretty recently. Only two of them were around when we started Africa. All the rest are newbies. And even the two that were around, Apple and Microsoft, were barely around.

Starting point is 00:31:20 We hired away what would have been employee 26 at Microsoft for a man. Well, speaking of Apple and Microsoft and then growing to be, the size they are, they now account for over 13% of the S&P 500 and making up roughly 15 to 25% respectively. We haven't seen two stocks make up that level since IBM and AT&T in 1978. So what is the sudden appeal of these two? You've mentioned the fangs, but a lot of those, some of these letters are falling away, just becoming MA at this point. Why are people flocking to these stocks in particular, would you say, and especially in this new high interest? rate environment that we're currently in.

Starting point is 00:32:02 I think it's just the epitome of what I've been almost ranting about. They are virtual monopolies, each of them, and I speak while I look at my giant iPad, and actually I can see my medium-sized iPad

Starting point is 00:32:17 and my iPhone. It's all here within touching distance. I mean, amazing implement, and they got there with the best capabilities and the best styling. They got there, with the most and the first, and they make a lot of money. And they own that market, just as Microsoft Road, it's really it's one initially one program to glory. And Apple is in its way

Starting point is 00:32:46 even more amazing because in the end, it's a producer of goods, even though it's sensibly enough subcontract out there to the cheapest cost-effective labor in the world that it can find. I don't criticize it for doing that. It's legal and it's what a sensible capitalist would do. But they are kind of living proof of what a really effective monopoly can do for you and good luck to them in a sense. But at some level, a sensible society develops, say, rules and regulations for how big is too big and what to do about it. It was pretty tough back in the day when they decided Teddy Roosevelt, I guess, that Standard Oil owned a world. And So divided it into half a dozen pieces, which then could amuse themselves for the following

Starting point is 00:33:33 80 years, putting themselves back together. Basically, what ExxonMobil and so on did. They undid Teddy Roosevelt's, you have to say, brilliant work, because it was much healthier to have for a while eight powerful oil companies rather than one or two. What's kind of interesting is that 18T and IBM have gone on to do quite well, even since the late 1970s when they were making up such a large degree. So it kind of makes you wonder where we'll be with Apple and Microsoft even 30, 40 years from now. I pulled up this report mainly for you because I know you're such a student of history. And you alluded to this earlier. But I went back and I saw these headlines from different papers in this report. And in 1973, there was one that said,

Starting point is 00:34:17 economists see a soft landing when boom ends. 1978, soft landing economy scene. 1989. U.S. economy seems to be heading for a soft landing. 2000. Soft landing in sight for economy. Rate cut next. 2007, Fed chairman projects soft landing for U.S. economy. So we all know how those worked out.

Starting point is 00:34:35 And you said earlier that there has been no soft landing. Why do you think this keeps happening, this narrative, right? I mean, I understand that trying to instill confidence to some degree, but with this kind of track record. It's long being a part of my stump speech, almost as long as I can remember. the commercial imperative to be bullish. Just try and work out an alternative. You never make as much money of being bearish if you're one of the great investment banks

Starting point is 00:35:02 or commercial banks. You're selling or investment companies. You're selling stocks to the world or stock advice to the world. The optimal flight path to long-term profit is to be resolutely bullish and pump out as many new instruments and as many new funds and products as you can on the way up and then be a little quicker and slicker on the way down, regroup as quickly as you can, try and make a bit of money on the downside if you're smart enough, and then make a long, drawn-out fortune being bullish again. There's no edge in being bearish for them, and so they never are.

Starting point is 00:35:39 You tell me why the Morgan Stanley guy today is so bearish. I don't know. He hasn't read the secret little book of advice that comes with those jobs, which says, never be bearish. This is about as bearish as any guy in a firm like that has ever been in my career. The only other example was UBS Brinson after they'd done a deal with Gary Brinson, who was a suitable value-oriented investor going into the 2000 event. And they pumped out rather cautious advice like we did at the time. But they were the 8,000 pound gorilla. And fortunately, they changed their battle plan to get religion and go into the growth stocks just before the end. somewhat leaving the field to us. It wasn't that there weren't a lot of other value managers around.

Starting point is 00:36:23 They just weren't standing on the table shouting like we were. And in a sense, Gary Brinson was for a while. So with that one exception, there are almost no bears in the established industry, permanent bullishness. And one of the things that really irritates them consequently is when any others are bear. And they immediately say, oh, perma bear, perma bear, perma bear. If you look at their records, there's a lot of perma here. But it's permaballs. The entire industry is a permaball. And any good propagandist going back to the Nazis knows what you do is you accuse the enemy of what you're doing. So perma bear is a good way of dismissing people who are trying to irritate you by making some of your clients nervous on the way up.

Starting point is 00:37:07 But they make tons of money. It makes absolute sense. I even sympathize with them. The commercial interest is clear. but do not expect any clear-cut bearishness from the institutional world, from the financial world in general. It just never happens, never will happen. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:40:18 The fund's total return in 2025 was 8%, and the average annual total return since inception 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. I have a couple of questions around VC since you mentioned it. A lot of people are waking up to the idea of fractional reserve banking with this whole bank crisis. And there's a lot of VCs in the news, right? Surrounding Silicon Valley Bank and almost being, you know, blamed for the bank run. Then there was blame thrown at depositors

Starting point is 00:41:05 for not knowing that they were at risk. What was kind of your take, knowing that Silicon Valley Bank was such a staple, a 16th largest bank, you know, helping all these burgeoning companies that you yourself are looking into to some degree to, you know, to fight climate change or what have you? What could have been changed there, in your opinion? Was there anything to the argument around VCs sparking this out of fear? Your general take would be interesting. Yeah, I just see what you see. And it did look like the big end of the VC market. The VC operators did absolutely nothing to help, but I accelerated the damage. And maybe if you knew it better than I do, you would conclude that it was inevitable that they would have failed.

Starting point is 00:41:53 and I can't conclude that, I just don't know. And the top end of the big VC firms have got a great record and they've done a really good job over decades. My real admiration, though, is for the startups themselves. These really are some of the best people around. And in the Green VC world, which we specialize in, we have our own team and we've done 65 deals, 70 deals. And we have a half our foundation in Early Stage Green VC, which is quite a lot. My admiration is for the guys. I mean, these are, I talk about capitalism can't spell altruism.

Starting point is 00:42:26 These guys actually can spell altruism. They're either Oscar winning performers or they actually care. Amazing, isn't it? They actually care about being useful and helping a planet in distress. You know, they think it's worthwhile what they're doing in the green world of technology. And if we get through this, unpleasantness, and I'm far from sure that we will. But if we do, it will be because we're a very inventive species. And in America in particular, we take risk pretty quickly and easily, and we support risk takers

Starting point is 00:42:55 and the combination. And with the great research universities, which is so important to the equation, we have a really impressive raid of invention, engineering, cost reduction, and it may get us through this, not because we're going to do what is right, because it's what is right, to hell with that. It's because they will make it cheaper to do what we have to do. And eventually, it will be cheaper to have an electric car than a regular car if it is not already. It will be cheaper by far to run it and have cheap green electricity and cheap green power, which we will have. We will have plenty of cheap green power into the indefinite future. It does remind me of a topic that we have not talked about. That is, we're writing a paper my colleague and I, and I think it's going to be

Starting point is 00:43:42 called the long term is now. Because the issues that I worry about, which is under-recognized long-term problems, is my job description. And that's climate change, running out of resources, running out of people and toxicity. And for 15 years, the potential clients have been rolling their eyes at me because these are boring topics. And then suddenly, in the last two years, everything is climate. And in the last year, you can pick up the Atlantic or Business Week and you can read about resource shortage. And you can read about people shortage. No one breathed the word about people shortage. This is the most dramatic collapse. We have been growing pretty much the population of the world for hundreds of thousands of years ever since Homo sapiens was Homo sapiens and very,

Starting point is 00:44:29 very slowly at first and then accelerating to warp speed with the Industrial Revolution. And in my life in particular, we tripled the global population. But this year, global babies will be the same as 2000. For the first time in human history, We will have peaked out a few years ago in terms of the babies born. And the population grows because people live longer and you have more old fogies. But in the end, everything depends on the baby's born. The fertility rate replacement is 2.1. And you're talking about in China, 1.3 in Korea, 0.8 in Japan, 1.304.

Starting point is 00:45:07 In Italy, 1.2 or 3, Hungary and so on. And in the U.S., 1.7, in the U.K., 1.65. I mean, these are incredible numbers. You know, the cohort of young men presenting themselves for military in Japan are down by 30%. In 20 years, it will be down by almost 50%. And, you know, this has powerful implications that the economic world is pretty uncertain. But one of the few certainties is that for the next 20 years, we'll have fewer workers presenting themselves for inspection as potential workers. And we know that for absolute certainty because they're born.

Starting point is 00:45:41 And my guess is that the baby cohort will continue to shrink. And that China, for example, which is really the pointy edge of this problem, because it's not only that they had 1.3 or 4 last year in fertility, it's that they have very few fertile women as a percentage of the total. The one child policy bears particularly on the 20 to 40 year old category, which are the people who have babies. And it tilted 15% to men, which doesn't help your number of fertile women. So they are desperately short of fertile women times those that they have times 1.3 or a miserable fertility rate. This is kind of double jeopardy. It means that within 20 years, they will have to deal with the kind of pressures of retirement looking after old fogies, lack of workers at such a scale that they will have really

Starting point is 00:46:37 serious problems and they will need to use their considerable brains to start working on this now in order to head off a destabilized society. And an echo of that is going to be in South Korea, Japan and so on, and rapidly spreading around the developed world. There is a growing concern, but it's tiny compared to what you might have. Anyway, these are all bearing down on us now. So we have a long-winded recessionary period coming any minute. And into that period, we have much accelerated climate damage, probably knocked off half a percent of global GDP, probably for the first year a measurably large amount. Floods, fires, interrupting agriculture, flooding when you're meant to be planting and when you're reaping and so on, too hot for certain crops, chronic droughts,

Starting point is 00:47:27 hurting other crops, just to drag on growth, particularly in the developing world, but also a push on prices. It is inflationary. Then we have recent. source shortages. Part of the problem with no CAPEX for the last 20 years is we don't have wonderful mines itching to come on the market as we had in 2011, 2012, when the last peak occurred. Most of the big miners had their last desperate giant new mines to bring on, which they did all together, like the good old days. And this time, there's no CAPEX. There are no great mines waiting. We are simply on a flight path if we mean to green the global economy. We don't have anything like the amount of copper, lithium, cobalt, and nickel that we will need to get the job done.

Starting point is 00:48:13 So one of the jobs of venture capitalists now should be looking at where the bottlenecks and problems will be, reaching forward and trying to do something about it. So lithium ion batteries can be replaced by sodium iron, can be improved by using half the lithium or half the resources. And they will be. But there simply is not enough lithium to do the job the old-fashioned way. typical of last year. We have to keep changing everything. And this is a fairly relentless pressure on prices. And it came out in the wall how quickly that can flare up, of course, with Potash, which Russia and Belarus control 40% of the global sales. And this is not going away. For the rest of any listeners' life, we are going to have rotating bottlenecks and shortages, and then they'll get over that one, and that will pop up over here. And in general,

Starting point is 00:49:07 the era of declining resource prices, which went on for 100 years from the beginning of good data until 2002, the price of the average important commodity dropped by 70%, which is pretty handy for getting rich. And now that index, which went from 100 to 30, is back to 91 or 92. It means it's tripled since 2002. The average important commodity, in real terms, has tripled since 2002. The world has changed. The age of plentiful resources and declining prices is gone forever, as the title of my piece in 2011 said. It has gone forever. And that is inflationary. Is it not? If you're dealing with the world as having to pay out for resources, there is nothing more inflationary than that. And it doesn't arrive like a clap of thunder, like a thunderstorm.

Starting point is 00:49:57 It creeps in, three steps forward, 2.7 back. But it's there forever. So you're running out of people. you're running out of resources and the climate is turning against you and that seems like inflationary, inflationary, inflationary, all three of them and anti-growth. And they're all biting now, to my surprise. And the damage from climate far accelerated above my original fears and the speed with which the fertility rate has continued down has surprised everyone in the last 10 years. And the final issue, if you can bear with me, is toxicity. And toxicity, could be argued is a bigger problem than climate change. We have just created a world that is toxic to life for a variety of reasons.

Starting point is 00:50:41 Mainly you could argue by chopping up all of the natural habitat so that all over Europe you don't have any large stretch of forest, you have pockets here and there. And then by the introduction of massive chemicals after World War II, still growing like a weed, which are in the air in particular matter, deadly for humans, but also deadly for many varieties of other living creatures and chemicals in the water. The net result is that the biomass of insects appears to have dropped 50 to 75% since World War II. The sperm count in the developed world has dropped less than half and it's showing no sign of decelerate and it appears to be running at almost 2% a year in both cases. Loss of insects, loss of sperm count, 2% a year. I would argue

Starting point is 00:51:28 it's quite plausible that we're already in what E.O. Wilson, the great ant man, would call the cascade effect. In other words, even if we started to behave miraculously brilliantly tomorrow, it's too late that insects, for example, are simply not as fitted for our environment as they used to be. And so irregularly, every second to third generation, they have a much smaller offspring. And the numbers are irregularly, erratically going out of business. And this applies, of course, to the birds that eat them and the bugs that even, the amphibians, and so on, all down 50, 60, 70%. And it is much worse than people think. But the threat to us, my belief is we are going to end up banning whole ranges of chemicals. In fact, the majority of chemicals in the next several decades.

Starting point is 00:52:18 And if we don't, we are toast. And it's showing up already, in my opinion, in both fertility and also in general health. American life expectancy today is 76. In England, it's 81, but if you went around, as the economist pointed out, you go around London, you find that New Cross Gate, which is not a place you'd like to be on a dark night, it's the most desperately poor part of Greater London. It has a life expectancy of 76. That's as low as it gets. In Westminster, I was checking myself is 86, 87, the richest, one of the rich of districts. And so we're at a level of New Cross gate in the U.S. And Sweden is 84. We've managed to open up an eight-year gap in life expectancy

Starting point is 00:53:02 as if we were on the cusp of a developing country. And we've gone backwards for the last seven years, which is unique in the developed world. And the only one who comes close is the UK, which is flat for that time period. So we have lots of things to worry about. And they all seem to be coming somewhat to fruition now in time to overlap with what would be a fellow. normal traditional recession caused by the usual reasons. And will these long term is now factors, will they make it longer and worse? I think it's a possibility, which I've tried to write about. I don't think it's certain. I think things this complex can never be certain, but I think it's quite likely that we will have unexpected negative consequences for the next

Starting point is 00:53:50 few years. Speaking of that, I live in Los Angeles and just yesterday there was a tornado, an EF1 tornado in South Montebello, only 25 minutes from my house, which is just mind-boggling. And so to your point, I mean, things are really getting streamed out there. We had one in Massachusetts 18 months ago. Unbelievable. Also for the first time. So you touched on so many points that I would love to cover what we'd do on the time,

Starting point is 00:54:15 but the picture of either people getting paid to have babies or maybe we're incubating them like The Matrix. I mean, you could paint all kinds of interesting, futuristic pictures from these trends. I'd like to see if we can end on a high note here because I recently came across this nature article suggesting that superconductivity might be possible at room temperature. And this has been kind of a proposed idea for a long time, but maybe, perhaps maybe they're making progress on it, which would really create more efficient batteries. It would dramatically change clean energy in a very quick way, as I understand.

Starting point is 00:54:46 And this is way above my pay grade also. I'm just wondering if you're following a story like that, but in my bigger picture is, is now a golden era for VC because technologies like these are presenting themselves. Meanwhile, a lot of VCs are locking up because of fears around the general markets and high interest rates and money kind of flowing elsewhere that's less risky. So if you could really motivate VCs to run into the storm here and do the counterintuitive thing, which is to really invest in companies whose fundamentals are probably still strong, but the prices are now lower.

Starting point is 00:55:15 What would you say to them? I think VC is our best shot at digging out of all these problems and that it does attract some of the best people and a quarter of them are apparently from around the world. I mean, we do a really good job of taking their best people too, which is fine in the end because we crack these technological problems that they will spread around the world. The thing about research is in the long run, it's absolutely formidable. in a sense they always work. Eventually, you always get fusion. You really do. And in the end, it's always longer than you think. So fusion being, of course, the classic in both cases, but it's the

Starting point is 00:55:57 same for everything. You pick up all these wonderful new ideas in the trade rags and you think, oh, wow, that's going to make all the difference in the world. And 10 years later, they're still working on it in the lab. And then 10 years later, it's VC. And then 10 years later, they're starting to mass produce it, and 10 years later, they really have the cost down. The engineering effect is much more impressive in its way. It's underestimated because from the moment they start producing until 10 years later, they are unbelievably good at driving the cost down. And the first phase, of course, you can't have the second phase without the first, but the first phase is really a terrible tease because it's full of brilliant ideas that you will not live to see. It'll be your children.

Starting point is 00:56:40 And most of them will eventually make it. The battery technology effort is amazing. They're different kinds of batteries, long term, short term, fast, slow, all over the place. It seems like some of the best talent in the world is working on. And yes, of course, there will be also fortunes made and so forth. And yes, this is a bubble. And the bubble, like 2000, was focused on growth stocks. And at the top of the growth stock bubble were companies who are kind of research.

Starting point is 00:57:10 facilities that have no sales and have no earnings and might be three or four years away from having any sales at all. And of course, when confidence goes, they go down the most. My quantum scape went from 132 in December 2020, which is when I start the bubble losing air on that day. It peaked bigger than the market value of General Motors or Samsung. And with years to go before it has any sales, and last December it hit 5.1. They, um, So they research companies and early stage of BC are right at the point of maximum vulnerability to a loss of company. That's the short-term story.

Starting point is 00:57:50 And it may be a year or two of substantial difficulty. But in the long run, it's the only place to be. You're doing something worthwhile. You're generating new ideas. You're generating productivity gains. You're encouraging the economy in a world where economic growth has been slowing pretty steadily. and you're doing your best to counter it. And I think it will be in green, VC.

Starting point is 00:58:14 Of course, you have the backing of the entire world's governments, all getting behind it now. IRA being a huge example, many multi-billions, but it's happening everywhere. And so it's like an unfair tailwind blowing you along. I'm very happy to have half my money there. Notwithstanding the next two difficult years, it's a hell of a place to be in the long run.

Starting point is 00:58:35 I like to say it's the only case of potentially having your cake and eat it that I have ever come across, where it is exactly what we should do for the long-term well-being of the climate. And it's a candidate for making the most money of any sliver of investment in the entire capitalist system, which is pretty cool. And I certainly hope I'm right. Well, you've been right about a lot of things, especially since we have been chatting over the last couple of years. It's always an honor to have you on the show, Jeremy. I really appreciate you taking the time out of your incredibly busy schedule and valuable, valuable time that you spent with us today. So thank you so much again for coming on the show. And I hope we can check in again

Starting point is 00:59:13 down the road and see how some of these things are progressing. But for now, thank you so much. And it really is a pleasure. And I see it as my job description to try and get some of these ideas out and about. So thank you. All right, everybody, 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 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 Lockerby. 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. And with that, we'll see you again next time.

Starting point is 00:59:51 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 rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP542: The Crisis is Bigger Than Banks w/ Jeremy Grantham

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