#59 – The “PermaBear”

BOOK RECOMMENDATIONS

The Making of a Permabear: The Perils of Long-term Investing in a Short-term World by Jeremy Grantham and Edward Chancellor is a brilliant book. Enjoy the podcast but you should certainly also read the book which Steve thinks is a fantastic example of the genre.

Get it on Amazon and donate to our featured charity.

How Steve Knows the Guest

Jeremy was being interviewed by Edward Chancellor at the Library of Mistakes, so Russell Napier connected Steve with Edward and arrangements were made to record in Edinburgh. Steve of course went to the Library of Mistakes event and they kindly invited him to a dinner with Jeremy and Edward the night before the recording.

Behind the Scenes at the Edinburgh studio:

Chapters

05:34 – The Brutal 1973-74 Crash and Bond Market Extrapolation
13:15 – Why Peak Profit Margins Lead to Market Bubbles
18:28 – How AI Interrupted the 2022 Bubble Amid Global Risks
25:00 – Why Regulators Fail to Temper Market Bubble Enthusiasm
31:13 – The Challenge of Timing Markets and Institutional Career Risk
35:24 – Identifying Market Bubbles Through Narrowness and High Beta Stocks
40:17 – Navigating Long Periods of Value Underperformance and Human Bias
48:37 – The Paradox of Client Loyalty After Avoiding Market Bubbles
51:57 – Building an Ideas-Driven Firm and Recruiting Top Investment Talent
01:02:58 – Understanding the Era of Finite Resources and Commodity Volatility
01:09:42 – The Rapid Disintegration of the World Due to Climate Change
01:16:17 – The Silent Crisis of Toxicity and Accelerating Fertility Decline
01:24:50 – AI’s Uncertain Path and Grantham’s Billion-Dollar Philanthropy

Transcript

STEPHEN CLAPHAM: Hi, I’m Steve Clapham, and welcome to the Behind the Balance Sheet podcast, where we meet leading investors and commentators and educate ourselves about the world of investing and the world. Our mission is to remove some of the mystique around investing and improve our understanding of successful investors, strategies, and tactics.

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STEPHEN CLAPHAM: I like to encapsulate my conversations with podcast guests in the two-word episode title. And for Jeremy Grantham, I used the term perma-bear in quotation marks, because although he’s often perceived as a Cassandra-like figure, highlighting doom and gloom, in reality, he’s also made very positive calls at cycle bottoms, notably in 2009. You won’t be surprised that Grantham is bearish today and sees an AI-induced bubble.

STEPHEN CLAPHAM: He thinks the market will fall by 50%. That’s in half. When we were recorded in April, fuel prices were rocketing and the outlook for the Iran-Mor was uncertain. Hence, Grantham sees parallels today to the early 1970s, a terrible period, close second only to the Great Depression following the 1929 crash, and a period which he recalls as brutal.

STEPHEN CLAPHAM: He points out that at peak you always have high multiples applied to abnormally high profit margins, and today is no different. The market delivers a higher long-term return than is really justified because of these bubbles and their hangovers and their large drawdowns. Half the time is spent crawling back to the old high. Great market peaks are always followed by the worst of times for the economy.

STEPHEN CLAPHAM: Grantham’s no longer managing portfolios, instead devoting his considerable energies to philanthropy. We discuss his foundation’s efforts to combat climate change, to resource depletion and to toxicity, which is affecting fertility. He highlights how the global population will be in decline unless this is addressed. Grantham remains relentlessly curious, even at his quite advanced age.

STEPHEN CLAPHAM: He was telling me over dinner the night before we recorded in Edinburgh about his experiments with AI. His book with Edward Chancellor, The Making of a Permabear, is just fantastic. There is so much wisdom and so many fantastic stories. I really enjoy spending time with Jeremy, truly one of the most original thinkers in the investing world and one of the investment greats. I’m sure you’ll enjoy our conversation.

STEPHEN CLAPHAM: So Jeremy, listen, I’m really grateful to you for taking the time because you’re on holiday in Scotland.

STEPHEN CLAPHAM: We’re recording this in Edinburgh and I’m excited to talk to you because you’ve got this wonderful book which tells the story of how you got started in investing but share with the readers because half my guests wanted to buy their first stock with their newspaper round money and half the guests got into it by accident but you’re kind of somewhere in between.

JEREMY GRANTHAM: Yeah no I got into it for the best excuse me the best possible reason which was I was looking to have a good time and I just graduated from business school and I’d bought some time going into management consulting and you don’t have to be very smart to realize that’s a bit of a waste of time.

JEREMY GRANTHAM: And so I spent a year asking my friends from my class what business was the best, where was the most fun, and by a huge amount that was investing. It was a little small cap shooting star market and the That’s a lot of fun always. And since they were all beginning analysts, they were there and they were having so much fun, I couldn’t wait to join them.

JEREMY GRANTHAM: And so I did a fairly professional campaign with lots of help. Got a list of 50 people to apply to and kind of worked my way through. Had a couple of very interesting job offers. A very Fancy hedge fund dude who wore pinstripe suits and…

JEREMY GRANTHAM: Neckerchiefs and everyone, he was everyone’s cool hero and came and talked to the Harvard Business School students. And another one was in London, also very enterprising. And both of them were held up by boring real world things like registration of a new fund. And so they weren’t going to have me on board and pay my rent until the fund was registered.

JEREMY GRANTHAM: And it went on and on. And finally, I thought, well, a better move anyway. And I had a fairly prosaic offer from a mutual fund group in Boston called Keystone, which at the time was $1.6 billion versus Fidelity’s $1.7, if you can believe that.

STEPHEN CLAPHAM: Wow.

JEREMY GRANTHAM: $1.7 billion.

JEREMY GRANTHAM: I’m sure they have inflows and outflows many times that every day now.

JEREMY GRANTHAM: But Keystone lasted a few more years and fizzled out and Fidelity inherited the world. I went to Fidelity, interviewed, and the guy interviewing me was so hyper that he was, he had one of those early machines, Bunker Ramos, they were called. And as he talked to me with one eye, he was checking all his stocks with the other eye.

STEPHEN CLAPHAM: Oh, how funny.

JEREMY GRANTHAM: I know, it was terrible. I didn’t have the nerve to walk out, but I should have done probably. And anyway, so I… I got a job offer at Keystone and went there. And sure enough, investing was a lot of fun.

STEPHEN CLAPHAM: Well, it’s been the right decision, right? And I’m really curious because I like to interview older investors. We’ve seen more cycles. But the only other person that lived through the 73, 74 crash as an investor was Mario Gabelli. And for some reason, he wouldn’t talk about it. I don’t know why.

STEPHEN CLAPHAM: It was extreme. Oh, that was brutal. It was absolutely brutal. Tell us about it.

JEREMY GRANTHAM: We used to semi-joke that the main problem in 73, 74 was getting your weary ass to work. Left foot forward, right foot forward. I mean, everyone was slightly depressed.

JEREMY GRANTHAM: The little guys went down, the big guys went down, the quality went down, the junk went down. Everything went down, rotating week by week, lower and lower. Oh, my God. The big chemical companies yield 6%. Surely that will put the brake on. And it appeared to for a week or two, and then, and now they, 7%, 8%, 9, 10. And finally, things like Celanese, Monsanto, and so on were yielding 10%.

JEREMY GRANTHAM: And finally, that did put the brake on. And at a lowly 7.5 PE and 10% yield on the big industrials, it stopped going down. But everyone was… Pulverized and there was quite rapid inflation. So in real terms, I think the market went down about 65% and took no prisoners. It was just bad, much worse than anything since then. And really, by everyone’s agreement, the worst one, second only to the Great Depression.

STEPHEN CLAPHAM: And the setup going into that, there’s… A number of parallels today, aren’t there?

JEREMY GRANTHAM: Well, there was an oil crisis. Every serious…

JEREMY GRANTHAM: Spike in oil has been followed by a recession and a stock market decline. And that one was not only a real spike in oil, the biggest of all spikes, the two-pronged effort by the Middle Eastern powers to deliberately drive the price up, and lines of cars at the gas stations, but there was, out of that, rapid inflation. And out of that, very high rates. So the rates were going up as the stocks went down.

JEREMY GRANTHAM: And eventually the yield on stocks peaked in around 82, 16% for the 30-year bond. And the joke there was, you can see a T-bill peaking at 13 if inflation is over 10. 10 and a bit. But the 30-year bond to peak at 16? And you can understand the three-point premium over T-bills. But what you can’t understand is that for 30 years, they would price in the highest level of inflation that had occurred ever.

JEREMY GRANTHAM: And that’s quite a reveal, isn’t it? Because what it says is the bond market is not predicting the future. A group of economists had just decided that long-term inflation was four and a half. Of course, it was less than that, but their vision was four and a half. So a 16% long bond appeared to represent 11 and a half real for 30 years.

JEREMY GRANTHAM: And it was obvious that what the bond market was doing by then was just extrapolating the condition of the day as if it would stay that way forever, even though… As Keynes would say, even though we know from personal experience that it’s not the case, he argued that extrapolation is something we adopt to deal with the difficult times.

JEREMY GRANTHAM: And his point was the cardinal rule, never be wrong on your own. If you extrapolate today’s conditions and everybody does it, you’re all on the same page. And that’s the thing that really matters in career risk. All have the same thoughts, all do the same thing, and no one loses their job.

STEPHEN CLAPHAM: Yeah. Well, do you think we’re doing the same extrapolation today?

JEREMY GRANTHAM: Yeah, absolutely. Every bull market is peak profit margins. 1929, 2000, 2022, and today, and almost in the housing bubble of 07, you have very, very strong earnings. And profit margins always used to be mean reverting. High returns attracts capital, drives them down, and vice versa.

JEREMY GRANTHAM: And you would think, therefore, that if profit margins are abnormally high, you’d be very careful about the P. E. You apply. And that is not how the real world works. 1929, peak profits times peak P. E., 21 times earnings. Then the P. E. Drops for a long time, and then it reappears in the nifty-fifty. 1972, 21 times earnings again, times… Peak profit margins.

JEREMY GRANTHAM: And then on to 2000 world record profit margins times 35 times earnings. So they celebrated the new high in profit margins by multiplying by a new high in PE. And this is double counting of the worst variety. So in 1974, you have crushed, oil crushed margins, multiplied by seven and a half times earnings.

JEREMY GRANTHAM: Then in 82, you multiplied by eight times earnings, crushed margins. And then even more recently, in 2009, you had, because of the great financial crash, you had a dramatic drop in earnings times the lowest P. E. We’d had for 22 years. So this is why Schiller found that if you were clairvoyant about the actual earnings into the future, earnings and dividends, and you discounted them back.

JEREMY GRANTHAM: That the real stock market was about 17 times more volatile than was justified by the fairly steady path of actual earnings and dividends that we were on paper meant to be discounting. So it was clear we were not doing that at all. We were constantly extrapolating today’s conditions, much too high, much too low, riding the cycle.

JEREMY GRANTHAM: And you would think, once you’ve established that, and you can easily prove it, You would think how easy it is to beat the market, but of course it isn’t, because the career risk involved of playing the logical game of going short the bubbles and long the bus is nerve-wracking from a business point of view.

JEREMY GRANTHAM: Because the uncertainty in the cycle, both up and down, is longer than the client’s patience, particularly in a bull market. In a bull market, the client’s patience contracts and you get fired before you’re right. And therefore, I like to say that’s why you will never hear a major sensible firm, Goldman Sachs, J. P.

JEREMY GRANTHAM: Morgan and so on. They will never tell you. To get your tail out of the market. They never have, they never will. It’s simply terrible commercial strategy and they will never do it. So the individual is always led to believe, however high the market is, that it’s kind of okay. And of course it isn’t.

STEPHEN CLAPHAM: But it’s almost worse today because you’ve got all these commentators telling you that you’re guaranteed to make 8% per annum. By investing in S&P 500 irrespective of the valuation.

JEREMY GRANTHAM: Yeah, but you always had that. 1929, a very famous article said that basically all you had to invest was $50,000 and you were rich for life.

JEREMY GRANTHAM: I think Ladies Home Journal. And the market is just a buy and hold. And Jeremy Siegel, now Dean of Wharton.

JEREMY GRANTHAM: Wrote an article almost identical in the tech bubble of 2000. You should just ignore the cycles and just tuck the stocks away and get rich. And of course, if you have a 50-year horizon, tucking stocks away and getting rich will do just fine.

STEPHEN CLAPHAM: Sure.

JEREMY GRANTHAM: Because the market really does compound a little higher than makes sense. The market return is a bit higher than appears to be justified by anything approaching logic.

JEREMY GRANTHAM: 8 real is just a very handsome return. On the other hand, half of all the time is spent climbing back to the old high. So 1929 doesn’t get back there until about 1955. And then the next crash of the nifty 50 in 72 doesn’t get back there until 85, 86.

JEREMY GRANTHAM: And it turns out it’s almost exactly half the time. So people think you’re going up always. It’s not so. You’re going up half the time to new highs, basically, and half the time you’re waiting to recover from some decent setback.

STEPHEN CLAPHAM: And how long will it take us to recover from the next bust? Because we’re at quite high levels, don’t you think?

JEREMY GRANTHAM: I think the most sensible measures of the market, and I always tout Hussman, I’ve never spoken to him, I’ve never even met him, but his data is very much like… Ours used to be when I worked on it day after day, and he’s tested everything. And the most reliable forecaster is a cousin of Warren Buffett’s total price of the market compared to GDP.

JEREMY GRANTHAM: And on that basis, Hussman would say the most reliable indicator that he has says that this is the highest market in history above 2000. Which is the contender. So we have the highest market. And the terrible thing about peak markets is they don’t predict much better than average times, economic and otherwise.

JEREMY GRANTHAM: They are always followed by the worst times. So 1929, priced higher than it’s ever been, predicting, you know, you would think on paper, wonderful times are followed by the depression. 1972, you would think is predicting something good, but you get a very nasty recession, oil crisis and collapsing stocks.

JEREMY GRANTHAM: And so it goes on. The tech bubble is followed by a really decent sized recession as it breaks. And just the loss of market cap in 1929, and all the bubbles, also compounds the problems.

JEREMY GRANTHAM: Great market peaks like this are traditionally followed by the worst of times. So don’t kid yourself. Now, the great exception is 2022. In 2022, all the conditions of a major bubble are met, and it breaks, and the S&P drops 25%, the MAG-7 drops 40%, growth starts about 30%, 35%.

JEREMY GRANTHAM: And the bond market has the worst year in its history. So 22 is an ugly year. But then in November…

JEREMY GRANTHAM: Chat GPT comes out. And whatever you say about Chat and the rest of the boys is it’s pretty obvious that it’s a game changer. It’s a life changer. It’s important. It’s an important idea. It may make us all ineffably rich. It may destroy us all, take our jobs or even inadvertently stomp on us.

JEREMY GRANTHAM: But it’s important. And so I kind of get it. And it’s the first bubble that was interrupted by anything that powerful.

JEREMY GRANTHAM: It would take a war, a giant virus, or AI. They’re the kind of things that will do that. And they happen not to have done it until, well, you could argue that World War II interrupted the second leg of the depression.

STEPHEN CLAPHAM: Yeah.

JEREMY GRANTHAM: There are quite a few people who think that’s the case. And this was the same. We had a nice recession going there from my perspective.

JEREMY GRANTHAM: The economy was weakening, and that was interrupted in turn by massive investments in AI. I mean, capital investments all over the place, second only to the railroads, a very big fraction of GDP. An increment of 2% of GDP was just investments into AI. And if you think that we were drifting down, animal spirits, alkanes were weakening.

JEREMY GRANTHAM: Had that kept going, we could have easily… Fallen into at least a mild recession and the market could have gone down another 20% or so. And I would have just about been happy and given it a check. But with AI, the Mag7 went up. They didn’t just go up, they kind of doubled. The rest of the market looking at them in shock, still drifting off a little bit for the first half year and then flat for another four or five months.

JEREMY GRANTHAM: And finally, almost a year later, they threw in the towel and… Decided that the Mag 7, after all, knew what they were doing, and there was a bull market. And back to a new high we came, and here we are. And the thing about this one, though, is that the global environment, I think, is the worst it’s ever been.

JEREMY GRANTHAM: Technically, with clairvoyance, you knew that other things had been worse. You knew if World War II arrived, it would be worse. But in real life, you didn’t know that. You didn’t know that World War I was coming. You didn’t know that World War II was coming. It took odd behavior, archdukes being shot, and Hitler invading Poland. If he hadn’t done that, you know, we might have muddled through without a war.

JEREMY GRANTHAM: But this time, you know we have… The Ukraine, the Middle East, really risky enterprises, Taiwan lurking over everybody’s head. You know that trade wars are way on, tariff craziness beyond belief, etc. International trade has really carried the world since World War II, getting bigger and bigger fraction of everything.

JEREMY GRANTHAM: Everyone benefits, and now we’re bound and determined, it appears, to have that going to reverse. So you have geopolitics, global trade. And then behind that you have climate change. I’ve been worried about climate change for 25 years, but it’s only in the last two years it became big enough to actually impact global GDP, I think by about half a percent a year.

JEREMY GRANTHAM: And the number of billion dollar plus disasters have gone through the roof, storms, floods, droughts, fires, and continues to rise as it will. Now, critically, insurance is becoming higher priced and in some cases impossible to get. And that really, insurance really gets to the heart.

JEREMY GRANTHAM: It’s very central, shall we say, to capitalism.

STEPHEN CLAPHAM: We’ll come back to climate change because I do want to talk about the work of your foundation. But you said the global environment is the worst ever. I mean, we’ve obviously got a potential threat to energy supplies.

STEPHEN CLAPHAM: Why do you think… The market has kind of shrugged this off. I mean, the VIX has collapsed. The volatility has collapsed. And people seem quite relaxed that we’re going to sort of muddle our way through the Middle Eastern situation. But the economy was already pretty fragile going into this.

JEREMY GRANTHAM: Yeah, we don’t do that kind of stuff very well. If you go back to the late summer of 29, You know, business was turning down very rapidly, but the data lagged a couple of months, so people didn’t know. They were very relaxed and about as optimistic as they had ever been in history. And then, wham The growth rate is in reverse. Profits are falling. What a surprise.

JEREMY GRANTHAM: We’re not good at predicting turning points. And I actually have a theory on that.

JEREMY GRANTHAM: I don’t think it’s a bug. I think it’s built into the system. And here’s why.

JEREMY GRANTHAM: The great enterprises, the organizations, nonprofit and corporate, tens of thousands, hundreds of thousands of employees. By definition, they are led by people with very high political skills. Keynes was really clear.

JEREMY GRANTHAM: The main thing you have to know if you’re a politician is never be wrong on your own. Be wrong in company, fine, but never risk being wrong on your own. And therefore, at any major turning point, you must expect that they will not call it.

STEPHEN CLAPHAM: Of course.

JEREMY GRANTHAM: Doesn’t matter what they believe.

JEREMY GRANTHAM: The engine room may be screaming at them that there’s a major vulnerability, but the spokespeople will never see it. They’ll always wait and see what other people are doing and then jump. Not just the stock market, everything, real life. And so no one ever calls turning points.

STEPHEN CLAPHAM: You make an important point.

JEREMY GRANTHAM: By the way, let me just add, and therefore an individual who has, in some cases, much less career risk is actually free to look at the data. To see the giant bubbles appearing. You have to be brain dead not to see it and act on it yourself. An institution cannot do that, will not advise you to do that, but you as an individual can see that.

STEPHEN CLAPHAM: In the book, you make an important point, I think, that bubbles have a serious net adverse economic impact because they’re usually followed by a capex bust. So there’s an economic…

STEPHEN CLAPHAM: Impact from the from the bursting of the bubble why do you think that’s not more widely understood by the regulators and why don’t they try to temper enthusiasm because i mean Greenspan everybody you know talks about you know reverent tones about Greenspan not me not you but i mean why why don’t people realize this i mean we could have a podcast on on the strange behavior of Homo sapiens.

JEREMY GRANTHAM: I mean, we are a weird group. But Greenspan, I wrote a paper called Feet of Clay. I thought he was laughably wrong. In fact, my first confrontation with Alan Greenspan, he had his investment advisory firm and he went around selling his consulting service. And it was so bad that when I’m feeling mean, I used to say he was the only person who was laughed at at business. I mean, he was used as a joke.

JEREMY GRANTHAM: He was so bad. Then he kind of disappeared, boot licking down in Washington, and then reappears as president of the Fed, chairman of the Fed. What the hell is that? Guy was proven incompetent and not a serious financial expert by any means. And he got everything wrong. And he invented the asymmetric Fed behavior, which is, if anything goes wrong, we’ll bail you out. If anything goes right, you’re on your own.

JEREMY GRANTHAM: Wonderful. We’ll socialize the costs, privatize the gains. And Bernanke, Yellen were acolytes. Present guy, not so bad, I think. But in any case, we had this big block in which we tried every trick we knew to create chain link bubbles by letting everybody know that the Fed had your back. Why wouldn’t that…

JEREMY GRANTHAM: Create bubbles, and it did. So Greenspan generated the 2000 bubble into which he poured fuel on the fire and said how wonderful the technology was, which it was, of course, of the internet. But the more obviously wonderful an idea is, the easier it is for them to suck in too much money.

JEREMY GRANTHAM: Lost everyone’s money, even though it changed the world. Internet lost everybody money. The bust in 2000, Amazon, the great hero of the internet, it had gone up six or seven times in 18 months. And then in the decline, it lost 92%, as I like to say, check it, and then inherited the world.

JEREMY GRANTHAM: So it’s not that they don’t work out very well in the long run. It’s that the great ideas like AI. Are guaranteed to suck in more money because everyone can see it will change the world. And so everyone throws money at it. You know, my 100 billion CapEx is bigger than your 87 billion, this kind of thing.

JEREMY GRANTHAM: What does that guarantee? It guarantees a bubble in AI cafes, like fiber optic cable, and no one ever predicts it. And so if you can see it with your own eyes, why wouldn’t you act on it?

STEPHEN CLAPHAM: Well, the trouble with this is that it’s quite difficult to work out the timing.

JEREMY GRANTHAM: But that’s not a trouble for an individual. It’s your money. Fine. You get out a little early. Who cares? It’s how you compound in the long run. It’s a huge risk for an institution.

STEPHEN CLAPHAM: No, sure.

JEREMY GRANTHAM: We have all the career risk you would want, and the market’s uncertainty is considerably longer occasionally than the client’s patience. So if you play that game, you will sooner or later be wrong, and Keynes would say, quote, you will not receive much mercy, unquote, and we can vouch for that since in 2000.

JEREMY GRANTHAM: Doing the right thing for the right reasons and winning the bet, we nevertheless lost two-thirds of our market share in two and a quarter years. Not bad.

STEPHEN CLAPHAM: And you lost half your clients.

JEREMY GRANTHAM: We lost, yeah, half the clients and more than half of the money adjusted for the market. Everyone else, we went from $30 billion to $20 billion and they went from $30 billion to $60 or 45 So we lost at least two-thirds of our market share and quickly.

JEREMY GRANTHAM: And we were making money each year. We just weren’t making as much money as the market.

STEPHEN CLAPHAM: Would you do that again if you had to relive that experience?

JEREMY GRANTHAM: I don’t do investing for the last 16 years of that kind. But looking at my colleagues at GMO, I would say that’s precisely what we’ve done. We’ve done our best to do it. More carefully or better, but we’ve stood our ground and mainly invested away from the U. S.

JEREMY GRANTHAM: And mainly invested in value. We have a fund that goes long cheap and short expensive, which is, last I looked, up nine for this year, nine percent, in a world that’s generally down. And value is doing better.

JEREMY GRANTHAM: Yeah. In general, the market is outrageously hard to predict unless you take a long-term view.

STEPHEN CLAPHAM: Yeah.

JEREMY GRANTHAM: You know it will come down, but you don’t know when. And I used to get a lot of grief, by the way. I’d say that in public and people would say, yeah, but the long-term is just a series of short terms. And if you can’t do period A and you can’t do period B and there’s 10 of them in a row, you obviously can’t do the collection. So it seems like bullshit.

JEREMY GRANTHAM: And then finally, I found the example, which is in the book, where you stand on the top of a high rise in Florida in a hurricane and you throw feathers in the air from a big bag of feathers. And some of them land a block away in a half minute. And some of them, like poor canaries from Jamaica, get swirled away and can’t get out of it and end up in Maine several days later.

JEREMY GRANTHAM: So you know nothing about that in the short term, but you know something about the long term. Sooner or later, you can guarantee every feather will hit the ground. And that’s like a bubble. It’s a gravitational pull. You know with certainty that sooner or later it will come down. You don’t know precisely when.

STEPHEN CLAPHAM: And you wrote in the book that all 27 of the bubbles you’d examined had returned to the previous trend.

JEREMY GRANTHAM: Yeah.

STEPHEN CLAPHAM: So where do you expect the S&P to be when it does crack?

JEREMY GRANTHAM: Well, trend is…

STEPHEN CLAPHAM: Roughly, I mean…

JEREMY GRANTHAM: It’s pretty painful. Trend is at least half, down by half.

STEPHEN CLAPHAM: Okay, so 50% fall.

JEREMY GRANTHAM: Yeah, all the great bubbles are 50% plus.

STEPHEN CLAPHAM: And they then take quite a bit of time to get back.

JEREMY GRANTHAM: They usually do, but it’s very variable. You know, the depression was whatever, 25 years, and I think the shortest one was just six or seven years.

JEREMY GRANTHAM: But yes, it takes quite a while.

STEPHEN CLAPHAM: And one of the things I was curious about, you talk about the thinning out before at the top. You talk about your bubble detector looks at the narrowness of the market.

STEPHEN CLAPHAM: Why is that? Is there a reason behind the…

JEREMY GRANTHAM: I think so. And this is just, I hope, intelligent guesswork.

JEREMY GRANTHAM: The last great signal before the bust in 29 is that very aggressive, flaky little stocks. Mostly without much in the way of earnings, that had done brilliantly in 1928. They were all up 80%. And then in 1929, they start to go down early in January. And they actually go down as the S&P powers upwards.

JEREMY GRANTHAM: So the day before the crash, S&P’s low-priced index, which was a brilliant study of those things, was down almost 40%. I mean, I say that’s the primal scream from the stomach of the stock market of all time. And nothing like that happens again. High beta stocks do not go down when the market goes up. They may go up a bit less sometimes, but they never go down except in 1929.

JEREMY GRANTHAM: And then you wait until 1972. 1972, the top of the nifty 50. The 50 great companies like Coca-Cola dominated the world and became 50% overpriced for the only time in history, really. And what happened in 1972 is the S&P. Went up 17% and the average stock went down 17% so I can remember the data forever.

JEREMY GRANTHAM: And then nothing like it happens again until 2000. You remember in 2000, in March, the growth stocks broke and they hurtled downwards 50% led by Cisco. And the S&P hit a co-equal high in September. And by September, what that meant is everything that wasn’t a growth stock was up. 13 or 14%.

JEREMY GRANTHAM: And the growth stocks were down, they’d rallied a bit, they were down 40%. And it balanced the books. And it rang the signal, watch your tail. And of course, it went on not just for another leg down, but had an unusual third year down in 2002. And nothing like that happens again until 2022.

JEREMY GRANTHAM: In 2022, I owned a huge unusual position in QuantumScape, a venture capital company that was doing solid state batteries. And unexpectedly, it came public as a SPAC, which I hate. I think they should be illegal, immoral. They certainly are immoral and they should be illegal.

JEREMY GRANTHAM: And here I was suddenly owning one with the biggest position I’d ever had.

JEREMY GRANTHAM: It was such a big position. I owned it. The only thing I owned, because it was too big for the foundation, it would have seemed. A little wonky. And it came at 10, as they always do. And that was four times my money, not too bad. And in three months, it was 131. It was bigger than General Motors.

JEREMY GRANTHAM: It was still several years away from having any sales for get profits and was selling for more than the price of General Motors. I think that’s bigger than anything that happened in 1929. That is a more spectacular example. It was in fact a meme stock. But I was so close to it that I couldn’t breathe. Forget using my brains.

JEREMY GRANTHAM: The position was hundreds of millions of dollars, but I wasn’t allowed to sell it. I had to wait six months. And I was saying to my colleagues that that was the kind of stock that should be selling at $5 to $10 a share, not $131. And it was 25 when the six months ran out and we sold it. And… And then it went as low as four afterwards.

JEREMY GRANTHAM: But it was followed by, you know, Cathie Wood, very brilliant talker, by the way, and her entire portfolio of junior growth stocks without any earnings, basically, that had done so brilliantly off the low of COVID started to drop. And by the end of 22. With the market strongly up on the S&P, her portfolio was down 30-35%. Gross stocks were in ragged disarray. That was another signal. Bang Just like the other.

JEREMY GRANTHAM: And only the fourth one in history.

JEREMY GRANTHAM: And the market, of course, dutifully collapsed in 22. And then, as we’ve covered, was rudely interrupted by the AI.

STEPHEN CLAPHAM: Yeah, this most recent period has been quite remarkable. And I interviewed quite a lot of value managers. And of course, they’ve had a terribly, terribly painful time because value has been so difficult.

JEREMY GRANTHAM: Last year was okay, finally.

STEPHEN CLAPHAM: Last year was the first year.

JEREMY GRANTHAM: 15 years or something like that.

STEPHEN CLAPHAM: Well, I mean, what would your advice be to people in that sort of circumstance? Just stick to what you know. I mean, it’s unprecedented that it would be such a, I mean, five years, okay, but 10 years, 15 years. What do you do when you’re in that situation? You’re wedded to that philosophy and it’s not working.

JEREMY GRANTHAM: Yeah, I mean, the trivial but simultaneously serious answer is you go out of business. I mean, it’s just, you have a sense of value if you’ve done it correctly is always a sensible way to manage money. It’s not just buying the guy whose assets are the cheapest in the marketplace, price to book.

JEREMY GRANTHAM: Price to book is the market’s way of saying, These are the assets I think are the worst. Pe is just these are the earnings I think are the worst. But if you’ve got a nice dividend discount model adjusting for this and that, or a multi-factor value model, then you should always be using it in a sensible world.

JEREMY GRANTHAM: And then when sensible investing hits a spectacularly long run, I think owing to… Greenspan and the boys setting the fuse and then everyone else going along with it. And then the COVID bailout in the U. S., which provided money beyond everyone’s wildest dreams for a while.

JEREMY GRANTHAM: And you were sitting in the woods by law. You know, you were you were at home. You had these big checks arriving. There was nothing to do except speculate. And so everyone learned to speculate. And they had these wonderful.

JEREMY GRANTHAM: Things on the internet where you could get together and compare nodes to the moon, to the moon, and off you go and have a wonderful time. And we had speculation like we have never seen to keep this thing going year after year after year. And you take it on the chin and you see if you can survive.

JEREMY GRANTHAM: And GMO has survived, but certainly it hasn’t thrived in that time period, being as sensible as it could be. Because we had a very nice year last year. Staying away from the US. The US did much better than I would have thought, but the rest of the world did far better than that. So emerging and developed ex-US had a splendid year.

JEREMY GRANTHAM: And they’ve had a very good year this year, much better than the US also. And if this keeps going, whoopee. And these cycles do tend to be multi-year. So maybe we have seen the turn and up, down and sideways, the US will… Underperform. It will have, of course, rallies, but I think it might.

JEREMY GRANTHAM: It is probably facing a 10-year decline. Just to remind you, if you were sitting there in 2000 with GMO’s then 10-year forecast, we had emerging at the top of the list with 11 or 12 a year forecast percentage points, and at the very bottom of the list of 14 asset classes. We had the S&P forecast to be minus one and a half or two.

JEREMY GRANTHAM: And that’s a pretty big gap for something with a correlation of 0.7. And 10 years later, the 11 was actually beaten. It was close to 13 and the minus one and a half became minus three. And the gap was well over 200 percentage points in favor of emerging. So those things do happen and they can last for a long time.

JEREMY GRANTHAM: So that was the massive… Hit to the S&P by emerging and the rest of the world, followed by a massive hit the other way around from the recovery low of 2009. You know, the S&P and the growth stocks destroyed the rest of the world and emerging markets until January of last year.

STEPHEN CLAPHAM: It’s funny because this isn’t like long and distant history. And it seems perfectly… Natural thing to assume that the US at, it was two-thirds of the global capitalization. Would likely underperform the rest of the world. It seemed perfectly obvious. And I said this at a conference, and there was a hot…

STEPHEN CLAPHAM: You know when you say something controversial, you hear that. And people looked at me, and of course the questions were all about how can you say that? Because everybody extrapolates. And I find it puzzling that people don’t learn the lessons of history.

JEREMY GRANTHAM: No, they don’t. It is puzzling. It’s very interesting.

JEREMY GRANTHAM: And it’s reflected in climate change and other… Existential risks. We don’t do that. We don’t do long-term very well. And we are programmed, A, for optimism. I think pessimism was not a good survival characteristic.

STEPHEN CLAPHAM: Yeah, of course.

JEREMY GRANTHAM: For a few hundred thousand years, it probably helped you survive if you were remorselessly optimistic. And it’s built deep into who we are. And so we’re optimistic, which means that the bull markets will always be longer than bear markets and so on. But the other thing is we don’t do long term. So we have no interest in anything over saving some food for the winter.

JEREMY GRANTHAM: We’re not programmed to care at all about the distant future. And we love our grandchildren, but we’re not programmed to actually act as if we do. So I always think of this as the top dogs at the chemical companies that know that they’re putting out poisonous pesticides. They know it. Everyone knows it. The files are full of…

JEREMY GRANTHAM: Incriminating data, just as the tobacco files were at Philip Morris and so on. And they just go to work and they crank out their poisonous cigarettes, they crank out their poisonous pesticides as if they mean to kill their grandchildren. And then at the weekend, they play soccer with them and are benevolent, help with the school fees.

JEREMY GRANTHAM: No, it’s weird. How do we explain this? And then all the time, getting back to Keynes and so on, we’re extrapolating the day’s conditions, not as he said. Even though we know from personal experience life is not like that, it’s just something we adopt because it works fine and we can live with it.

JEREMY GRANTHAM: And so you talk to those people and they at least express shock, or a little voice at the back of their head is saying, oh my God, I hope he’s not right. And things that people hope are not right, they can be really vicious about it. In 2000 and in the great financial crash, but mainly in 2000 people… Around town was saying we had lost our way.

JEREMY GRANTHAM: We were just shockingly out of touch. And as you know, the engine rooms of the great firms, they all agreed with me because I got them to vote in an epic financial analyst meeting with 1,200 people and 400 experts at equities. I got them to put their hands up and they all believed that the market in 10 years would go back to 17 and a half.

JEREMY GRANTHAM: And they all believed that that would guarantee a major bear market. There was less than 1% who believed that it would not go back to 17.5 times earnings. It was 32 at the time, and it went back, of course, and it guaranteed a major bear market. But the engine room knew it, and the people who employed them were on the podium with me saying, oh, Jeremy, everything, don’t be hysterical, everything will work out fine.

JEREMY GRANTHAM: That is the way the industry works. The engine room knows what the score is. They can see the bubble as well as you can as an individual. The bubbles are like giant Himalayan peaks that come out of the plane. You have to be brain dead to miss it, but you also have to be rash to adopt it as a business strategy if you’re in the investment business.

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STEPHEN CLAPHAM: As an investor.

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STEPHEN CLAPHAM: You lost half your clients in the… And then you prospered and did brilliantly in the following bust. And your assets grew significantly. But you wrote, of the clients that fired us, not one came back.

JEREMY GRANTHAM: Not one.

STEPHEN CLAPHAM: And you went on to say, if you avoided a bubble, you arrived back on trend eventually, but not necessarily the same clients you left with. So the problem for an allocator is, how do you tell the difference between a manager who’s early and one who’s wrong?

JEREMY GRANTHAM: Later, when time has gone by, it will be revealed.

JEREMY GRANTHAM: Was he merely early but correct or was he wrong? And, you know, it’s a kind of cliche to say early is wrong. Fine. Then what’s the alternative? Have perfect timing or do nothing ever? And the answer is yes, that is the alternative. No one has perfect timing, so everyone stays together and does the same thing and runs off the cliff together.

JEREMY GRANTHAM: And that’s the way it works.

STEPHEN CLAPHAM: But how would you assess a manager if you were an allocator? Would you look for somebody that was intelligent? Or would you look for somebody that had character? I mean, what would be the things that you would look for if you were on the other side of the desk?

JEREMY GRANTHAM: I’d look for logic and great data. Do they sound sensible? Have they analyzed the data correctly? Is the data impressive? Have they got some insight into how the market works?

JEREMY GRANTHAM: All that good stuff.

STEPHEN CLAPHAM: And you managed to recruit some amazing people. James Montier, I mean, he’s a genius.

STEPHEN CLAPHAM: Your colleague, Edward, who helped with the book.

STEPHEN CLAPHAM: I mean, brilliant writer.

JEREMY GRANTHAM: And a very, very creative thinker in terms of investing, I might add.

STEPHEN CLAPHAM: How did you come to recruit these people? Did you look for a maverick?

JEREMY GRANTHAM: No, that was largely luck. I was mesmerized by the game, working with a handful of people, and happy to delegate a lazy bum that other people… Do the hiring and this and that and the other. And I think I only offered a job to six people, including Edward and James Montier.

STEPHEN CLAPHAM: And Ben Inker?

JEREMY GRANTHAM: No, no, I didn’t offer him a job. He was… I was told that he had to join by David Swenson of Yale, the most famous. Of our clients. And so, of course, being a guy of great principle, I said, yes, sir. And I hired him.

JEREMY GRANTHAM: And he’s been obviously terrific.

JEREMY GRANTHAM: But the others all turned me down. Rob Barnard, Andrew Smithers, who laughed all around town explaining how I propositioned him in the first meeting. He came in. He sat down. I was so impressed by his kind of ruthless logic, grinding everything to powder, that I said, my God, why don’t you quit this running around?

JEREMY GRANTHAM: Difficult to go touring with investment advice, really tough. Why don’t you come and…

JEREMY GRANTHAM: Brainstorm here and he said no and that he was happy as a clam and went off and told the story around around town and had a good laugh but always always was very nice to me for the rest of his career which includes today and so my my advice is you know you never go if you want to build a decent relationship just offer them a job but we should just explain that they’re responsible.

STEPHEN CLAPHAM: What was the Credit Suisse Global Investment Yearbook and now the UBS Yearbook, which I always write about in my newsletter. It’s an amazing publication.

JEREMY GRANTHAM: And let me just finish, because there was Chris Darnell, who a business school teacher called me up and said, I vaguely remember you said to give you a call if anyone interesting came along. And I have this guy who was a genius at Yale and finished top of his year by a lot. And he’s now in danger of flunking out of Harvard Business School. And I thought, oh, perfect.

JEREMY GRANTHAM: Because, you know, Harvard Business School, like any business school, is a trade school, and its intellectual content is not high. And if you’re a mathematician, Jesus, it must have been really boring. And it was. And he could barely bring himself to go to class. And so we met, and I did my best to persuade him that we were thinkers and we were ahead of the curve.

JEREMY GRANTHAM: And he joined us despite fabulous offers elsewhere. So he was my, I suppose, one real success. And for the rest of it, I depended on my colleagues hiring good people. And that’s always good news, bad news.

JEREMY GRANTHAM: Sometimes you get it right, sometimes you get it wrong.

STEPHEN CLAPHAM: And what was it about the firm that attracted an Edward Chancellor, James Monti?

JEREMY GRANTHAM: If I may say so, it is obvious that we were not in the profit-maximizing business. We didn’t have a single person whose job description was sales for 22 years. And we did what we thought we could do, what was interesting, challenging, and then we went around to see if the clients agreed with us. And since our first products were doing very well, that gives rise to Grantham’s Law No.

JEREMY GRANTHAM: 2, if you’re doing well, you can sell. Any new product. If you’re doing badly, you can’t sell any new product, however promising it is. And so they moved into the next one and the next one and the next one. And we didn’t need any marketing. Anyway, we were not commercial. We were really ideas driven.

JEREMY GRANTHAM: And my job description was bouncing in and out of everyone’s room saying, what is your idea this week? And after a bit… Paranoia, they all made sure they had an idea for the week. We would discuss it to and fro for half an hour, then I’d go on to the next one until I came to Edward who’d say, get lost, I have a deadline. He was pounding away for cranking out some nice idea for an article.

STEPHEN CLAPHAM: So, I’ve got a few questions I’d like to ask you just before we move on to the What you’re doing now…

JEREMY GRANTHAM: I’m sorry to interrupt you. But we also really looked after our clients. And everyone says that. I know that. But you know, dear listener, too, that it’s not true. They look after their profits, they look after their company, and if that happens to look after the client as well, whoopee.

JEREMY GRANTHAM: And we genuinely did not do that.

JEREMY GRANTHAM: If we thought a client wanted to do something… That was not good for them, we would tell them. If they wanted to buy into Japan, we would say no.

JEREMY GRANTHAM: If we wanted to, we started a growth fund because growth was so unpopular. They were hiding under the table at institutional meetings. Value managers were winning over one year, three year, five years, 10 year inception, you know, everything. And this was…

JEREMY GRANTHAM: I think it was about 88, 89. And growth stocks actually looked cheap on our dividend discount model for the first and only time in their history up till then. And so we said we’d start a growth fund. And very quickly, everyone was so surprised. It had novelty value. They all signed up and it became, it had the most institutional clients of any fund that we had.

JEREMY GRANTHAM: And by then we had quite a lot of funds, like 30, 40 funds. Of different kinds. And whenever we hired them, we said, look, this is not going to last. And when it goes back to normal, which was about a 20% premium to the rest of the market in terms of value, price to deliver less value, and historically had delivered less value, by the way, forever growth stocks. And they all said, yeah, yeah, yeah, fine, fine, fine.

JEREMY GRANTHAM: They didn’t even really listen. They didn’t take it seriously. And Luckily, the timing worked quite well that time and the market turned, made a few points the first year and then quite a few points the second year and then made quite a lot of money the third year. And we had about a 15 point gain over three years. We didn’t do brilliantly against the benchmark, but growth was the main driver.

JEREMY GRANTHAM: It was like 12 points for growth and three points for us in incremental. And then we went back to the clients and said, that’s it. Growth is a very bad place to be long term for the last hundred years. It’s had its little moment. We suggest you get out. And that was fascinating. Anyway, they all got out except three. So let’s say 30 of them got out and three stayed.

JEREMY GRANTHAM: And the growth stocks, sad to say, got trashed for quite a few more years.

JEREMY GRANTHAM: And the people who got out… Said, what should I do with this money? I’ve kind of mentally allocated it to you. And that pushed us into asset allocation.

STEPHEN CLAPHAM: Oh, I see.

JEREMY GRANTHAM: So we said, well, emerging looks good and small cap value looks good. And we pieced together amateurish asset allocation efforts. And then we began to say, this is pathetic. Let’s do better. And Chris and the boys and me and Ben, we all got together and said, what can we do? And worked out a more coherent battle plan for asset allocation.

JEREMY GRANTHAM: That became a hugely rapidly growing business. And just for the record, to give you an idea of what was going on here, we had $30 billion in 1997, down to $20 billion in 2002. Actually, in 2002, we made a couple of billion. So we were back to $22. And then four years later, we were 165.

STEPHEN CLAPHAM: It’s astonishing.

JEREMY GRANTHAM: As new people came. Incidentally, only one of my old clients, I met him in an elevator. You know how that happens once in a while? Yeah, yeah, yeah. Trapped in the elevator. And he said, with grinding his teeth, well, I guess you were right, Jeremy. That was it. And then I leapt out of the elevator.

STEPHEN CLAPHAM: Quite gratifying.

JEREMY GRANTHAM: Well, not really. I would have been more gratified if he’d just handed over half the money he’d taken away.

STEPHEN CLAPHAM: Yeah, it’s difficult. It’s like buying a stock that you’ve sold higher up.

JEREMY GRANTHAM: Thank you.

STEPHEN CLAPHAM: Close after.

JEREMY GRANTHAM: It is, yes.

STEPHEN CLAPHAM: I asked Bill Nygren if he had a problem doing that.

STEPHEN CLAPHAM: He said, I’ve made so many mistakes. He said, I wouldn’t have any stocks left.

JEREMY GRANTHAM: Oh, no. But if you’ve just sold a stock in the previous year, at four, the number of people who can buy it back at 12, you could number on the fingers of one hand. It’s so difficult. And people can, but they are so rare. I am not numbered in that group.

STEPHEN CLAPHAM: Because you seem very rational.

JEREMY GRANTHAM: I am very rational, but that’s pushing rationality too far for me.

STEPHEN CLAPHAM: And did you enjoy the quants more than the individual stock investing?

JEREMY GRANTHAM: Yeah, yeah, I think.

JEREMY GRANTHAM: For a while, stock investing… Was heaven for me. I’ve got to say that. Picking stocks one by one, there was no insider information. We were the professionals. The locals in small cap value were relatives of the founders. They were amateurs. We were professionals.

JEREMY GRANTHAM: Presidents, CEOs were pathetically grateful for us to call. They would spend an hour on the telephone. They would tell us everything we wanted to know. And this is not… Even remotely liked day and it wasn’t even remotely fair in a way. It was taking candy.

JEREMY GRANTHAM: But it was fun as well. And then it was more of the same and more of the same and more of the same. And so after 15 years, very quickly I found that if I listen to another broker telling me about quarterly sales, I think I’m going to throw up.

JEREMY GRANTHAM: Literally, it happened in less than a year. And quant investing was a completely different kind of thinking. What is driving the world here and what is working there and how do you balance momentum and value?

JEREMY GRANTHAM: What is the regression rate? What factors impact the regression rate? What accelerates the regression, slows it down?

JEREMY GRANTHAM: And these were, in their way, wonderful issues. So I had another really terrific… Five or six years and then a pretty decent five or six years. And then that began to get repetitive. And then I was lucky. Asset allocation is yet again a totally different kind of thinking.

JEREMY GRANTHAM: Equities versus cash and so on, country versus country and everything else. It was a nice problem.

STEPHEN CLAPHAM: So you were successful because you had this intellectual puzzle that you wanted to solve.

JEREMY GRANTHAM: Yes. And I got to, every 15 years, I got to change my career and start again. And the final one. And there’s a five-year overlap. Five-year transitional overlap.

JEREMY GRANTHAM: So there’s really 10-year blocks. And the final one was propaganda. I got to write quarterly letters and papers on running out of resources and the race of our lives about climate change and toxicity a while ago and its effect on our prospects for fertility population and a viable environment.

STEPHEN CLAPHAM: So let’s talk about that, the work of your foundation. I mean, it’s remarkable what you’ve done and how much you’ve spent. How do you measure success?

STEPHEN CLAPHAM: Let’s start by telling the audience a bit about the three areas and why you chose them.

JEREMY GRANTHAM: The quickest one. Resource shortages was just a purely intellectual idea to start with. We just noticed a pattern and we created really good data that made it clear. Everyone’s view of resources was dominated by oil. So really, they were measuring oil. That’s not all that useful. So we took the 35 most important commodities and we equal weighted them.

JEREMY GRANTHAM: And so we asked the question, what in general have resources done? And And we found that even though you had worse and worse copper ore, you had greater and greater technology. And the equation was something like shortage quality minus two a year and technology plus three a year. So technology had spent 100 years winning. The price had fallen 1% a year and over 100 years it was down 70% real.

JEREMY GRANTHAM: I mean, what a help to getting rich. And we noticed this pattern and we saw the great surge for World War I, the great surge for World War II, great surge for the oil crisis, but coming back to lower loads every time. And now, bang, from 2002 until 2011, we had had World War III without World War III and the prices were way back where they had come from.

STEPHEN CLAPHAM: Which was China.

JEREMY GRANTHAM: Which was China. China had gone… In 25 years, from 5% of cement, 50.

STEPHEN CLAPHAM: Yeah.

JEREMY GRANTHAM: From, you know, 7% of iron ore to 50. There were three or four commodities where they were 50%. 50% of every pig eaten, 50% of every bag of cement, etc. And 50% of every ton of coal.

JEREMY GRANTHAM: Just amazing. And, of course, that can’t last. But it was enough to break the back. Of commodities and everyone brought on their last best reserve they’d had up their sleeve of copper and aluminum and tin and nickel and zinc and so on.

JEREMY GRANTHAM: And then, of course, China decided to slow down and attempt to redirect their economy a bit. But also, simultaneously, agriculture was boosted by three of the most unpleasant global years for the major areas of grain production. So everything had gone up together. And our paper was called Time to Wake Up, the Era of Plentiful Cheap Resources is Gone Forever.

JEREMY GRANTHAM: And it has. I think it’s fair to say that the period we’re in now, there’s much greater awareness of shortages. And I think the equation is the shortage component, instead of being minus two, is more like minus three. And the technology component is more like two.

JEREMY GRANTHAM: So we’re in a world where shortage is now slightly winning instead of technology slightly winning. And it remains an incredibly volatile business. A few extra tons of copper and the market breaks and a few tons short and the market screams upwards. That’s always going to happen.

JEREMY GRANTHAM: But if you look at the underlying trend, you see we’re in a different world now. If you go back to 2002, We’re probably three times the average price on those 35 commodities. And we’re nowhere near the peak, but we’re three times the price of the low. And we appear to be in a volatile sideways transitional phase. My guess is the next phase.

JEREMY GRANTHAM: It’ll take 10 or 20 years to recognize it because of the volatility will be upwards. We are, of course, running out. And then as we got into that issue, we realized that running out was absolutely fascinating. These are all finite resources. What do you think?

JEREMY GRANTHAM: Kenneth Boulding said the only people who think you can have compound growth on a finite world are madmen and economists. And the economics industry is not interested in resource limitations. It’s not interested in the fact that this is a finite… Inheritance that we got, that we are gobbling through, particularly in the case of natural gas and oil. And that was one.

JEREMY GRANTHAM: And we realized that the central idea there was living beyond our means, and there are limitations. We are hurtling through space. Spaceship Earth, says Kenneth Boulding, fellow Yorkshireman, incidentally, and long deceased.

JEREMY GRANTHAM: The next one was climate change. And we, the whole of my family got involved together as we went on a series of trips and were impressed by how rapidly the world was disintegrating. And the more you get into that, again, if you’re not brain dead, you begin to realize how badly that will end unless we act. And we don’t.

JEREMY GRANTHAM: We act at half the speed. So we’re going to have the carbon count, which… Used to be 280. It’s now 430. It’s going to go to maybe 550 with our semi-half-baked efforts, but getting better. And at 550, be lucky to have three degrees centigrade up from today’s one and a half. And each one-tenth seems to be more destabilizing than we thought.

JEREMY GRANTHAM: So the increase suddenly and damage floods droughts storms much greater than we expected, knocked off perhaps half a percent of global GDP in the last couple of years. Before that, we worried about it, but it didn’t really show up in the data. And now it impacts insurance. You can’t get insurance. It’s gone through the roof.

JEREMY GRANTHAM: Insurance is really hardwired into capitalism. And that is how climate change over the next 20 years is going to impact directly how everyone thinks about life. And we have to spend a lot of money. Not just on the accidents themselves, but now we have to spend billions and billions on trying to prevent them.

JEREMY GRANTHAM: So someone worked out that in the last 20 years, about a third of our GDP growth was either correcting or avoiding natural disasters. And of course, that number will get bigger and bigger until it’s 130%. And the remaining part goes backwards. I suspect.

STEPHEN CLAPHAM: Oh, dear.

JEREMY GRANTHAM: Well, you say, oh, dear, yeah, but that’s not the end of the world. We’re a very rich world, and we can take a few decades where we go back a bit if we use that time to keep improving. And wind, solar, battery storage in particular have all been much better, much better. If you go back 30, 40 years, we have done much better on Earth than we ever expected.

STEPHEN CLAPHAM: Yeah.

JEREMY GRANTHAM: And in 80% of the world. Wind, solar and storage is simply cheaper than a coal or natural gas. It’s cheaper even if you gave them the coal plant.

JEREMY GRANTHAM: Just delivering the coal is more expensive in many places than building from scratch a solar farm and storing for a couple of days. Anyway, so that’s an EVs. Been very encouraging. And if you look at the way they’re improving, people don’t realize that it was so easy to get two years behind. But today, you can get vehicles with over 400 miles of deliverable range, and they’re on the cusp of 500 in the next year or two.

JEREMY GRANTHAM: And they charge quicker and quicker. And you can get one today that will do…

JEREMY GRANTHAM: 80% in 10 minutes or 12 minutes. So you hardly time to have a cup of coffee. And in any case, you don’t need to recharge because 400 miles will take you wherever you want to go. And these are all pleasant surprises. So they’re going fine.

JEREMY GRANTHAM: Anyway, so climate change, great financial implications, going to make growth more and more difficult. And yet it’s full of challenges, full of opportunities. The actual greening of the economy, trillions of dollars, are an enormous number of opportunities, and we have a big chunk of our portfolio investing in green tech.

JEREMY GRANTHAM: You know, an enormous number of really smart people, a lot of them from Overseas, come to America because of our VC industry and structure and tradition and funding it.

JEREMY GRANTHAM: And we really drive the process. American capitalism, I think, is a little fat and happy and monopolistic, but venture capital is extremely virile, extremely useful. And better than the rest of the world. Israel is very good, but very small.

JEREMY GRANTHAM: And the rest, the Europeans are significantly off the pace and nowhere else in the world does it really matter. But V. C. And America is the crown jewel of their rather wobbly capitalist system, I think. And if you look at the Mag 7, you know, they’re…

JEREMY GRANTHAM: Most of them are not as old as GMO. And the two that are, Microsoft and Apple, are by the skin of their nose. I infamously hired, make that number seven, I forgot him. I hired a young kid who was number seven, going to be number seven at Microsoft and had been offered shares. And I explained to him that was another flaky tech firm and the investment business was much safer. Got them on. Cost him hundreds of millions.

STEPHEN CLAPHAM: Did he still send you a Christmas card?

JEREMY GRANTHAM: No, he never sent me a Christmas card. And I checked for bombs from him.

STEPHEN CLAPHAM: And just on, we were talking in the car here about fertility and toxicity. Please just two minutes on that, because I think this will be new to many of the listeners.

JEREMY GRANTHAM: We don’t do very well listening to unpleasant news. And we have this enormous optimistic bias we’ve been talking about. And that certainly applied to climate change. When I started 25 years ago, and then I started talking to investment groups 20 years ago, there was nothing but eye-rolling.

JEREMY GRANTHAM: And now, of course, they have woken up despite the U. S. Being currently recalcitrant for a year or two. Well, that is nothing compared to toxicity. Toxicity is… I believe more dangerous, moving faster, and totally avoid it. You can read about it, but no one is processing the data. More and more articles appear.

JEREMY GRANTHAM: We’ve created a world which is kind of a toxic stew, and among other things, insect life is going out of business, and all the great insect experts like E. O. Wilson, the famous Ant-Man. We spent four hours. With him bullying him when he was 90 years old, probably killed him off.

JEREMY GRANTHAM: But they all believe that without insects, nature cascades.

JEREMY GRANTHAM: And without nature, we don’t have a world that is suitable for humans. And eventually we fail. And the problem is they can’t prove it. They can’t prove it because they never had any money and because the system is so infinitely complicated.

JEREMY GRANTHAM: And the other people are humans.

JEREMY GRANTHAM: We’re particularly vulnerable because we’ve designed a world in which we have our noses rubbed up against these toxins. Plastics at every corner are leaching endocrine disruptors, messing with our hormone system, messing with our fertility.

JEREMY GRANTHAM: And worse than that, anything you can measure, the sperm count, one of the few things you can measure pretty accurately in this stuff. And we deduce that Back in hunter-gatherer days, there was 200 units per milliliter.

JEREMY GRANTHAM: And by the time the academics got into it in 1972, that was down to 100 about in round numbers. And 1972 was not a good place to start. Everyone smoked. Pollution was much worse than today. Ddt was everywhere, all messing with… Endocrine systems. But anyway, 100. Now it’s 35. And we have been dropping in the 21st century almost 2.5% a year. Can you believe that? And back in the 20th century, we’re dropping at 1.5%.

JEREMY GRANTHAM: So it’s accelerating. And it’s accelerating because the quantities of plastic in particular, but also pesticides, are increasing so rapidly. And what is terrible about a lot of these Endocrine disruptors, they have what is called an epigenetic effect. It’s not just you, but it’s your children, your grandchildren, etc. And recent studies suggest that it could go on for 20 generations.

JEREMY GRANTHAM: Antifungicide, a fungicide. And if that is the case across many pesticides, then you’d have to conclude we’re in deep trouble and better put all our resources to addressing this. And from a fertility point of view, the declining sperm count didn’t seem to matter because we were over-engineered, I like to say, like a good Victorian bridge. So it came…

JEREMY GRANTHAM: Down all the way to about 45 or 50 before it had any effect. And then hitting that 17, 18 years ago, no one really had infertility for this reason then. And now the world health people say it’s about 17, maybe 18% today of all young couples need help. And the dominant expert…

JEREMY GRANTHAM: Shana Swan and her colleagues who’ve been doing this 30, 40 years, they say that in 20, 25 years, the average young couple will need help. The median, the one in the middle, which is really dire beyond belief. And 20, 25 years beyond that, if unaddressed, the viability of our species will be at risk.

JEREMY GRANTHAM: We’re not doing much. The other thing is it affects our sex drive. It’s exactly what you would expect from endocrine disruption. When you test it on rats and mice, the sex drive goes to hell. If you measure anecdotally, even every magazine that measures sexual activity says every country, every age group dropping like a stone. But there is one academic report out of 8,000 Japanese between 20 and…

JEREMY GRANTHAM: 40, I think, maybe 20 to 50, 8,000 of them. And they asked them lots and lots of questions. And in answer to the question, how many of you had absolutely no sex in the last 12 months? It’s 45% of the men and 45% of the women.

JEREMY GRANTHAM: But in the age group men, 20 to 28, it is 52. I mean, read it and weep. Men, 20 to 28, 52% had no sex of any kind in the previous 12 months in Japan. Not surprisingly, you might argue that their fertility rate is 1.2, I think, and South Korea is 0.7. China is 1.0.

JEREMY GRANTHAM: India, shockingly, is 20 years ahead of schedule at 1.9. No one 20 years ago thought they would get there before 2050 or 60. It is the two biggest countries in the world are not replacing. It is guaranteed. The population will crash. It is guaranteed that the workforces will continue to slow.

JEREMY GRANTHAM: The cohort of 20-year-olds in Japan is 50% of what it was at its peak in 1948. 50%. If the U. S. Was 12% below its peak, it would be freaking out. My joking rule 21 in investing is never extrapolate from the Japanese. They are completely different people with a completely different culture.

JEREMY GRANTHAM: They all live as if the biggest thing in life is being socially responsible and pulling your weight.

JEREMY GRANTHAM: There’s no other, certainly not the U. S., anything like that. And we are going to have a steady drag. Europe is already showing the effects economically. And the Americans treat the Europeans now as if Europeans have lost the plot because of their urosclerosis.

JEREMY GRANTHAM: They don’t know enough to actually look at the workforce differential. Number of hours worked in Europe has been declining half a percent a year. In the U. S., mainly thanks to immigration, now stopped, has been rising at closer to one. You have a one and a half percent a year for the last 15 years come straight out of GDP.

JEREMY GRANTHAM: Gdp is hours worked times productivity. But the thing that my colleague Jamie Lee and I have been working on is the circumstantial evidence that If you live in a world with no children, your animal spirits start to go. If they’re closing all the nurseries and then they’re closing all the grammar schools, as they are in Japan.

JEREMY GRANTHAM: We went on a bicycle tour there and we were Fed sandwiches by older ladies in a grammar school that had closed, you know, two or three years earlier. It was really quite weird. And four or five people sitting around in this village and they were rattling empty everywhere.

JEREMY GRANTHAM: And they pulled the rabbit out of the hat by having people emigrate to Tokyo. So Tokyo did not decline in population until three years ago and Osaka the same. And because the productivity is higher in the big cities, that worked for a while. But this is absolutely chronic. It is guaranteed. There is nothing that will get in the way of a declining workforce and therefore of declining…

JEREMY GRANTHAM: Productivity. And into this difficult world that hasn’t been addressed in any way comes AI. And the thing about AI is if there’s ever been a major technology with more disagreement, please let me know, because I missed it. At the Nobel Prize level, they disagree completely. At the expert level, they disagree completely. At the practitioner level, they disagree completely.

STEPHEN CLAPHAM: Well, we don’t know.

JEREMY GRANTHAM: That’s why you disagree completely. So we’re dealing with something that either will make us end up in heaven or it will kill us all inadvertently and everything in between.

STEPHEN CLAPHAM: That, I think, is a point at which we should leave this conversation. But I want to leave in a slightly upbeat note. How much money have you given away through your foundation to date?

JEREMY GRANTHAM: I’m hoping that by the end of this year or the middle of next year, we will have written checks for a billion dollars.

STEPHEN CLAPHAM: Jeremy, that is an amazing achievement. Thank you so much for agreeing to do this conversation.

DISCLAIMER: I so enjoyed it.

JEREMY GRANTHAM: It’s a great pleasure. So did I. Thank you.

STEPHEN CLAPHAM: Jeremy is a man true to his principles. Having lost half his clients in the dot-com boom. Imagine you lose 50% half your revenue in a fixed cost business. He would do the same thing all over again. Jeremy is a brilliant podcast guest because he has so many stories. But I would also…

STEPHEN CLAPHAM: Highly recommend the book, The Making of a Parma Bear, with Edward Chancellor, a former GMO employee and author. It’s a brilliant book, an enjoyable read, and highly informative. My thanks to Edward for fitting me in with Jeremy’s schedule, and also to the Library Of Mistakes in Edinburgh, a must-visit if you’re there, which hosted Jeremy the night before we recorded.

STEPHEN CLAPHAM: And thank you for listening. This podcast is allowing me to meet and spend time with some of my heroes. But just one request, please, can you tell a friend about this show? Thank you.

DISCLAIMER: Behind the Balance Sheet and affiliates and podcast guests may own shares or have an economic interest in securities discussed in this podcast, which is aired for your education and entertainment only. Nothing in this podcast should be construed as investment advice or relied upon for investment decisions. Always do your own research.

STEPHEN CLAPHAM: Thank you for listening. I hope you enjoyed this episode. It would mean a great deal to me if you could please share this with just one friend and feel free to spread the word by subscribing or even leaving a review on Apple Podcasts or Spotify. Thank you for your support.