February 28, 2025 • 42 mins
Merryn Somerset Webb interviews GMO co-founder and notorious caller of market bubbles Jeremy Grantham. Grantham, who also serves as the firm’s long-term investment strategist, leans in to his more than five decades of investing experience to explain the current “super bubble” in the markets. He comments on when we’ll see a correction, the fate of the green transition and why he’s so concerned about population decline.
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. Hi there, Maren Talks Money. Listeners.
Just a reminder that as well as listening to this podcast,
you really should also be reading the things that John
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Do sign up that if you haven't already, and I
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Speaker 2 (00:23):
It goes with the pod.
Speaker 1 (00:24):
In this week's I've written about our conversation with Jawad
from last week. I've written about gold, I've written about
the energy transition, and I've written about the zeitgeist investment
of this decade ward is it? Is it the energy transition?
Is it defense stocks? Or is it just gold? Sign
up and the links below. Welcome to Meren Talks Money.
(00:50):
The podcast so much people who know the markets explain
the markets. I'm Maren zums that web. This week, we
welcome back to the show.
Speaker 2 (00:56):
Jeremy Grantham.
Speaker 1 (00:57):
Jeremy is the co founder of GMO and a member
of GMO's asset Allocation team, serving as the firm's long
term investment strategist.
Speaker 2 (01:04):
He's more than.
Speaker 1 (01:05):
Five decades of experience in investing and has earned a
reputation as a bubble hunter, quick to point out speculative excess.
Speaker 2 (01:11):
On Wall Street and beyond.
Speaker 1 (01:13):
So in our conversation we talk about where he sees
bubbles in the markets now, I mean, honestly, where aren't
there bubbles at the moment? Why we haven't seen that
correction in the market he's been predicting for a while,
as have we the green transition, and why he is
so bassionate about addressing population decline. Jeremy, thank you so
much for joining us again. We really appreciate it.
Speaker 3 (01:36):
It's so pleasure to be here.
Speaker 1 (01:37):
I know that there's many things that you and I
would both prefer to talk about, but we're going to
have to start with talking about the American dock market.
Last time you came on, you said, and I absolutely
agreed with you, that everything had run ahead of itself.
Valuations were too high and we should definitely expect although
we can't time when it might happen, a very serious
(01:58):
correction in the US market still hasn't happened. We keep
thinking it's going to happen. Various signs that they're stress
in the market, and for example, when the Deep Sikh
news came out, we looked that and we said that'll
be the end of the AI bubble, but no, it
never seems to end. It just keeps going. Has anything
changed in the way you look at that market.
Speaker 4 (02:19):
I've always looked at it from the point of view
that the longer and the bigger, and the higher it goes,
the more exciting and dangerous it will be. And this
has moved up the rank of superbubbles, but it's nowhere
near Japan, the mother and father of all superbubbles in
(02:41):
eighty nine, and it's nowhere near their real Estate bubble
of the same era. They're the two great super bubbles
of history, but a decent way behind. I think this
is in third place, ahead of nineteen twenty nine, just
and ahead of December twenty TI twenty one, which actually
(03:02):
met all the characteristics of a late stage super bowbl
and one really should have expected it to blow up,
and it did. Twenty two was a good blow up
across a lot of asset classes. But AI chat GBT
came to the rescue in November of twenty two, and
initially for ten months, dragged by the mag seven and
(03:25):
the rest of the market going down a little bit.
That kept going for about a year and then in
October November of twenty three, the market said this looks serious,
we better join in, and the breadth became positive and
had a perfectly decent twenty four. And the net result
(03:46):
is that every measure of traditional value, the best of
the common ones being Schiller pe is at a record,
and most of the ordinary ones are in the top
one or two percent. And the best one of all,
which is a variant of of total market cap to
total value added in the economy, that has this one
(04:11):
the highest of any in history.
Speaker 2 (04:12):
That's the buffet measure rate.
Speaker 4 (04:15):
It's a variant if you take out financials and you
tweak this, and you tweak that. Hussman has a good
variant of that, and they make it clear that this
has overtaken twenty nine and twenty twenty one and moved
into first place on the American record, still way behind
the Japan. And then Ben Inca at GMO and I
(04:37):
twenty five years ago did a behavioral model which says,
forget all the logic about the efficient market or how
it should work, and dividend discount models and all that,
just let's see what actually explains, and what has that
explained since nineteen twenty five and explained very well. Indeed,
is low inflation, the market loves it. High inflation it
(04:58):
hates margins. Of course, the market loves it. Growth rate
has no correlation at all, But stability of GDP growth
the market likes. And that's way in third place. So
the things that make a portfolio manager feel comfortable, that's
what decides what the PE will be. And even on
that model that had a nearly perfect record, the market
(05:20):
could drop fifty percent to get back to the normal
response of flaky human beings. The normal behavioral responses would
have this market at a perfectly respectable eighteen pe on Schiller.
And it's actually just over twice. It's thirty seven.
Speaker 1 (05:39):
And the argument that the introduction of AI and the
enormous progress that's been made there and the way that
AI is going to permeate through our economies and change
our lives as we know them, is a justification for
the market staying this high. Evaluations will grow into reality.
(06:00):
Your reality will grow into valuations. Should I say make
this level okay? That that doesn't resonate with you at all.
Speaker 4 (06:07):
This is the argument used for every important new technology.
Every really important new technology has had a bubble around it.
A classic example in the old days was the railroads,
where it was so obviously going to change everyone's life,
and it did so that everyone could see it clearly.
(06:27):
Everyone could put their money in it because they knew
it was going to change the world, and so they
started to build and design six railroad lines between Leeds
and Manchester, and of course there was an almighty crash
and everyone lost their shirts. It was one of the
more spectacular bus that didn't say that railroads weren't important,
(06:51):
or railways in Britain.
Speaker 3 (06:53):
They were incredibly important.
Speaker 4 (06:54):
They did change everyone's life, they did elevate GDP in productivity,
but they were so obvious that in the early stages,
of course they attracted everyone's capital and a bust. And
then you fast forward to the more recent example, and
that is the Internet. The Internet again was obviously going
to change everything, and it sucked in lots of money,
(07:17):
lots of pet dot coms and everything had a spectacular
blow up. And let me just focus on Amazon. Amazon
went up over a couple of years twelve fourteen times.
It was wonderful, and then when the market broke, it
dropped a spectacular ninety two percent. You can check this,
and Amazon went down ninety two percent, and then out
(07:40):
of the wreckage. It was one of the handful that
inherited the earth and gobbled up the retail market as
others gobbled up other things, and all the pet dot
coms got washed away. It's precisely the importance and the
obviousness of the importance. It guarantees a bubble, and very
few have been as obviously important as AI. It will
(08:03):
of course change our world. It is of course impossible
to know in what ways and whether it will be
entirely beneficial or not. And one day one suspects we
will end up with something like a world run by automatons, cyborgs,
whatever we want to call them. It may take three
(08:23):
hundred years, it may take fifty, and I lean towards
the three hundred, as long as civilization hangs together, which
is another big story we could discuss. But when you
get to that point, you have to always remember productivity produces.
It has no offsetting consumption. So the way to think
(08:45):
of that is just skip right to the end. One
hundred percent cyborgs, no workers. What happens to demand? The
answer is, of course, the whole system is totally unbalanced.
There's no demand and therefore there's no need for the
cyborgs production unless you take the value that the cyborgs
are producing and pass it through to the average people.
(09:09):
So you have to have a very decent guaranteed minimum wage,
and as long as you do that, everything balances. And
in the old days, by the way, from nineteen thirty
five to seventy five, the productivity was three percent, and
the rich people got richer by three percent a year,
and the poor people got richer by three percent a year,
and everybody was happy as a clam. And that turns
(09:31):
out to be from economics and social point of view,
the golden era, and then from nineteen seventy five, particularly
in the US, all of that productivity, which dropped from
three percent to say two and a half and then
to two all went to the top ten percent one percent.
The average worker hardly made any progress of all since
nineteen seventy five for an hour worked, and that of
(09:53):
course generates a lot of disgruntlement and complications, which we
see everywhere really including the US. Despite our brilliant stock market,
the underlying frustration is very high, and the same in Europe.
And how that manifests itself is you vote against the
party in power, doesn't matter whether it's right wing like
(10:14):
the Conservatives in the UK, doesn't matter if it's left
wing as in France and so on. You kick them
all out, and you kick them out. It's a manifestation
of the fact there's a very high level of disappointment
amongst the broad band of workers. They're simply not doing
as well as they expected, not doing as well as
their parents did.
Speaker 3 (10:32):
Sorry, long answer, It.
Speaker 2 (10:33):
Was a long answer, but it was a good one,
thank you.
Speaker 1 (10:35):
So that rather suggests that a successful adoption of AI
needs a huge level of government input.
Speaker 4 (10:42):
If the government does not smooth out the benefits of AI,
you will have either starvation or revolution.
Speaker 1 (10:51):
So it's interesting, isn't it, because we feel like we're
moving into an era, particularly perhaps in the US, where
smaller government is valued over big govern which I would
generally agree with that a smaller government might be better
than an overbearing government. But your suggestion is that as
we move into an AI era, if the government doesn't
take huge steps to well redistribute, it won't work.
Speaker 4 (11:13):
And by the way, that doesn't take much government. You
could have a few hundred people tucked away in DC,
making sure that income is redistributed. That's not the part
of government that chows up all the workers. It's pretty straightforward.
You have a high minimum requirement to keep people alive
(11:35):
and to keep people reasonably content away from the barricades
in the high street.
Speaker 1 (11:41):
Okay, so let's go back a little bit to the market.
I can feel we're heading off on tangents. We both
want to go down, but we've got to deal with
the core first. Is there any part of the US
market where you would feel safe? Obviously we would agree
that the AI stocks, AI adjacent stocks, tech in general
is very overvalued, but it's not necessarily the case across
the board. So if you wanted to stay in the
(12:02):
US and on this huge part of the investing community,
they find it very difficult to think at all about
leaving the US market or even rebalancing away from the
US market if they were to stay in it.
Speaker 2 (12:14):
Is there any.
Speaker 1 (12:14):
Sector, any part of it where you would say you'll
probably be okay if you stick with that.
Speaker 3 (12:19):
Yes.
Speaker 4 (12:19):
Obviously the future for greening the economy is going to
be a long and bumpy one. But physics cannot be
bullied away into hiding, and four years is only four years.
But the remorseless damage that we have all seen in
the last two years, the escalation of fires, floods, just sensational,
(12:43):
obvious to everybody except one or two percent who are
blinded by political beliefs. I would say that will just
march on if we do not solve that. The civilization
as we know it fails. How long it will take
is almost anybody's get But it's happening pretty fast, pretty remorselessly,
and we have to fix it. I think we probably
(13:05):
will fix it. And to do that to green the
entire global economy is a massive, challenging job that will
take lots of investment, lots of workers.
Speaker 3 (13:18):
And it will be done.
Speaker 4 (13:19):
I think since the psychology has smashed these stocks down,
and since the logic of the physics is inevitable, unlike
most things in the stock market, I would say that
is an area that we'll have sooner or later a
massive regrouping and a huge outperformance of the rest of
the market.
Speaker 3 (13:39):
Secondly, I believe.
Speaker 4 (13:41):
That the wider environment that we will get to talk
about is much deteriorated, and that we will have to
get used to many more short shocks to the system,
and many more big shocks to the system than have
characterized the last seventy five years. In that environment, you
(14:01):
do not want to be caught with a lot of leverage.
Leverage is going to be light the nineteen thirties. Leverage
is just going to take you out of business. You
have to be able to withstand shocks unexpectedly arriving, and
to do that you need no little or no debt.
And secondly, if you want to survive, you want to
have decent profit margins to give you some resilience. Marginal
(14:25):
Company's Cheap at Hell in nineteen twenty nine did not
outperform the Coca Colas, who were brutally expensive. The Coca
Colas went down seventy five percent, but the very cheap stocks,
the number seven, eight, nine, automobile companies and so on,
they all went out of business, and the ones that
survived went down ninety six percent. And when you're starting
(14:47):
from four out of one hundred, to go back and
catch up the Coca Colas, who are still at thirty,
you have to go up six or seven times just
to get back in the game. The thirties was a
pretty good ultimate room that things are cheap, usually for
a pretty good reason, so you have to tread carefully.
If you're going to play the cheap game, you've got
to make sure it is armor plated with high with
(15:10):
as much quality as you can get into it.
Speaker 1 (15:14):
Can I take you back to what you were saying
about the green transition and greening the economy, etc. Even
if you put aside the next four years and what
might or might happen around your noble energy and climate
change during that during the Trump period, it is still
the case that the national grid in the UK, across Europe,
the electricity grid everywhere and including in the US, still
(15:36):
has to be massively upgraded and massively improved because of AI.
Speaker 2 (15:41):
So even if you were to put aside.
Speaker 1 (15:44):
The discussion about climate change at the moment, it still
seems that there's a lot of scope for that build
out to be a good area to be invested in.
Speaker 4 (15:52):
Yeah, I think AI will improve all the aspects of
the economy that you're trying to improve. So it's very
helpful for green tech in general. The problem is it
helps everybody, and so you have to ask yourself a question,
is this society acting quickly enough in general, or is
(16:16):
it heading towards the cliff just simply moving too slowly,
protecting its corporate profits too much, and allowing the carbon
count and the methane count to just rise too high,
and seeing tipping points any minute now as tundrad melts,
and so on and so forth. And I think the answer
is we're not looking too good. And what AI does
(16:38):
is accelerates and makes more efficient the process that you're on.
And unless we're lucky, what that will mean is that
the system will run quicker and more efficiently towards the
cliff edge. And for every one item that you improve,
there will be the usual five in the current system
that are improving to make more and better useless consumption goods.
(17:03):
And we see this, by the way, in the inordinate
increase in electric demand and the coal and gas that
goes with that around the world in order to fuel AI,
along with those other cryptocurrency dangers.
Speaker 2 (17:18):
We might come to that later.
Speaker 4 (17:20):
Finally, after decades of moderate, actually flat use of electricity
is now not only rising rapidly, but predicted to rise
steadily and rapidly into the future because of AI and cryptocurrencies.
Speaker 1 (17:36):
But it was rising before the whole AI boom electricity
demand had started to rise the result of the electrification
of various things as a result of the attempt to decarbonizers.
Speaker 2 (17:46):
It was already happening.
Speaker 4 (17:47):
Prey hardly, and if you took out cryptocurrency, it was
most drifting outwards. And now no one would accuse it
of drifting outwards.
Speaker 2 (17:57):
No, definitely not drifting.
Speaker 1 (17:58):
Let's look if we can about other stock markets, and
now I said earlier that the lot of investors find
it difficult to imagine moving any waiting out of the US,
but there has actually been a shift towards Europe this year,
and there's also a growing discussion about the cheapness of
China and whether this might finally be the time to
invest in the Chinese stock market. Do you have any
positive feelings towards any other global like CAREW markets.
Speaker 4 (18:22):
I have had no argument with the non US markets.
They've been reasonably priced, perhaps a little overpriced most of them,
but nothing much for a long time, and they still are.
Of course, they are much less dangerous to own, and
they will very likely over five or ten years, crush
(18:46):
the US market, as has happened several times.
Speaker 3 (18:48):
That's how it happens.
Speaker 4 (18:49):
The US market will have a great decade, and then
fire markets will have a great decade and close the
gap a bit. And that's what will happen this time. Sure, Now,
will they be sympathetic in a major decline in the US,
which I suspect is waiting for us. Yeah, they can
be sympathetic. My just to remind you of how untidy
(19:12):
the world is, the emerging markets with a volatility one
point three times the market. In two the third year
of the decline, the S and P went down twenty
two percent. This was not pleasant for a third down
year in a row, and you might have expected emerging
markets to go down thirty but they.
Speaker 3 (19:29):
Went down two.
Speaker 4 (19:30):
They were just about flat, and a twenty point out
performance like that on the downside is completely a reflection
of different values. It does happen, and it probably will happen.
They will probably be sympathetic, and there will be periods
when they drop quite frighteningly to show sympathy. But in
between they will regroup, and they'll regroup faster, and after
(19:52):
the passage of a decent time, they will be way ahead.
I am very confident putting time on these. As we've
always discussed, it's pretty much impossible. But to go back
to the main event here, the longer and the higher
they climb, the worse it is. And we were hanging
out with a zero weight in Japan for three years
(20:14):
as it went from forty five times earnings to sixty five.
That is a whole lot worse than the US it's today,
And what was the price they paid? That was a
unique event, and they uniquely suffered for it. They spent
twenty years getting to a low, and they became a
cheap country. From sixty five times earnings, they became a
(20:38):
cheaper one.
Speaker 1 (20:38):
When twenty years is extraordinary, isn't it. If you were
to sit down with any major investor at the moment
and say there's a distinct possibility that the US market
will fall by that amount and it'll take twenty years
for you to be evans, no one will accept.
Speaker 4 (20:52):
That, absolutely, not than they never have and they never will.
Doesn't mean it hasn't happened every time we've had a
major bubble light now eighteen twenty nine, even in nineteen
seventy two and two thousand and the housing bubble. The
housing bubble, by the way, was a bigger bubble than
the current US stock market. Statistically, it was very impressive.
(21:13):
There'd never been a national bubble like that. Housing used
to crash in California while it bubbled in Chicago, but
that was the first time it did it, and that
made it a real outlier statistically.
Speaker 1 (21:26):
I remember being told over and over again during that
bubble that American house prices had never fallen and they
never would.
Speaker 4 (21:33):
And by the way, Bananke said that, yes, the US
house prices had never declined, and to which I wrote
in a quarterly letter, but they had never bubbled before,
and whenever anything has bubbled, it has always declined, and
of course it did. It was very well behaved, the
housing bubble. It declined in three years exactly what it
(21:54):
had gone up in three years, much to the cost
of some poor unfortunates who got sucked into the housing
market for the time.
Speaker 2 (22:00):
Yeah.
Speaker 1 (22:01):
No, that hurt an awful lot of people, and actually
this current bubble may have hurt an awful lot of people.
Maybe not in the same way because most people won't
be leveraged into it, but nonetheless there's an entire generation
of people who now believe in this, as is the
case in every bubble, that what they've done is brought
into a sure thing.
Speaker 2 (22:17):
So there is a lot of disappointment.
Speaker 4 (22:19):
I heard right, Yeah, my cryptocurrency for one, which is
now four trillion dollars.
Speaker 1 (22:25):
When you talk about cryptocurrency, are you talking about bitcoin
or are you talking about currencies as a whole, And
do you make a division between the two.
Speaker 4 (22:32):
I was talking about all of them added together. But
none of them produce anything, and none of them are
a medium of exchange materially, but they are a wonderful
speculative medium. And with the stimulus program of Biden and COVID,
three trillion dollars to play with in a system that
(22:54):
had never had that kind of money locked up at home,
nothing to do but learn how to speculate, and learning
to speculate, it's pretty darn easy. You just buy what's
moving and what everyone is shouting about. And I did
that myself as a young man, and made a quick
fortune in the two years out of business school, enough
to buy a couple of nice houses without a mortgage.
(23:17):
I know, but I didn't buy the houses. I bought
silly sucks that all blew up. And we went from
that equivalent, which today would be two million dollars a
million dollar house in the suburbs of Boston.
Speaker 3 (23:31):
Et cetera.
Speaker 4 (23:32):
And we went back to twenty thousand and with that
nest egg that I had, I had the courage to
start a business with a partner in the investment business
because I could live on my loot, which I managed
to lose so quickly that even before we got our
office set up, I had lost it.
Speaker 2 (23:49):
And you still managed to get some clients. It's a merror.
Speaker 4 (23:52):
We didn't actually get any clients for quite a while,
but it did, of course teach me a very powerful
lesson that even in my own account, on the frivolosand
speculating and crazy stuff.
Speaker 3 (24:04):
But it was not a great idea.
Speaker 4 (24:06):
So I reverted to my Yorkshire roots of waste not,
want not and value for money big.
Speaker 2 (24:11):
Time, and that's worked out pretty well.
Speaker 4 (24:13):
But to be slapped around the head by the way,
dear listener, when you're still young and don't have that
much money to lose, is a terrific idea, rather than
having it happen to you when you get carried away
at safety when you're about to retire, as it can
be brutal.
Speaker 1 (24:28):
Let's let's not get let's not worry too much I
can feel myself getting stressed about all the people who
may find themselves in a difficult situation as your correction comes.
So let's move on to talk about other difficult things.
One of the things that I know you think about
a lot of we were talking about earlier is population dynamics.
And we say in the world of journalism that you
must never ever write about demographics. Never, because if you
(24:51):
write about demographics, everything becomes clear, and then you can't
write any more columns. Once you've written the demographic demographics column,
you have the answer, and then you're stuffed after that,
you can't write enough column Now you're looking at the
way that population is changing around the world, and that's
giving you a sense of the future as well.
Speaker 4 (25:08):
Right, Yeah, First of all, let me say I didn't
know that was the watchword in journalism, but certainly my
colleague and I have discovered that it's the same in
the financial world. I've had a pretty decent following for
twenty five years. When I write a quarterly letter, people
have tended to refer to it. And this was the
(25:30):
first paper we produced very well researched. I thought it
took a lot more time and effort and we dropped
it into the black hole. Nobody even acknowledged that it
had been posted, and for a few months it sent
me into a bit of a kind of psychological funk.
But what has happened is why you're describing people don't
want to hear about certain topics and declining population and
(25:54):
their consequences and why the population is declining. These are
not topics people want to talk about. It makes them
profoundly uneasy, and they wish you'd shut up and write
about something else. That's exactly having said that, Yeah, so
I see it as the fastest moving potential threat out there.
And how we're going to try and make the point
(26:15):
felt is try and relate it more to the short
term mentality, which is, dudes, you'd better realize that a
declining workforce is bad for economics, really bad. And it
turns out not just to be bad directly. Fewer hours
come straight off GDP. If you're growing at one and
(26:37):
a half percent a year, in which they were when
I arrived in America in the sixties, and then you
go down to minus a half a percent, which they
have done in Europe for the last fifteen years. It
has averaged a little shy of minus half a percent.
That's a two percent drop that comes straight off your
(26:59):
GDP growth. But secondly, we stumbled across the thought that
those societies with falling workforces will find they're working in
a lower productive world. So if you run a correlation
which we've just done, with the decline in the workforce
(27:20):
on one side and productivity per capita on the other,
you find there's a positive correlation between a decline in
the one and a decline in the other, and it's
aboutzero point three, which means you can see it pretty
easily as you plot the countries across the chart, the
ones that have the better population have the better productivity.
Speaker 1 (27:40):
Can I interrupt you briefly there to say that, to me,
that's completely counterintuitive because I would have expected in a
falling working population there being an imperative for productivity improvement.
And as one of the conversations has been had in
the UK for some time now, is it the case
that because we have so much cheap labor available, or
(28:00):
have done over the last couple of decades because of
our migration policies. Is it that availability of cheap labor
that has meant that our productivity has been so bad,
and if we restrict that, or if we make labor
more expensive, for example with their rich or Reece's most
recent increase in employer nancial insurance, will we see an
improvement in productivity if we tighten the labor market. And
(28:23):
so I'm surprised that it's that way round, because I
would have expected it to be the opposite.
Speaker 4 (28:29):
Economics being complicated, It may very well be in certain situations,
if you tighten the labor market, you will increase the productivity. Okay, granted,
the problem here is the reason I believe the productivity
drops is mainly what Caines would call animal spirits.
Speaker 3 (28:49):
If you are.
Speaker 4 (28:52):
Living in a world where you see children basically becoming
scarce behind you, Kindergarten's closing Grammars goals, closing applications to
college dropping rapidly you start, it starts to affect you
a bit, and as you get into the corporate system,
it's not expanding rapidly. Promotions are not anywhere near where
(29:15):
they were thirty forty years ago, not as rapid. The
thing is constant tinering downwards, and you become less aggressive,
less willing to borrow money, less willing to get into
a venture capital situation. Why wouldn't you be Why wouldn't
you be more dynamically thinking in an economy expanding rapidly
(29:36):
than you are when you're and you're not used to it,
And managing downwards in an economy is brutally difficult. As
you speak to the guys running Detroit sort of thing,
or Japan, it's much more difficult. It is falling off
a log to manage for growth. Capitalism does it in
its sleep, But when you're declining, you have a situation
(29:58):
where there are ten shops and four of a shut it.
What is it like for the other six any industry
where people are going out of business because they're over capacity?
What is it like for profit margins to have too
much capacity? To have one industry, one major company flailing
at the edge to stay alive. It inflicts wounds on everybody.
Speaker 3 (30:19):
And it's very.
Speaker 4 (30:20):
Easy to see how managing downwards is a tough business.
When you close a railroad station, how do you downsize this,
that and the other. This is not a happy go
lucky society, and as a consequence, I think people become disappointed.
And we've seen in America how easy it is to
have a society go from quite a brilliant to an
(30:41):
optimistic to disappointed. When you're disappointed, you're disgruntled, and when
you're disgruntled, you vote against the party in power. And
all over Europe for the last three years we've seen
a very consistent, unprecedentedly consistent move against the party in power,
doesn't matter whether it's right wing or left wing. Kick
the fellows out. And in point of fact, Biden had
(31:04):
a smaller swing against the party then by a decent
margin than the average European election for the last dozen
which is an interesting subtopic in itself. Anyway, So you
become discouraged, it's bad for productivity, it's bad for everything.
Kane's made the point that you could line up all
(31:25):
your economic stimuli, everything a wonderful plan. But if for
whatever reason people became pessimistic, they sat on their money
and they did not spend. Your toast said, do you
very quickly fall into a major recession or a depression,
which he experienced.
Speaker 1 (31:43):
And animal spirits, as you say, disappear completely Okay, So
how reversible is this? We can see, as you say,
across Europe, population is declining. Fertility rates in particular, fertility
rates fully, almost bizarrely fast, and we see that in
the UK as well, and you can, of course, you
can mitigate that with migration, but is that a long
term solution or not. It doesn't appear that the populations
(32:06):
of post European countries consider it to be an acceptable
long term solution.
Speaker 4 (32:11):
If you see the long term battle plans to twenty
one hundred, which I was looking at yesterday, Europe is
not going to be necessarily a basket case on population
because it will have a couple of one hundred million
immigrants over that time span and its native workforce will
drop by a couple of one hundred million. It's not
(32:32):
really out of balance, and a couple of one hundred
million over seventy five years is not enormous. And the
politics I think will shift is the one or two
countries that try and hold out with no immigrants start
to implode. Will There'll be a lot more talk on
this topic, a lot more study articles published. It'll become
(32:54):
pretty obvious pretty quickly that you need immigrants. Now where
are the immigran is coming from? In about forty five years,
at the current rate of drop, African fertility will be
about replacement two point one, So you have a window
of seventy five years or so if you can handle
the politics sensibly where it will be a potential help,
(33:18):
and after that not so much.
Speaker 2 (33:21):
Yeah, that's the other thing.
Speaker 1 (33:22):
Fertility rates in pretty much every country have persistently consistently
fallen faster than expected. Right, So when you give a
timeframe for when Africa will be at replacement rate, the
way things have worked out so far suggest it'll probably
be quite a lot sooner than that. Everything in population
seems to be happening faster than we expected.
Speaker 4 (33:42):
No, Africa actually has been dropping faster than Europe, but
people don't notice it because it's dropping from six point
five to four point two. But that gap of two
point three is faster. And if they maintain that rate,
which as you say, we think it's pretty likely, they
may very well get there in as little as forty
(34:04):
five years. And maybe it will be forty, maybe it
will be fifty, but it will be pretty quick, and
it will be a lot faster than most people realize.
Speaker 1 (34:11):
Now, So you need a much longer term solution to
population decline because it's at one point all populations will
be declining and there won't be the option to move
populations around the place to solve one dunts problem. So
that's a very temporary solution. And as we always say
in the UK, immigrants age two. So it's all very
(34:31):
well bringing in lots of people because you have an
aging society, but that generation also ages.
Speaker 2 (34:37):
You haven't solved your problem.
Speaker 4 (34:39):
No, you bore yourself some time.
Speaker 1 (34:42):
Yeah, you've put some time, but you still have to
find a way as a global population to deal with
the dynamics of low fertility and decline.
Speaker 3 (34:52):
There are two issues.
Speaker 4 (34:54):
One is we've created a toxic environment, so the fertility
rates are going to drop because of that, as they
have been doing, particularly for the last fifteen years, and
that will continue. There's no reasonable hope that we will
clean up the world fast enough to.
Speaker 3 (35:12):
Stop that for a few decades.
Speaker 4 (35:15):
Some areas like the EU are doing so well it
will eventually act as a break. And the other thing
is what I like to call as propaganda toxic capitalism.
We've created an anti natal culture and for whatever reason,
people quite reasonably have been given incentives not to have children.
(35:37):
It's a better life for them individually, often not to
have children, to have fewer children, and In the end,
we will only change the fertility rate by changing the stimuli.
So we have got to end up some time I
would guess at least a few decades from now, where
the culture has been changed to one of nurturing family
(36:00):
and two point one well educated, healthy children.
Speaker 3 (36:04):
That is a part of the commons.
Speaker 4 (36:06):
By the way, if you don't have two point one children,
humans go out of business pretty dim fast. And I
could show you some statistics how quickly it happens, much.
Speaker 3 (36:14):
Faster than you think. But you need it.
Speaker 4 (36:17):
Just like clean air, good soil, clean water. You need
two point one well educated, healthy children. And you have
got to end up with a system that gives you
all those four.
Speaker 1 (36:28):
It feel badine point one short, it feel guilty.
Speaker 4 (36:32):
Yes, we're point nine long, so okay.
Speaker 2 (36:36):
I'll get fine, thank you.
Speaker 1 (36:38):
So we're not already coming up with a solution here
already practical actions beyond changing the way we all live.
Speaker 4 (36:48):
The solution starts always is better than ninety nine percent
of the people with communications slash propaganda. You have got
to have people understand what the problem is before they
can solve it. And they do not understand it, they're
not even prepared to listen to it, and yet the
clock is ticket. We've got to persuade these people. This
is a problem. It is solvable. You have just got
(37:11):
to find a way of changing your incentives. Now you
can bully them as I'm sure they will pretty quickly
in China, so you can't get a house unless you're married, etc.
And then you can give them carrots and you can
say every child, you get not a silly little six
thousand dollars, but you get eighty thousand dollars, and you
(37:31):
get subsidized childcare. We look after your education of the children,
and we look after their health because everyone's benefit. You
can decide to have no children, but you're not going
to prosper if the world is cracking up around you
for lack of people, the infrastructure is collapsing around you.
I think you need a couple of dozen of these
(37:53):
cultural shifts that really make people feel that. They say
it takes a village, it takes the society to bring
up enough good, healthy children, And you've just got them
to change the general tone that people appreciate people having children,
recognize them as producing a good that they need.
Speaker 1 (38:15):
Jeremy, do you have any feelings on gold because that
looks to us like it might be the other bullmarket
of the coming ten years done it.
Speaker 4 (38:25):
Yes, I've always felt uncomfortable about gold because it doesn't
have a dividend, It doesn't produce anything in the end
other than it's a wonderful, handsome metal. And it does
have a tiny amount of industrial use, but for ninety
percent of it, one has to admit it's a speculative medium.
Now it has ten thousand years head start over bitcoin,
(38:51):
and it's absolutely indestructible. It is there, it's always going
to be handsome, it's always going to.
Speaker 3 (38:57):
Be slightly useful.
Speaker 4 (38:59):
So I'm comfortable with gold, but it is far better
to stack in your mattress than bitcoin.
Speaker 1 (39:07):
I think I have to agree with you on that
as well. There's too much agreement in this conversation. It
should be making us uncomfortable. Can I ask you one
last question? Is there a book you're reading at the
moment that you might recommend to our listeners?
Speaker 3 (39:19):
Yeah?
Speaker 4 (39:20):
Actually, James Galbraith, a son of Kenneth Galbraith, the famous
economist of the fifties sixty seventies. He has a book
that looks at economics more compatibly with the laws of physics,
the laws of nature, and entropy. I think it's called
(39:41):
entropy economics, or words to that effect.
Speaker 3 (39:44):
And it's brand.
Speaker 4 (39:45):
New, and it's only half a few weeks, and it
covers disturbingly large chunks of what I'm working on, some
of which I thought was come blindingly original until I
read it.
Speaker 3 (39:59):
And it's done.
Speaker 2 (40:01):
You can now you can just plagiarize that. It'll make
it a whole lot easier.
Speaker 4 (40:04):
Yeah, but it makes the point that economics has been
spectacularly incapable of dealing with the real world.
Speaker 3 (40:12):
It doesn't.
Speaker 4 (40:13):
It thinks you can do it with capital and labor
and productivity. And my ancient joke was, try making a
loaf of bread with just a baker and an oven.
You need wheat, and you need heat, you need energy,
and you need materials, and economics doesn't cover them. It
(40:34):
doesn't cover the fact that every material of the past
is finite. We mine it, we run out. No, no,
we don't. It's just a question of price.
Speaker 3 (40:45):
They say.
Speaker 4 (40:45):
It is a totally inadequate system for dealing with a
finite world. And you can't have compound growth on a
finite planet. Everybody knows that that's the laws of physics.
It doesn't work, and they have nothing to do with that.
So what we get there is lots of assumptions to
deal with the world that is simply not the real world.
(41:06):
And I'm very attached to the real world and i
don't want to see it get destroyed unnecessarily because of
the wrong assumptions by fifty years of economists. And James
Galbraith shares that view excellent.
Speaker 1 (41:19):
I'm going to order that and read it, and it
sounds like everyone else should as well. Jeremy, thank you
so much for being with us today. I really appreciate it.
Speaker 3 (41:25):
It was a real pleasure. Thanks for having me.
Speaker 2 (41:32):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (41:34):
If you like our show, rates, review, and subscribe wherever
you listen to podcasts, I keep sending your questions or
your comments to Merin.
Speaker 2 (41:40):
Money at Bloomberg dot net.
Speaker 1 (41:41):
You can also follow me in John on Twitter or
x I'm at Marinus w and John is John Underscore Steppe.
This episode was hosted by me Maren zumsep Web. The
show is designed by Samasadi and Moses and sound designed
by Blake Maples. As special thanks to Jeremy Grantham,
Bloomberg Audio Studios, podcasts, radio news. Hi there, Maren Talks Money. Listeners.
Just a reminder that as well as listening to this podcast,
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Do sign up that if you haven't already, and I
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Speaker 2 (00:23):
It goes with the pod.
Speaker 1 (00:24):
In this week's I've written about our conversation with Jawad
from last week. I've written about gold, I've written about
the energy transition, and I've written about the zeitgeist investment
of this decade ward is it? Is it the energy transition?
Is it defense stocks? Or is it just gold? Sign
up and the links below. Welcome to Meren Talks Money.
(00:50):
The podcast so much people who know the markets explain
the markets. I'm Maren zums that web. This week, we
welcome back to the show.
Speaker 2 (00:56):
Jeremy Grantham.
Speaker 1 (00:57):
Jeremy is the co founder of GMO and a member
of GMO's asset Allocation team, serving as the firm's long
term investment strategist.
Speaker 2 (01:04):
He's more than.
Speaker 1 (01:05):
Five decades of experience in investing and has earned a
reputation as a bubble hunter, quick to point out speculative excess.
Speaker 2 (01:11):
On Wall Street and beyond.
Speaker 1 (01:13):
So in our conversation we talk about where he sees
bubbles in the markets now, I mean, honestly, where aren't
there bubbles at the moment? Why we haven't seen that
correction in the market he's been predicting for a while,
as have we the green transition, and why he is
so bassionate about addressing population decline. Jeremy, thank you so
much for joining us again. We really appreciate it.
Speaker 3 (01:36):
It's so pleasure to be here.
Speaker 1 (01:37):
I know that there's many things that you and I
would both prefer to talk about, but we're going to
have to start with talking about the American dock market.
Last time you came on, you said, and I absolutely
agreed with you, that everything had run ahead of itself.
Valuations were too high and we should definitely expect although
we can't time when it might happen, a very serious
(01:58):
correction in the US market still hasn't happened. We keep
thinking it's going to happen. Various signs that they're stress
in the market, and for example, when the Deep Sikh
news came out, we looked that and we said that'll
be the end of the AI bubble, but no, it
never seems to end. It just keeps going. Has anything
changed in the way you look at that market.
Speaker 4 (02:19):
I've always looked at it from the point of view
that the longer and the bigger, and the higher it goes,
the more exciting and dangerous it will be. And this
has moved up the rank of superbubbles, but it's nowhere
near Japan, the mother and father of all superbubbles in
(02:41):
eighty nine, and it's nowhere near their real Estate bubble
of the same era. They're the two great super bubbles
of history, but a decent way behind. I think this
is in third place, ahead of nineteen twenty nine, just
and ahead of December twenty TI twenty one, which actually
(03:02):
met all the characteristics of a late stage super bowbl
and one really should have expected it to blow up,
and it did. Twenty two was a good blow up
across a lot of asset classes. But AI chat GBT
came to the rescue in November of twenty two, and
initially for ten months, dragged by the mag seven and
(03:25):
the rest of the market going down a little bit.
That kept going for about a year and then in
October November of twenty three, the market said this looks serious,
we better join in, and the breadth became positive and
had a perfectly decent twenty four. And the net result
(03:46):
is that every measure of traditional value, the best of
the common ones being Schiller pe is at a record,
and most of the ordinary ones are in the top
one or two percent. And the best one of all,
which is a variant of of total market cap to
total value added in the economy, that has this one
(04:11):
the highest of any in history.
Speaker 2 (04:12):
That's the buffet measure rate.
Speaker 4 (04:15):
It's a variant if you take out financials and you
tweak this, and you tweak that. Hussman has a good
variant of that, and they make it clear that this
has overtaken twenty nine and twenty twenty one and moved
into first place on the American record, still way behind
the Japan. And then Ben Inca at GMO and I
(04:37):
twenty five years ago did a behavioral model which says,
forget all the logic about the efficient market or how
it should work, and dividend discount models and all that,
just let's see what actually explains, and what has that
explained since nineteen twenty five and explained very well. Indeed,
is low inflation, the market loves it. High inflation it
(04:58):
hates margins. Of course, the market loves it. Growth rate
has no correlation at all, But stability of GDP growth
the market likes. And that's way in third place. So
the things that make a portfolio manager feel comfortable, that's
what decides what the PE will be. And even on
that model that had a nearly perfect record, the market
(05:20):
could drop fifty percent to get back to the normal
response of flaky human beings. The normal behavioral responses would
have this market at a perfectly respectable eighteen pe on Schiller.
And it's actually just over twice. It's thirty seven.
Speaker 1 (05:39):
And the argument that the introduction of AI and the
enormous progress that's been made there and the way that
AI is going to permeate through our economies and change
our lives as we know them, is a justification for
the market staying this high. Evaluations will grow into reality.
(06:00):
Your reality will grow into valuations. Should I say make
this level okay? That that doesn't resonate with you at all.
Speaker 4 (06:07):
This is the argument used for every important new technology.
Every really important new technology has had a bubble around it.
A classic example in the old days was the railroads,
where it was so obviously going to change everyone's life,
and it did so that everyone could see it clearly.
(06:27):
Everyone could put their money in it because they knew
it was going to change the world, and so they
started to build and design six railroad lines between Leeds
and Manchester, and of course there was an almighty crash
and everyone lost their shirts. It was one of the
more spectacular bus that didn't say that railroads weren't important,
(06:51):
or railways in Britain.
Speaker 3 (06:53):
They were incredibly important.
Speaker 4 (06:54):
They did change everyone's life, they did elevate GDP in productivity,
but they were so obvious that in the early stages,
of course they attracted everyone's capital and a bust. And
then you fast forward to the more recent example, and
that is the Internet. The Internet again was obviously going
to change everything, and it sucked in lots of money,
(07:17):
lots of pet dot coms and everything had a spectacular
blow up. And let me just focus on Amazon. Amazon
went up over a couple of years twelve fourteen times.
It was wonderful, and then when the market broke, it
dropped a spectacular ninety two percent. You can check this,
and Amazon went down ninety two percent, and then out
(07:40):
of the wreckage. It was one of the handful that
inherited the earth and gobbled up the retail market as
others gobbled up other things, and all the pet dot
coms got washed away. It's precisely the importance and the
obviousness of the importance. It guarantees a bubble, and very
few have been as obviously important as AI. It will
(08:03):
of course change our world. It is of course impossible
to know in what ways and whether it will be
entirely beneficial or not. And one day one suspects we
will end up with something like a world run by automatons, cyborgs,
whatever we want to call them. It may take three
(08:23):
hundred years, it may take fifty, and I lean towards
the three hundred, as long as civilization hangs together, which
is another big story we could discuss. But when you
get to that point, you have to always remember productivity produces.
It has no offsetting consumption. So the way to think
(08:45):
of that is just skip right to the end. One
hundred percent cyborgs, no workers. What happens to demand? The
answer is, of course, the whole system is totally unbalanced.
There's no demand and therefore there's no need for the
cyborgs production unless you take the value that the cyborgs
are producing and pass it through to the average people.
(09:09):
So you have to have a very decent guaranteed minimum wage,
and as long as you do that, everything balances. And
in the old days, by the way, from nineteen thirty
five to seventy five, the productivity was three percent, and
the rich people got richer by three percent a year,
and the poor people got richer by three percent a year,
and everybody was happy as a clam. And that turns
(09:31):
out to be from economics and social point of view,
the golden era, and then from nineteen seventy five, particularly
in the US, all of that productivity, which dropped from
three percent to say two and a half and then
to two all went to the top ten percent one percent.
The average worker hardly made any progress of all since
nineteen seventy five for an hour worked, and that of
(09:53):
course generates a lot of disgruntlement and complications, which we
see everywhere really including the US. Despite our brilliant stock market,
the underlying frustration is very high, and the same in Europe.
And how that manifests itself is you vote against the
party in power, doesn't matter whether it's right wing like
(10:14):
the Conservatives in the UK, doesn't matter if it's left
wing as in France and so on. You kick them
all out, and you kick them out. It's a manifestation
of the fact there's a very high level of disappointment
amongst the broad band of workers. They're simply not doing
as well as they expected, not doing as well as
their parents did.
Speaker 3 (10:32):
Sorry, long answer, It.
Speaker 2 (10:33):
Was a long answer, but it was a good one,
thank you.
Speaker 1 (10:35):
So that rather suggests that a successful adoption of AI
needs a huge level of government input.
Speaker 4 (10:42):
If the government does not smooth out the benefits of AI,
you will have either starvation or revolution.
Speaker 1 (10:51):
So it's interesting, isn't it, because we feel like we're
moving into an era, particularly perhaps in the US, where
smaller government is valued over big govern which I would
generally agree with that a smaller government might be better
than an overbearing government. But your suggestion is that as
we move into an AI era, if the government doesn't
take huge steps to well redistribute, it won't work.
Speaker 4 (11:13):
And by the way, that doesn't take much government. You
could have a few hundred people tucked away in DC,
making sure that income is redistributed. That's not the part
of government that chows up all the workers. It's pretty straightforward.
You have a high minimum requirement to keep people alive
(11:35):
and to keep people reasonably content away from the barricades
in the high street.
Speaker 1 (11:41):
Okay, so let's go back a little bit to the market.
I can feel we're heading off on tangents. We both
want to go down, but we've got to deal with
the core first. Is there any part of the US
market where you would feel safe? Obviously we would agree
that the AI stocks, AI adjacent stocks, tech in general
is very overvalued, but it's not necessarily the case across
the board. So if you wanted to stay in the
(12:02):
US and on this huge part of the investing community,
they find it very difficult to think at all about
leaving the US market or even rebalancing away from the
US market if they were to stay in it.
Speaker 2 (12:14):
Is there any.
Speaker 1 (12:14):
Sector, any part of it where you would say you'll
probably be okay if you stick with that.
Speaker 3 (12:19):
Yes.
Speaker 4 (12:19):
Obviously the future for greening the economy is going to
be a long and bumpy one. But physics cannot be
bullied away into hiding, and four years is only four years.
But the remorseless damage that we have all seen in
the last two years, the escalation of fires, floods, just sensational,
(12:43):
obvious to everybody except one or two percent who are
blinded by political beliefs. I would say that will just
march on if we do not solve that. The civilization
as we know it fails. How long it will take
is almost anybody's get But it's happening pretty fast, pretty remorselessly,
and we have to fix it. I think we probably
(13:05):
will fix it. And to do that to green the
entire global economy is a massive, challenging job that will
take lots of investment, lots of workers.
Speaker 3 (13:18):
And it will be done.
Speaker 4 (13:19):
I think since the psychology has smashed these stocks down,
and since the logic of the physics is inevitable, unlike
most things in the stock market, I would say that
is an area that we'll have sooner or later a
massive regrouping and a huge outperformance of the rest of
the market.
Speaker 3 (13:39):
Secondly, I believe.
Speaker 4 (13:41):
That the wider environment that we will get to talk
about is much deteriorated, and that we will have to
get used to many more short shocks to the system,
and many more big shocks to the system than have
characterized the last seventy five years. In that environment, you
(14:01):
do not want to be caught with a lot of leverage.
Leverage is going to be light the nineteen thirties. Leverage
is just going to take you out of business. You
have to be able to withstand shocks unexpectedly arriving, and
to do that you need no little or no debt.
And secondly, if you want to survive, you want to
have decent profit margins to give you some resilience. Marginal
(14:25):
Company's Cheap at Hell in nineteen twenty nine did not
outperform the Coca Colas, who were brutally expensive. The Coca
Colas went down seventy five percent, but the very cheap stocks,
the number seven, eight, nine, automobile companies and so on,
they all went out of business, and the ones that
survived went down ninety six percent. And when you're starting
(14:47):
from four out of one hundred, to go back and
catch up the Coca Colas, who are still at thirty,
you have to go up six or seven times just
to get back in the game. The thirties was a
pretty good ultimate room that things are cheap, usually for
a pretty good reason, so you have to tread carefully.
If you're going to play the cheap game, you've got
to make sure it is armor plated with high with
(15:10):
as much quality as you can get into it.
Speaker 1 (15:14):
Can I take you back to what you were saying
about the green transition and greening the economy, etc. Even
if you put aside the next four years and what
might or might happen around your noble energy and climate
change during that during the Trump period, it is still
the case that the national grid in the UK, across Europe,
the electricity grid everywhere and including in the US, still
(15:36):
has to be massively upgraded and massively improved because of AI.
Speaker 2 (15:41):
So even if you were to put aside.
Speaker 1 (15:44):
The discussion about climate change at the moment, it still
seems that there's a lot of scope for that build
out to be a good area to be invested in.
Speaker 4 (15:52):
Yeah, I think AI will improve all the aspects of
the economy that you're trying to improve. So it's very
helpful for green tech in general. The problem is it
helps everybody, and so you have to ask yourself a question,
is this society acting quickly enough in general, or is
(16:16):
it heading towards the cliff just simply moving too slowly,
protecting its corporate profits too much, and allowing the carbon
count and the methane count to just rise too high,
and seeing tipping points any minute now as tundrad melts,
and so on and so forth. And I think the answer
is we're not looking too good. And what AI does
(16:38):
is accelerates and makes more efficient the process that you're on.
And unless we're lucky, what that will mean is that
the system will run quicker and more efficiently towards the
cliff edge. And for every one item that you improve,
there will be the usual five in the current system
that are improving to make more and better useless consumption goods.
(17:03):
And we see this, by the way, in the inordinate
increase in electric demand and the coal and gas that
goes with that around the world in order to fuel AI,
along with those other cryptocurrency dangers.
Speaker 2 (17:18):
We might come to that later.
Speaker 4 (17:20):
Finally, after decades of moderate, actually flat use of electricity
is now not only rising rapidly, but predicted to rise
steadily and rapidly into the future because of AI and cryptocurrencies.
Speaker 1 (17:36):
But it was rising before the whole AI boom electricity
demand had started to rise the result of the electrification
of various things as a result of the attempt to decarbonizers.
Speaker 2 (17:46):
It was already happening.
Speaker 4 (17:47):
Prey hardly, and if you took out cryptocurrency, it was
most drifting outwards. And now no one would accuse it
of drifting outwards.
Speaker 2 (17:57):
No, definitely not drifting.
Speaker 1 (17:58):
Let's look if we can about other stock markets, and
now I said earlier that the lot of investors find
it difficult to imagine moving any waiting out of the US,
but there has actually been a shift towards Europe this year,
and there's also a growing discussion about the cheapness of
China and whether this might finally be the time to
invest in the Chinese stock market. Do you have any
positive feelings towards any other global like CAREW markets.
Speaker 4 (18:22):
I have had no argument with the non US markets.
They've been reasonably priced, perhaps a little overpriced most of them,
but nothing much for a long time, and they still are.
Of course, they are much less dangerous to own, and
they will very likely over five or ten years, crush
(18:46):
the US market, as has happened several times.
Speaker 3 (18:48):
That's how it happens.
Speaker 4 (18:49):
The US market will have a great decade, and then
fire markets will have a great decade and close the
gap a bit. And that's what will happen this time. Sure, Now,
will they be sympathetic in a major decline in the US,
which I suspect is waiting for us. Yeah, they can
be sympathetic. My just to remind you of how untidy
(19:12):
the world is, the emerging markets with a volatility one
point three times the market. In two the third year
of the decline, the S and P went down twenty
two percent. This was not pleasant for a third down
year in a row, and you might have expected emerging
markets to go down thirty but they.
Speaker 3 (19:29):
Went down two.
Speaker 4 (19:30):
They were just about flat, and a twenty point out
performance like that on the downside is completely a reflection
of different values. It does happen, and it probably will happen.
They will probably be sympathetic, and there will be periods
when they drop quite frighteningly to show sympathy. But in
between they will regroup, and they'll regroup faster, and after
(19:52):
the passage of a decent time, they will be way ahead.
I am very confident putting time on these. As we've
always discussed, it's pretty much impossible. But to go back
to the main event here, the longer and the higher
they climb, the worse it is. And we were hanging
out with a zero weight in Japan for three years
(20:14):
as it went from forty five times earnings to sixty five.
That is a whole lot worse than the US it's today,
And what was the price they paid? That was a
unique event, and they uniquely suffered for it. They spent
twenty years getting to a low, and they became a
cheap country. From sixty five times earnings, they became a
(20:38):
cheaper one.
Speaker 1 (20:38):
When twenty years is extraordinary, isn't it. If you were
to sit down with any major investor at the moment
and say there's a distinct possibility that the US market
will fall by that amount and it'll take twenty years
for you to be evans, no one will accept.
Speaker 4 (20:52):
That, absolutely, not than they never have and they never will.
Doesn't mean it hasn't happened every time we've had a
major bubble light now eighteen twenty nine, even in nineteen
seventy two and two thousand and the housing bubble. The
housing bubble, by the way, was a bigger bubble than
the current US stock market. Statistically, it was very impressive.
(21:13):
There'd never been a national bubble like that. Housing used
to crash in California while it bubbled in Chicago, but
that was the first time it did it, and that
made it a real outlier statistically.
Speaker 1 (21:26):
I remember being told over and over again during that
bubble that American house prices had never fallen and they
never would.
Speaker 4 (21:33):
And by the way, Bananke said that, yes, the US
house prices had never declined, and to which I wrote
in a quarterly letter, but they had never bubbled before,
and whenever anything has bubbled, it has always declined, and
of course it did. It was very well behaved, the
housing bubble. It declined in three years exactly what it
(21:54):
had gone up in three years, much to the cost
of some poor unfortunates who got sucked into the housing
market for the time.
Speaker 2 (22:00):
Yeah.
Speaker 1 (22:01):
No, that hurt an awful lot of people, and actually
this current bubble may have hurt an awful lot of people.
Maybe not in the same way because most people won't
be leveraged into it, but nonetheless there's an entire generation
of people who now believe in this, as is the
case in every bubble, that what they've done is brought
into a sure thing.
Speaker 2 (22:17):
So there is a lot of disappointment.
Speaker 4 (22:19):
I heard right, Yeah, my cryptocurrency for one, which is
now four trillion dollars.
Speaker 1 (22:25):
When you talk about cryptocurrency, are you talking about bitcoin
or are you talking about currencies as a whole, And
do you make a division between the two.
Speaker 4 (22:32):
I was talking about all of them added together. But
none of them produce anything, and none of them are
a medium of exchange materially, but they are a wonderful
speculative medium. And with the stimulus program of Biden and COVID,
three trillion dollars to play with in a system that
(22:54):
had never had that kind of money locked up at home,
nothing to do but learn how to speculate, and learning
to speculate, it's pretty darn easy. You just buy what's
moving and what everyone is shouting about. And I did
that myself as a young man, and made a quick
fortune in the two years out of business school, enough
to buy a couple of nice houses without a mortgage.
(23:17):
I know, but I didn't buy the houses. I bought
silly sucks that all blew up. And we went from
that equivalent, which today would be two million dollars a
million dollar house in the suburbs of Boston.
Speaker 3 (23:31):
Et cetera.
Speaker 4 (23:32):
And we went back to twenty thousand and with that
nest egg that I had, I had the courage to
start a business with a partner in the investment business
because I could live on my loot, which I managed
to lose so quickly that even before we got our
office set up, I had lost it.
Speaker 2 (23:49):
And you still managed to get some clients. It's a merror.
Speaker 4 (23:52):
We didn't actually get any clients for quite a while,
but it did, of course teach me a very powerful
lesson that even in my own account, on the frivolosand
speculating and crazy stuff.
Speaker 3 (24:04):
But it was not a great idea.
Speaker 4 (24:06):
So I reverted to my Yorkshire roots of waste not,
want not and value for money big.
Speaker 2 (24:11):
Time, and that's worked out pretty well.
Speaker 4 (24:13):
But to be slapped around the head by the way,
dear listener, when you're still young and don't have that
much money to lose, is a terrific idea, rather than
having it happen to you when you get carried away
at safety when you're about to retire, as it can
be brutal.
Speaker 1 (24:28):
Let's let's not get let's not worry too much I
can feel myself getting stressed about all the people who
may find themselves in a difficult situation as your correction comes.
So let's move on to talk about other difficult things.
One of the things that I know you think about
a lot of we were talking about earlier is population dynamics.
And we say in the world of journalism that you
must never ever write about demographics. Never, because if you
(24:51):
write about demographics, everything becomes clear, and then you can't
write any more columns. Once you've written the demographic demographics column,
you have the answer, and then you're stuffed after that,
you can't write enough column Now you're looking at the
way that population is changing around the world, and that's
giving you a sense of the future as well.
Speaker 4 (25:08):
Right, Yeah, First of all, let me say I didn't
know that was the watchword in journalism, but certainly my
colleague and I have discovered that it's the same in
the financial world. I've had a pretty decent following for
twenty five years. When I write a quarterly letter, people
have tended to refer to it. And this was the
(25:30):
first paper we produced very well researched. I thought it
took a lot more time and effort and we dropped
it into the black hole. Nobody even acknowledged that it
had been posted, and for a few months it sent
me into a bit of a kind of psychological funk.
But what has happened is why you're describing people don't
want to hear about certain topics and declining population and
(25:54):
their consequences and why the population is declining. These are
not topics people want to talk about. It makes them
profoundly uneasy, and they wish you'd shut up and write
about something else. That's exactly having said that, Yeah, so
I see it as the fastest moving potential threat out there.
And how we're going to try and make the point
(26:15):
felt is try and relate it more to the short
term mentality, which is, dudes, you'd better realize that a
declining workforce is bad for economics, really bad. And it
turns out not just to be bad directly. Fewer hours
come straight off GDP. If you're growing at one and
(26:37):
a half percent a year, in which they were when
I arrived in America in the sixties, and then you
go down to minus a half a percent, which they
have done in Europe for the last fifteen years. It
has averaged a little shy of minus half a percent.
That's a two percent drop that comes straight off your
(26:59):
GDP growth. But secondly, we stumbled across the thought that
those societies with falling workforces will find they're working in
a lower productive world. So if you run a correlation
which we've just done, with the decline in the workforce
(27:20):
on one side and productivity per capita on the other,
you find there's a positive correlation between a decline in
the one and a decline in the other, and it's
aboutzero point three, which means you can see it pretty
easily as you plot the countries across the chart, the
ones that have the better population have the better productivity.
Speaker 1 (27:40):
Can I interrupt you briefly there to say that, to me,
that's completely counterintuitive because I would have expected in a
falling working population there being an imperative for productivity improvement.
And as one of the conversations has been had in
the UK for some time now, is it the case
that because we have so much cheap labor available, or
(28:00):
have done over the last couple of decades because of
our migration policies. Is it that availability of cheap labor
that has meant that our productivity has been so bad,
and if we restrict that, or if we make labor
more expensive, for example with their rich or Reece's most
recent increase in employer nancial insurance, will we see an
improvement in productivity if we tighten the labor market. And
(28:23):
so I'm surprised that it's that way round, because I
would have expected it to be the opposite.
Speaker 4 (28:29):
Economics being complicated, It may very well be in certain situations,
if you tighten the labor market, you will increase the productivity. Okay, granted,
the problem here is the reason I believe the productivity
drops is mainly what Caines would call animal spirits.
Speaker 3 (28:49):
If you are.
Speaker 4 (28:52):
Living in a world where you see children basically becoming
scarce behind you, Kindergarten's closing Grammars goals, closing applications to
college dropping rapidly you start, it starts to affect you
a bit, and as you get into the corporate system,
it's not expanding rapidly. Promotions are not anywhere near where
(29:15):
they were thirty forty years ago, not as rapid. The
thing is constant tinering downwards, and you become less aggressive,
less willing to borrow money, less willing to get into
a venture capital situation. Why wouldn't you be Why wouldn't
you be more dynamically thinking in an economy expanding rapidly
(29:36):
than you are when you're and you're not used to it,
And managing downwards in an economy is brutally difficult. As
you speak to the guys running Detroit sort of thing,
or Japan, it's much more difficult. It is falling off
a log to manage for growth. Capitalism does it in
its sleep, But when you're declining, you have a situation
(29:58):
where there are ten shops and four of a shut it.
What is it like for the other six any industry
where people are going out of business because they're over capacity?
What is it like for profit margins to have too
much capacity? To have one industry, one major company flailing
at the edge to stay alive. It inflicts wounds on everybody.
Speaker 3 (30:19):
And it's very.
Speaker 4 (30:20):
Easy to see how managing downwards is a tough business.
When you close a railroad station, how do you downsize this,
that and the other. This is not a happy go
lucky society, and as a consequence, I think people become disappointed.
And we've seen in America how easy it is to
have a society go from quite a brilliant to an
(30:41):
optimistic to disappointed. When you're disappointed, you're disgruntled, and when
you're disgruntled, you vote against the party in power. And
all over Europe for the last three years we've seen
a very consistent, unprecedentedly consistent move against the party in power,
doesn't matter whether it's right wing or left wing. Kick
the fellows out. And in point of fact, Biden had
(31:04):
a smaller swing against the party then by a decent
margin than the average European election for the last dozen
which is an interesting subtopic in itself. Anyway, So you
become discouraged, it's bad for productivity, it's bad for everything.
Kane's made the point that you could line up all
(31:25):
your economic stimuli, everything a wonderful plan. But if for
whatever reason people became pessimistic, they sat on their money
and they did not spend. Your toast said, do you
very quickly fall into a major recession or a depression,
which he experienced.
Speaker 1 (31:43):
And animal spirits, as you say, disappear completely Okay, So
how reversible is this? We can see, as you say,
across Europe, population is declining. Fertility rates in particular, fertility
rates fully, almost bizarrely fast, and we see that in
the UK as well, and you can, of course, you
can mitigate that with migration, but is that a long
term solution or not. It doesn't appear that the populations
(32:06):
of post European countries consider it to be an acceptable
long term solution.
Speaker 4 (32:11):
If you see the long term battle plans to twenty
one hundred, which I was looking at yesterday, Europe is
not going to be necessarily a basket case on population
because it will have a couple of one hundred million
immigrants over that time span and its native workforce will
drop by a couple of one hundred million. It's not
(32:32):
really out of balance, and a couple of one hundred
million over seventy five years is not enormous. And the
politics I think will shift is the one or two
countries that try and hold out with no immigrants start
to implode. Will There'll be a lot more talk on
this topic, a lot more study articles published. It'll become
(32:54):
pretty obvious pretty quickly that you need immigrants. Now where
are the immigran is coming from? In about forty five years,
at the current rate of drop, African fertility will be
about replacement two point one, So you have a window
of seventy five years or so if you can handle
the politics sensibly where it will be a potential help,
(33:18):
and after that not so much.
Speaker 2 (33:21):
Yeah, that's the other thing.
Speaker 1 (33:22):
Fertility rates in pretty much every country have persistently consistently
fallen faster than expected. Right, So when you give a
timeframe for when Africa will be at replacement rate, the
way things have worked out so far suggest it'll probably
be quite a lot sooner than that. Everything in population
seems to be happening faster than we expected.
Speaker 4 (33:42):
No, Africa actually has been dropping faster than Europe, but
people don't notice it because it's dropping from six point
five to four point two. But that gap of two
point three is faster. And if they maintain that rate,
which as you say, we think it's pretty likely, they
may very well get there in as little as forty
(34:04):
five years. And maybe it will be forty, maybe it
will be fifty, but it will be pretty quick, and
it will be a lot faster than most people realize.
Speaker 1 (34:11):
Now, So you need a much longer term solution to
population decline because it's at one point all populations will
be declining and there won't be the option to move
populations around the place to solve one dunts problem. So
that's a very temporary solution. And as we always say
in the UK, immigrants age two. So it's all very
(34:31):
well bringing in lots of people because you have an
aging society, but that generation also ages.
Speaker 2 (34:37):
You haven't solved your problem.
Speaker 4 (34:39):
No, you bore yourself some time.
Speaker 1 (34:42):
Yeah, you've put some time, but you still have to
find a way as a global population to deal with
the dynamics of low fertility and decline.
Speaker 3 (34:52):
There are two issues.
Speaker 4 (34:54):
One is we've created a toxic environment, so the fertility
rates are going to drop because of that, as they
have been doing, particularly for the last fifteen years, and
that will continue. There's no reasonable hope that we will
clean up the world fast enough to.
Speaker 3 (35:12):
Stop that for a few decades.
Speaker 4 (35:15):
Some areas like the EU are doing so well it
will eventually act as a break. And the other thing
is what I like to call as propaganda toxic capitalism.
We've created an anti natal culture and for whatever reason,
people quite reasonably have been given incentives not to have children.
(35:37):
It's a better life for them individually, often not to
have children, to have fewer children, and In the end,
we will only change the fertility rate by changing the stimuli.
So we have got to end up some time I
would guess at least a few decades from now, where
the culture has been changed to one of nurturing family
(36:00):
and two point one well educated, healthy children.
Speaker 3 (36:04):
That is a part of the commons.
Speaker 4 (36:06):
By the way, if you don't have two point one children,
humans go out of business pretty dim fast. And I
could show you some statistics how quickly it happens, much.
Speaker 3 (36:14):
Faster than you think. But you need it.
Speaker 4 (36:17):
Just like clean air, good soil, clean water. You need
two point one well educated, healthy children. And you have
got to end up with a system that gives you
all those four.
Speaker 1 (36:28):
It feel badine point one short, it feel guilty.
Speaker 4 (36:32):
Yes, we're point nine long, so okay.
Speaker 2 (36:36):
I'll get fine, thank you.
Speaker 1 (36:38):
So we're not already coming up with a solution here
already practical actions beyond changing the way we all live.
Speaker 4 (36:48):
The solution starts always is better than ninety nine percent
of the people with communications slash propaganda. You have got
to have people understand what the problem is before they
can solve it. And they do not understand it, they're
not even prepared to listen to it, and yet the
clock is ticket. We've got to persuade these people. This
is a problem. It is solvable. You have just got
(37:11):
to find a way of changing your incentives. Now you
can bully them as I'm sure they will pretty quickly
in China, so you can't get a house unless you're married, etc.
And then you can give them carrots and you can
say every child, you get not a silly little six
thousand dollars, but you get eighty thousand dollars, and you
(37:31):
get subsidized childcare. We look after your education of the children,
and we look after their health because everyone's benefit. You
can decide to have no children, but you're not going
to prosper if the world is cracking up around you
for lack of people, the infrastructure is collapsing around you.
I think you need a couple of dozen of these
(37:53):
cultural shifts that really make people feel that. They say
it takes a village, it takes the society to bring
up enough good, healthy children, And you've just got them
to change the general tone that people appreciate people having children,
recognize them as producing a good that they need.
Speaker 1 (38:15):
Jeremy, do you have any feelings on gold because that
looks to us like it might be the other bullmarket
of the coming ten years done it.
Speaker 4 (38:25):
Yes, I've always felt uncomfortable about gold because it doesn't
have a dividend, It doesn't produce anything in the end
other than it's a wonderful, handsome metal. And it does
have a tiny amount of industrial use, but for ninety
percent of it, one has to admit it's a speculative medium.
Now it has ten thousand years head start over bitcoin,
(38:51):
and it's absolutely indestructible. It is there, it's always going
to be handsome, it's always going to.
Speaker 3 (38:57):
Be slightly useful.
Speaker 4 (38:59):
So I'm comfortable with gold, but it is far better
to stack in your mattress than bitcoin.
Speaker 1 (39:07):
I think I have to agree with you on that
as well. There's too much agreement in this conversation. It
should be making us uncomfortable. Can I ask you one
last question? Is there a book you're reading at the
moment that you might recommend to our listeners?
Speaker 3 (39:19):
Yeah?
Speaker 4 (39:20):
Actually, James Galbraith, a son of Kenneth Galbraith, the famous
economist of the fifties sixty seventies. He has a book
that looks at economics more compatibly with the laws of physics,
the laws of nature, and entropy. I think it's called
(39:41):
entropy economics, or words to that effect.
Speaker 3 (39:44):
And it's brand.
Speaker 4 (39:45):
New, and it's only half a few weeks, and it
covers disturbingly large chunks of what I'm working on, some
of which I thought was come blindingly original until I
read it.
Speaker 3 (39:59):
And it's done.
Speaker 2 (40:01):
You can now you can just plagiarize that. It'll make
it a whole lot easier.
Speaker 4 (40:04):
Yeah, but it makes the point that economics has been
spectacularly incapable of dealing with the real world.
Speaker 3 (40:12):
It doesn't.
Speaker 4 (40:13):
It thinks you can do it with capital and labor
and productivity. And my ancient joke was, try making a
loaf of bread with just a baker and an oven.
You need wheat, and you need heat, you need energy,
and you need materials, and economics doesn't cover them. It
(40:34):
doesn't cover the fact that every material of the past
is finite. We mine it, we run out. No, no,
we don't. It's just a question of price.
Speaker 3 (40:45):
They say.
Speaker 4 (40:45):
It is a totally inadequate system for dealing with a
finite world. And you can't have compound growth on a
finite planet. Everybody knows that that's the laws of physics.
It doesn't work, and they have nothing to do with that.
So what we get there is lots of assumptions to
deal with the world that is simply not the real world.
(41:06):
And I'm very attached to the real world and i
don't want to see it get destroyed unnecessarily because of
the wrong assumptions by fifty years of economists. And James
Galbraith shares that view excellent.
Speaker 1 (41:19):
I'm going to order that and read it, and it
sounds like everyone else should as well. Jeremy, thank you
so much for being with us today. I really appreciate it.
Speaker 3 (41:25):
It was a real pleasure. Thanks for having me.
Speaker 2 (41:32):
Thanks for listening to this week's Marin Talks Money.
Speaker 1 (41:34):
If you like our show, rates, review, and subscribe wherever
you listen to podcasts, I keep sending your questions or
your comments to Merin.
Speaker 2 (41:40):
Money at Bloomberg dot net.
Speaker 1 (41:41):
You can also follow me in John on Twitter or
x I'm at Marinus w and John is John Underscore Steppe.
This episode was hosted by me Maren zumsep Web. The
show is designed by Samasadi and Moses and sound designed
by Blake Maples. As special thanks to Jeremy Grantham,
Host
Merryn Somerset Webb
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