Jeremy Grantham Says No One Should Invest in the US

In 2021, Jeremy Grantham was telling anyone who would listen that global asset markets were in one of the biggest bubbles of all time—and that a reckoning was coming. That reckoning, he says, began the next year.

The co-founder of GMO LLC says that, while this reckoning recently took a break, it’s now back with a vengeance. Grantham joins this week’s episode of Merryn Talks Money to make the case that—as a result—no one should be invested in the US. In particular, he warns of the Russell 2000, with its high level of zombie companies and horrible debt levels. He calls it “the most vulnerable area” to rising rates. 

See omnystudio.com/listener for privacy information.

Episode Transcript

Speaker 1 (00:00):
John Man.

Speaker 2 (00:01):
Isn't it nice when something we've been predicting for ages
finally happens. When I say nice, I mean kind of
intellectually satisfying. I supposed to actually nice when it comes
to this week.

Speaker 1 (00:12):
Yeah, yeah, I was saying intellectually satisfying watching the kind
of great bonding and busting of the Boind bubble, which
could have actually, I suppose very massy. Consequences are low.
Thankfully so far it doesn't seem to be having that
many because.

Speaker 2 (00:33):
What you means so far, it's been a couple of days.

Speaker 1 (00:37):
Yes, I know that it's happening, and I'm kind of worried.
That's the problem.

Speaker 2 (00:41):
You know, for context, You've written about this in your
news letter and everyone should read your money distilled on this.
What's it called? What one?

Speaker 1 (00:46):
It's the Boind market was in a bubble nose Boston?
Or was it the Boind bubble?

Speaker 2 (00:52):
Okay?

Speaker 1 (00:53):
There, Basically there's a Boind bubble.

Speaker 2 (00:56):
There's a bond bubble. It's ending. It's so you know,
yield yields gone to high as we haven't seen for
ages across the board. Everything. You can't blame less trust
because she's got nothing to do with Germany or the
US as far as we know. So we're seeing bond
jail's going up everywhere. That's got consequences for so many things.
Is almost ridiculous. But of course one of the one
of the consequences, of course is for governments, because this

(01:18):
means that their debt payments go up and up and up.
We already know that across the developed world debt to
the GDPs is one hundred percent plus, you know, up
from seventy to eighty percent and eight. So you know,
this is this is massive. When your interest costs go
up on that, you're in a lot of trouble.

Speaker 3 (01:33):
What do you cut? Well, this is it.

Speaker 1 (01:35):
And the problem is so the same time, I mean,
I suppose we're seeing it here at the moment, like
everyone's there talking about growth, growth, growth, But at the
same time, it's kind of like, well, yeah, but we
have to cut everything at the same time. And I
mean with her I kind of serious kind of overhaul
of the actual structure of this date, which is probably
something we're talking a bit to do. But you know,

(01:57):
all of this the hopes that by say canceling HS two,
we can spend that money there. It's all kind of
dancing in the edge of the volcano. Because everything every
kind of country has got this massive can addate to
GDP problem. It's kind of a matter of, well, how
is that going to end up resolving itself? And I

(02:19):
think that's why we're going to have to have a
lot of inflation in the future, because that kind of
is the only way to resolve it.

Speaker 2 (02:25):
We have a lot of inflation. Rates stay high, and
if rate stay high, that's got consequences for every single
asset class that has sowed on the back a very
low rates. And we might have seen we might have
seen markets fall from their highs, but they're still way
too high relative to this level of bondy alderm. That
goes for property markets across the board, equity markets across
the board, all that private equity or that venture capital

(02:48):
anything I haven't mentioned yet that's in trouble.

Speaker 1 (02:51):
No, but I guess I mean this is there's kind
of two problems. I think when is the kind immediate
problem of those government dat basically setting every word based
on various assumptions, the assumption that it's safe, the assumption
that only goes up, the assumption that is constantly highly liquid,
and it's kind of embedded in an awful lot of

(03:13):
financial models and in an awful lot of financial structures.
So that's the the immediate body. And that's when people
are talking about something breaking, that's what they mean.

Speaker 2 (03:23):
Well, remember that this is our you know, our defined
benefit pension systems are shot through with the government debt
and with bonds in general. And I wrote this week
about the cautious portfolio that every wealth man offer you
and the Adriginal sixty forty again, you know, very heavily
fixed income, and everyone believes that that's safe. This is

(03:44):
not safe. And the idea that a bond bear market
can last for a long time, it's something that everyone
is completely forgotten, despite the fact there was a thirty
five year bond bear market after the war. In fact,
if you look at the decades in which bonds have
not been in a bear market, depending on how you count,
it's like if you're than the ones when they've being
in a bull market.

Speaker 1 (04:02):
Yeah, I mean, you know what I mean.

Speaker 3 (04:04):
Yeah, No, you're right.

Speaker 1 (04:05):
The Deutsche Bank study came out the other day and
it was something like six or not something like eight
in ten of the decades in the twentieth century Gilts
actually lost your money in real terms, and you know,
giving it we think it's a safe facet. You kind
of like, well where did where did it get that reputation? Yeah,
I mean that is and also I mean I suppose

(04:25):
we've also seen a bit of a massive failure of
the collective imagination over the past couple of years, because
no one thought that bond yields could get to where
they are now like six months ago. I mean, yeah,
let's not brag, but yeah, so it's kind of you

(04:46):
can see why everyone's scared. But that goes back to
the second point, which is the longer term problem. So
it's not just about stuff blowing up. It's about the
fact that we're now moving into a kind of environment
for the long run where inflation is going to continue
to be an issue. And so that means that all
the assumptions we're making for the past forty odd years
have kind of flipped on the head, which is something

(05:09):
everything's going to have to get used to it, which
means probably the markets will be a lot warbliered as
well a.

Speaker 2 (05:14):
Lot of volatility. Yeah, oh so so exciting. Now listen, John,
on a more helpful note. We've decided, haven't we to
always have a personal finance tip of the week. Yes, yeah,
we've got one.

Speaker 1 (05:27):
Still only the jungle law.

Speaker 2 (05:29):
Yeah, I'm hoping you're going to come up with that.

Speaker 1 (05:31):
I'm working on it. I'm working on it.

Speaker 2 (05:33):
John's going to either sing or play an instrument next
week to introduce the personal finance Tip of the week. Now,
as an I'm torn on personal finance tip of the week.
There are two things that are quite important at the moment. Well,
it's one thing that's very important, and that's our property market,
falling property prices, paralysis in exchanges. You know that there
just isn't that much going through Chaine, the back change,
the back. There's a house on my strap that has

(05:55):
just sold or come close to. Somebody's depended on a chain.
There as so many links that can fall through. Things
can go wrong. And I didn't even know that this existed.
But I've recently been reading about insurance that you can
buy to protect yourself from a collapsing house purchase, and
that seems to me like not a bad idea. I'm
not a great one for buying pointless insurances, but you
can spend a lot of money on getting into the

(06:18):
zone of buying a house, and if it then falls through,
you can be seriously out of pocket. You do that
three or four times, even twice, your deposit is seriously impacted.
So is it worth spending? And these insurances seem to
cost KD of sixty eighty quid? Is that something worth
looking at? I wonder if it might be.

Speaker 1 (06:32):
Definitely what's looking any because if you can easily share
it a look like a couple of grind whenever you're
looking to buy a host and things like selves and
or so if it's all in league and a sexty
or something you quite, that probably sayings worth it.

Speaker 2 (06:45):
The other thing I want people to look at at
the moment is the offset mortgage. You and I remember
the offset mortgage because we're getting old. There was we
remember it that we remember another day, long long ago
when interest rates were not zero, when if you had
savings you could offset them against the day on your
mortgage and that would bring down your mortgage payments every month,
and it was kind of useful. It's time to look
at those again. If you've got a mortgage and you've

(07:07):
got savings, go have a look at some of the offsets.
They're pretty useful, excellent tips. Welcome to Meren Talks Money,
the podcast in which people who know the markets explain
the markets. I'm merin Sumset Web. This week our guest
is Jeremy Grantsam, co founder of investment firm GMO. Grantham
is well known for his analysis of bubbles and for

(07:27):
his parish forecasts that have come at pretty useful times,
such as in two thousand and two thousand and eight.
In our conversation, we talk about where valuations are, where
we expect the market to go, and why this has
been one of the greatest bubbles of all time. Jeremy,
thank you so much for joining us today.

Speaker 3 (07:44):
That's a pleasure.

Speaker 2 (07:46):
Now, last time we talked, which was just over two
years ago, it was the end of twenty twenty one.
Later middle of aug was twenty twenty one. I think
you and I had a conversation where we talked about
how we were in one of the greatest bubbles in
financial history, which seemed pretty obvious to you and actually
pretty obvious to me at the time, not so obvious
to everybody else. Out with some other people, and we

(08:06):
talked about where investors could hide from the craziness of
that bubble, although we couldn't find very many places. And
the best advice you gave my listeners at the time,
which was purely, absolutely brilliant, and I hope that they
all took it, was to rush out and get the
longest fixed rate mortgage on their house that they possibly could.
So fingers crossed, lots of them did that and sitting

(08:29):
there with a ten year mortgage of one to one
and a half percent instead of six to six and
a half percent.

Speaker 4 (08:35):
Yeah, well, if a handful of people did it, we
could feel justified.

Speaker 2 (08:38):
I think so if we saved anybody. So let's talk
about that great bubble. It was excellent timing. And hopefully
the listeners also rushed out and solved their overpriced equities,
because twenty twenty two so the beginning of the popping
of that bubble. And I'm saying the beginning because I'm
guessing that what you're going to tell me is that
we are only part way through that bubble collapsing. So

(09:03):
where are we with the whole thing now?

Speaker 4 (09:05):
Well, everything was proceeding perfectly well, and the great bubbles
take their time quite a few years, going up quite
a few years coming down, and the market suffers from
attention deficit disorder, so it always stinks every rally at
the beginning of the next great ball market and so on.
But there were some definitely original interferences.

Speaker 3 (09:28):
With this deflating period.

Speaker 4 (09:30):
The first of them was what I call the presidential cycle,
which I wrote about suggesting we would have a time
out because there's never been a serious market decline between
October the first of the second presidential year and the
end of April in the third year, because the administration

(09:52):
would like to have a strong labor market running up
to the election, and they realized, of course that economics
moves rather slowly, lot of inertia, and so they had
to stimulate it a year and a quarter before, and
so that's the period of stimulus. And since FDR there
has never been a big decline. And the average gain
in that seven month window equals the remaining.

Speaker 3 (10:14):
Forty one months. It's amazing.

Speaker 4 (10:16):
Of the four year presidential cycle, it seems impossible, but
it's true. Check it, and the average gain is about
fifteen percent in that window, and this time we had
thirteen or fourteen.

Speaker 3 (10:26):
It was right on the nose.

Speaker 4 (10:28):
So we had a typical presidential cycle rally, and we
had a strong January bounds. If you've wiped out the
growth stocks the following January, you always have a great bounce,
even if the bear market is not over. The perfect
example would be two thousand and one. The tech bubble
was huge.

Speaker 3 (10:46):
It got the.

Speaker 4 (10:47):
Growth stocks got hammered. In two thousand they were down
fifty percent, and then rallied a bit at the end
of the year, and then in January they had a
huge rally eight or nine percent, And so we should
have expected the same, and basically we got it a
little bit less, but a strong January rallied. Why not

(11:10):
because there were lots of tax losses that had been
taken and people replacing their position, investing their Christmas bonuses
and so on. So that was fairly normal, and so
was the presidential cycle effect. What was abnormal is that
they occurred in the middle of a great.

Speaker 3 (11:34):
Bubble that was on the way down.

Speaker 4 (11:37):
This had not happened in nineteen twenty nine, seventy two,
or two thousand or two thousand and seven. All of
them had neatly sidestepped that seven month window. But this one,
it fell right in the middle of the deflating phase.

Speaker 2 (11:52):
So we got a bit of a reprieve as a
result of that.

Speaker 4 (11:55):
Yeah, we got a bit of a temporary reprieve. And
then I argue back to the meat grinder, but both
the meat grinder had time to really get going. We
ran into the artificial intelligence mini rally, and yes it
was only a dozen or two stocks, but it included

(12:18):
some very big ones and they had huge rallies, and
even though the average stock didn't move, it sent the
smpl oh I don't know, fifteen sixteen, seventeen percent this
year year today and on the backs of these handful
of huge names.

Speaker 2 (12:40):
Okay, so another little reprieve for the index.

Speaker 4 (12:43):
Yeah, his artificial intelligence for real. And my answer is yes, absolutely,
it is for real. It will have huge effect. Is
it big enough soon enough to stop the deflating No,
I don't think it is. It's a ten to twenty
multi the catal effect going off into the distant future,
and it will be huge, and in what way I

(13:06):
don't know. It's over my pay grade, but it will
be potentially in vast in its effects.

Speaker 3 (13:12):
In the meantime, it leng the the interruption.

Speaker 4 (13:17):
In this deflating period, but under the surface, the economics deteriorate,
debt increases, consumers spent their stimulus program. It's all gone,
except that maybe the richest ten or fifteen percent that
don't really count because they don't spend it as desperately
as everybody else does. So, and we've taken off the

(13:41):
moratorium on paybacks of college loans, which is a huge
thing in the US, and the leting indicators, which have
a terrific record, continue down.

Speaker 3 (13:52):
The availability of debt.

Speaker 4 (13:54):
For small companies becomes increasingly difficult to get. The debt
level themselves at the government level are huge, and the
interest rates increase, putting a real burden on the budget.
And many things continue to deteriorate. And my guess is

(14:16):
we will have a recession. I don't know whether it
will be fairly mild or fairly serious, but it will
probably go deep into next year, as I have been
saying for three year.

Speaker 2 (14:29):
Okay, but there's still a general view that this is
going to be a soft landing. And I think you
said before that all landings are soft landings until they
become hard landings.

Speaker 3 (14:40):
Well, every bubble has been.

Speaker 4 (14:44):
Greeted with a chorus of soft landing, and there's never
been one Japan. The greatest bubbles, both in real estate
and the stock market was followed by a last decade,
arguably a last two decades, but nineteen twenty nine, of
course was mishandled followed by depression. The nineteen seventy two

(15:07):
fifty to fifty was followed by a very serious recession,
and two thousand was followed by a mild recession still
allowed the NASDAK to decline seventy two percent and fifty percent,
and the housing bust of those seven was of course
followed by a potentially disastrous recession, which was counted by

(15:29):
biggest stimulus by far in American history up till that point,
finally exceeded amazingly by the stimulus program around COVID and
the after effects of which we we are now dealing with.

Speaker 2 (15:44):
So we have a lot of people saying at the
moment that it is extraordinary and impressive how interest rates
have gone up so fast.

Speaker 3 (15:52):
This is the.

Speaker 2 (15:53):
Speed of the movers has not been seen for many,
well many hundreds of years. So seventeen eighty eight, someone
told me the other day, so an incredibly fast move.
And the extraordinary thing is that nothing very big has
broken yet, but everybody expects something to break, they're just
not quite sure what it will be.

Speaker 4 (16:12):
Well, if they think that they're being historic historically rather literate,
because that is the pattern, something breaks and nobody seems
to know what it is. You increase the pressure on
a very complicated system until a few things snap, and

(16:33):
each cycle is different, so each cycle something else happens.
It's always a surprise, but you always have a surprise,
so the idea of a surprise is totally unsurprising.

Speaker 2 (16:45):
Can you make any guesses as to what the surprise
might be this time?

Speaker 4 (16:50):
Well, of course we did have an interesting kind of
sneak preview. Didn't weigh with the large regional banks in
America where a couple just up and went out of
business in a flash.

Speaker 2 (17:03):
Yeah, but unlike most things, that turned out to actually
be contained and containable. You know, we sat there looking
at it thinking is this it is something big breaking
and it turned out that that could be cleared up.

Speaker 4 (17:14):
It did indicate that the authorities are very kind of
well aware of this something breaking effect because they moved
very quickly, and one could argue open zealously gave a
blanket safety net to everybody. Maybe You could argue that
people should have been able to analyze the vulnerability of

(17:36):
Silicon Valley Bank and so on to the VC industry
and to the level of high years, the pain that
high yels would inflict on their large portfolio of rock
bottom investments. They had made a huge number, unprecedented actually
in the banking industry, the percentage of their portfolio that

(17:59):
was invested in very low yielding paper, just in time
to be hit hard by an increase in rates. The
combination of that very large component and the fact that
they were uniquely dependent on BC and VC is itself,
along with real estate, kind of guaranteed to take a

(18:21):
lot of pain in these kinds of cycles. The VC
industry has been the only part so far that has
moved along at a much quicker pace and is fairly
deep into a trouble. The IPOs completely ceased and the
money flowing into new PC's dropped way down, fell to

(18:45):
about a third.

Speaker 3 (18:47):
In a real hurry.

Speaker 4 (18:49):
So the VC industry acted as if there was a
major bubble breaking, and the rest of the market, particularly
the growth end and the artificial intelligence and had a
much easier time.

Speaker 2 (19:03):
Yeah, does it feel like maybe it is the private
equity lest VC part of the market that is most
vulnerable at the moment, and you've got a lot of
debt piled up in there. You've got a lot of
companies that are burning cash fast and require more cash
put in. We're hearing quite a lot about private equity
businesses having to borrow at at unexpectedly high rates, and
we're wondering what happens over the next couple of years

(19:27):
in that industry.

Speaker 4 (19:28):
It's plausible that they would feel the pain quickest. Everything
to do with real estate, of course, is pretty much certain,
although the delays and special cases there are much more impressive.

Speaker 3 (19:40):
But eventually it grinds through.

Speaker 4 (19:43):
When you lower the mortgage, people can afford to pay more,
and eventually they pay more and push out the prices.
So at three percent, you're paying four hundred thousand for
your house, and when the mortgage goes to six percent,
you suddenly realize you can't afford to buy the house.
You pull your bid, market backs off, and eventually the
prices come down.

Speaker 3 (20:02):
So mortgages move.

Speaker 4 (20:05):
To fill the available affordability, and house prices do exactly that.
They're not reliable in the short term, they're incredibly reliable
in the long term. An over forty year period of
driving down mortgage rates, of course, you drove up house
prices all over the world pretty much. And now the

(20:26):
rates have gone up, of course it will drive down.
And the ones that flow through quickly, some of the
Scandinavian countries side Sweden have a fairly severe housing pullback.
The ones that have more convoluted system, more locked in mortgages,
like the US, they take their time, but eventually people
can't afford to buy a house at a high mortgage

(20:49):
and the prices come down.

Speaker 3 (20:50):
So that's pretty reliable.

Speaker 2 (20:52):
Yeah, And you can see that happening across the world,
can't you. You can see house prices coming down all
over Europe, at Canada, beginning in the US, particularly in Scandina, Navier,
and in the UK is increasingly obvious as well, because
we're at that we're at that point where no one's
buying and no one's selling. We're at the paralysis stage
before you would exect prices to fall quite dramatically.

Speaker 4 (21:11):
And that's exactly the same in the US. Paralysis and
house prices are worse for the ordinary household, they're worse
for the economy than stocks because they're substantially more broadly owned.
It's really an important part of the median families income
picture and capital picture, and it is not stock sunning.

(21:33):
And so the the motto should be don't mess with housing.
The supermato should be never have a housing bubble at
the same time as you have a stock market bubble,
which is the great mistake the Japanese made with the
biggest bubble in history on both frants at the same time.
But although although we didn't get carried away with ridiculous

(21:58):
subprime this time, the multiple of family income actually went
higher than it did in two thousand and seven, So
in terms of actual long term vulnerability posed by overpricing,
this housing market was more overpriced, and it was accompanied
by a much more overpriced and plastically bubbly stock market

(22:24):
than two thousand and seven OKA.

Speaker 2 (22:26):
So we can see it working its way through the
housing market across the world. But obviously all the stock
markets are different because they've come out of this bubble
at different valuation levels, with the US, foribly being the
most expensive. So what can we expect to see happened
to the US stock market in particular?

Speaker 4 (22:42):
Now the most vulnerable area in my opinion is the
Russell two thousand is a good measure of where the
vulnerabilities will be. The Russell two thousand often has no
collective earnings at all. It has a very high density
of zombies, companies that really can only pay their interest

(23:05):
payments by issuing more debt.

Speaker 3 (23:08):
It has never been.

Speaker 4 (23:08):
Higher than it is today, and they have a very
high ratio, something like forty percent, don't have positive earnings,
and they have record debt.

Speaker 3 (23:17):
They have never had this kind of debt.

Speaker 4 (23:19):
So they're vulnerable on the debt front, vulnerable on the
financial front, and vulnerable on a broad economic front.

Speaker 3 (23:26):
And this is the interesting thing.

Speaker 4 (23:29):
The Russell two thousand is not up in real terms.

Speaker 3 (23:33):
For the last year.

Speaker 4 (23:35):
It's not up over two years, and really surprising, it's
not up over five years. It's actually down quite a
bit over five years. So it is showing its vulnerability,
and it brings up a kind of sidebar. Why don't
people state everything inflation adjusted? We always did in the
nineteen seventies, eighties and nineties, and we have now forgotten

(23:58):
because we had a twenty five your window where inflation
was dribbling down towards nothing, and we've lost the habit
because people think, oh, well, the S and P five
hundred's almost that it's high.

Speaker 3 (24:11):
The s and P five.

Speaker 4 (24:12):
Hundred is about eighteen percent below it's high. It's high
a year and nine months ago, and there's been decent
inflation in that window at least seven maybe eight percent plus.
The market is down in any case about ten per cent.
The markets are not doing as well as people think

(24:33):
because they they have lost the knack of taking off inflation.
Inflation is every bit as painful as any other percentage
point loss.

Speaker 2 (24:42):
But it isn't though, is it. I mean, it isn't
in people's minds. I mean, in some senses, this is
a great way for things to be brought back to
ground by a couple of years of relatively high inflation.
So people don't feel like they're losing all their hard
earned money, they don't feel as though their house prices collapse, etc.
If it only happens in real terms as opposed to

(25:03):
in nominal terms, generally, people seeming people feel happier about it.

Speaker 4 (25:08):
You're right, they're more easily misguided in thinking they're doing fine,
except when they go to the supermarket where the reverse end.
If anything, they over respond to so they come out
of the supermarket thinking that inflation will crush them, and
they are accept a ten pounds loss on their house
from inflation without even noticing it. The other thing, though,

(25:30):
is it it does take down their depths inflation, so
there is an offset. If you have a very big
mortgage and you have ten percent inflation, you owe ten
percent less and that sadly has always slipped through unnoticed.

Speaker 2 (25:45):
Also, yeah, and then if your salary goes up at
the same time, if your salary matches inflation, then in
some senses, for a lot of people, an inflationary environment,
as long as it doesn't get out of control in
a situation like this, isn't too bad. Adver get hit.
I'm just saying it's not too bad.

Speaker 4 (26:03):
You might say that, but if you actually ask them
how they feel, the results are quite conclusively opposite. People's
confidence in the economy is very low in the UK
and the US. If you ask them do you feel
better off than last year? Almost nobody since they feel

(26:25):
better off, even though obviously quite a large fraction are
better off in real life. The results are the rich
and the poor are feeling a little squeezed in today's environment,
so I think you're wrong in that sense. It does
reach right through into consumer confidence. Now, if you have

(26:46):
a lot of money in the piggybang from the government's
program stimulus program, that's a huge offset, and that that
has been very successful in keeping keeping spending going. And
there were some other psychological factors that people were so
wildly enthusiastic to come out of COVID and get on
a plane and go to Spain again and so on

(27:07):
and spread their wings and have a mail out that
they have done that so enthusiastically that they've run through
all their COVID savings and now they are racking up
credit card debt like there's note tomorrow and building out
their aggregate debt level. They've never saved less in America.
You may be aware than their saving now heaven. I mean,

(27:29):
the savings phrase has just about disappeared.

Speaker 2 (27:32):
But nonetheless, nonetheless, this inflation plus the folds in the
market do mean that. And you wrote about this in
your latest note that the meat grinder that quite a
lot of the stocks that we look at have already
come off very significantly in real terms. You say, for example,
the lakes of Amazon, Alphabet and Meta would have to

(27:53):
rise between seventeen one hundred and fifty percent to go
back to their twenty twenty one peaks in real terms.
So we've seen it awful lot of froth come up
the market in real terms, and I suspect there are
some groups of more enthusiastic growth infestors than perhaps you
or I are looking at those prices and saying, well,
this is a pactly good place to get back in.

Speaker 4 (28:13):
Well, they typically do that, and in a multi legged
bear market, they always have plenty of people buying into
each leg, and I have no reason to think this
would be any exception. Once you've seen a stock sell
at three hundred, even if it's intrinsically worth one hundred,

(28:34):
you feel somehow it has a divine right to go back.

Speaker 3 (28:37):
To three hundred.

Speaker 4 (28:38):
So when it comes down to two hundred, you think
it's a massive bargain even though it's intrinsic value maybe
one hundred. So you go whooping in there and you
buy it, and then it comes second leg down to
one hundred and fifty still looks pretty good, and then
eventually it comes down to one hundred and you're heartbroken
and you sell it anyway, and it goes down to
eighty and it's actually cheap.

Speaker 2 (29:00):
Can't buy it again because you've been too hurt.

Speaker 3 (29:02):
Yes, now you're paralyzed and hurt.

Speaker 4 (29:07):
And that's when I get to write to reinvesting when terrified. Yes,
two thousand and nine, and when people are so paralyzed
they don't care that it's the cheapest prices for twenty
two years. And GMO's famously allegedly bear If Forecast had
double digit real returns for seven years in everything, including

(29:31):
the S and P five hundred.

Speaker 2 (29:32):
Yeah, but you had to be brave in two thousand
and nine, didn't you. I mean there were several starts
you were. You possibly one of the loudest voices saying
you know, if you buy now, you've got an excellent
chance of making extraordinary returns over the next decade.

Speaker 3 (29:45):
It was hard to Why do you have to be brave?

Speaker 4 (29:48):
I would argue you have to be brave buying when
prices are extended and high, because you're much more likely
to lose money.

Speaker 3 (29:55):
It's just the perception, But the.

Speaker 4 (29:58):
Real bravery requires is to buy when the market is
smashed down to a bargain.

Speaker 3 (30:05):
Seems to me very.

Speaker 2 (30:06):
Little, but does not now is it.

Speaker 3 (30:08):
No, that is not now.

Speaker 4 (30:09):
If you look at if you look at the most
predictive measures, and mister Hussman does the best of those,
very detailed history, historical record of which ones actually do
the best predictive measure. It isn't Warren Buffett's price to
book compared to GDP. It's an interesting, more sophisticated measure

(30:36):
of the earnings taking out financial companies and so on.
And those measures are about as high as they have
ever been today. They're in the top two or three
percent of all time. There's a spike. There's a spike
in two thousand, and there's a spike in twenty twenty one.

(30:57):
And this is above two thousand, but below the spike
in twenty twenty one. But we are right up there.
In order to get the market down to a level
where it would typically out yield the long bond by
five percent, which it should, which you could argue it should,
the market would just sheare arithmetic, the market would have

(31:21):
to drop by more than fifty percent. This is not
my forecast. I have a very genteel forecast. Anything below
three thousand would make me think that it was reasonable.
And if everything works out, badly, which it sometimes does.
I would not be amazed if it went to two
thousand on the SP, but that would that would require

(31:44):
a couple of wheels to fall off, and wheels tend
to fall off in the grate in the Great bubbles unraveling,
but it doesn't mean they have to so, but it
would be unlikely not to get to something close to
three three on the S and P.

Speaker 2 (32:01):
Now what could turn that around, of course, is inflation
falling right back, right back to two percent or below,
which it was not impossible, and interest rates then falling
back as well, because we know, don't we let markets
really like low steady inflation. We know they really like
low steady interest rates. We know that they hate high
and volatile inflation. So and there is an expectation in

(32:23):
large parts of the market, although I think that's been
tested over the last couple of weeks. There has been
an expectation that eventually inflation would end up back at
target and that we would see rates begin to come off.
Now that the higher for longer story is beginning to
get a bit more traction, but that's relative the reason.
So shift in the inflation or interest rate environment would
change things.

Speaker 4 (32:44):
The model that Ben Incur and I did twenty years ago.
It's got a very very high correlation explaining PE. It
doesn't predict it, It just says, how do we get here?
It turns out the market is really a coincident indicator
of comfort. What is it to make a portfolio manager
comfortable in an institution? And the answer is, as you suggest,

(33:07):
steady inflation around two percent. It hates inflationary spines and
very high profit margins, and profit margins have been drifting
down and more than people realize, and inflation has been
bouncing around.

Speaker 3 (33:24):
But it's part of the scenery now.

Speaker 4 (33:27):
And the model says a shillerpee should be about sixteen
point eight, which is decently above average and doesn't sound
ridiculously low, and that's because the profit margins are still decent.

Speaker 3 (33:40):
Well, what is it?

Speaker 4 (33:41):
Well, a few weeks ago it was twenty nine thirty,
so it was not responding in the normal way.

Speaker 3 (33:49):
This is only the second time it had a bit
of a holiday.

Speaker 4 (33:53):
In two thousand, our model said we should have the
highest pe and history everything is perfect, and the market
said you're done right and went much higher than that
even for eighteen months. That's you could argue the fire
and away out the outlier in speculative craziness. And the

(34:16):
second time was when inflation spiked in twenty twenty two,
or was it twenty twenty one, twenty twenty one, twenty
one not in the summer of twenty twenty one, you
had a rapidly rising, unexpected inflationary jag and the market

(34:36):
continued to rise for the whole half year, and so
you had a huge divergence in our model and the
first half to wipe out in the first half of
twenty twenty two was the biggest decline in the first
half of the year since nineteen thirty nine, incidentally in
real times. But it didn't close the gap because inflation.

(35:00):
The longer it stayed there, the worse the model god,
and the profit margins began to decline a bit.

Speaker 2 (35:07):
Well, that was interesting, profit margins beginning to decline, wasn't it?
Because one of the things that we've talked about before
is how extraordinary it is that something that always mean
reverts profit margins did not mean revert, and a lot
of us have been waiting to see profit margins that
come down. They didn't, and they didn't, and they didn't
and even now. It's a pretty gradual erosion.

Speaker 3 (35:27):
Yes it is.

Speaker 4 (35:29):
And if you want to further narrow that story to
what they now call the Magnificence seven, there had never
been ever, ever such a divergence in favor of the
US in total corporate earnings since twenty ten, so this

(35:49):
is a recent event. The US has outperformed the rest
of the developed world by about.

Speaker 3 (35:55):
Seventy percentage points.

Speaker 4 (35:57):
So you could say, well, in that case, they should
have done seventy percentage points better, and they did more
than that because they in the market always goes in
for double counting, So if you have unexpectedly good profit margins,
you'd get an unexpected increase in price earnings ratio, which
also happened.

Speaker 3 (36:17):
Any case, if you go.

Speaker 4 (36:18):
Back to the seventy percent hour performance and you take
out them so called fans.

Speaker 3 (36:25):
You find that.

Speaker 4 (36:29):
The ninety you know, the ninety five percent or more,
the ordinary American stocks looked very much like the rest
of the world. Their performance was a little bit better,
their earnings were a little bit better, but in the
normal range. And then you have the Magnificence seven, whose

(36:49):
performance in earnings was unprecedented by a wide margin, and
whose performance in the stock market was even more unprecedented
because they not only had the earning, but they had
a steady rise in pe. So you've had the sudden
emergence of multi trillion dollar market caps. Quite an amazing

(37:11):
world and culminating in this year where if you took
out the Magnificent seven today, the S and P would
not be out for the year. It may be up
a point, but little or nothing, and all of the
ten or at twelve point rally is carried by carried

(37:35):
by the Magnificence seven. There has never been such a
narrow market. Now, what will happen to them is a
very interesting question, is it not? Will they continue to
grow and become seventy percent of the entire world's market cap.

(37:56):
Will they be attacked by governments? Will they attack each other,
grow into each other's markets and beat down their profit margins.
Will new technologies arise and n run the iPhone or whatever?

Speaker 3 (38:13):
Who knows?

Speaker 4 (38:14):
I noticed back in the nifty to fifty of nineteen
seventy two, that's when fifty high quality companies like Coca
Cola and IBM went to a fifty percent premium in
fair value against the market. It's the one time when
quality stocks had a huge bubble, and one of the
reasons was that none of them had failed. There were

(38:37):
no failures in the nifty to fifty group for fifteen
years prior to nineteen seventy two, and after nineteen seventy
two they actually started to die off like flies. We
had Avon, we had Polaroid, we had Exxon, we had
Eastman Kodak, we had IBM half wounded, seriously wounded, i
should say.

Speaker 3 (38:57):
And on it went. They lost their match, and they.

Speaker 4 (39:00):
Lost their huge premium uh and and they and they
did not and they underperformed badly.

Speaker 3 (39:06):
For a decade.

Speaker 4 (39:08):
Will that happen to these new nifty seven That's the
question that is unanswerable, I think, because each one of
them depends on a completely different slice of the economy.
Tesla has relatively little in common with Apple. Both of

(39:30):
them are you know, Tesla's a metal basher. Apple is
a metal basher with lots of software.

Speaker 3 (39:37):
And then you move into the into the.

Speaker 4 (39:43):
Software enterprises, the Googles and Amazons and facebooks. It's a
very complicated set of issues and to which I don't
have the answer, but I have pretty much faith that
in aggregate when you add them to the market and
you look at the price. You can't get blood out

(40:05):
of a stone if you've sent, if you've sent the
Shiller pe up towards thirty, you are unlikely to get
more than a three percent real return out of that
is the reciprocal of thirty. And the market really expect

(40:26):
twice there, doesn't it? So sooner or later? The simple
arithmetics suggests you'll either have a dismal return forever, or
you'll have a nice bear market and then a normal return.
And the nice bear market will be hopefully less than
a fifty percent declimb, but it won't be a huge

(40:46):
amount less from the peak than fifty percent in real
turn in real terms.

Speaker 2 (40:51):
Okay, Well, I think we've established where the bubbles still are,
but hopefully we can discuss some opportunities. I mean, obviously
every does everyone does. Don't want to be entirely in cash,
and they wouldn't be particularly healthy either. Where should people
be putting their money at the moment? I suspect you're
going to say value.

Speaker 4 (41:09):
Well, if you've spent forty years running down interest rates
until recently, you've basically spent forty years pushing up assets
led by real estate, as we've said, but everything eventually
follows for the same for the same logic. If I'm
paid a negative return in the piggy bank, I'd better

(41:30):
reach for yield and so on, and that game has
gone on. So global real estate is universally overpriced. Farms
and forests, you know.

Speaker 3 (41:42):
Fine art universally overpriced. The aberration is the stock markets
outside the US. Why were they so ordinary? Is slightly
bewildering to me.

Speaker 4 (41:58):
I suppose two thousand the tag bubble was a bit similar,
but it seems a little implausible that your typical assets
like real estate would become overpriced everywhere from Canada to Australia.
And yet in the stock market most of the most
of the markets were kind of overpriced, but ordinary, ordinarily

(42:21):
ordinarily overpriced, and a few were underprised then and they
were investible, and not just emerging markets. But the developed
world outside the US was investible and is investible, so.

Speaker 2 (42:35):
Japan, most of Europe, the UK there is. I mean,
we always look at the UK and Japan, John, and
I think they are the cheapest markets.

Speaker 4 (42:44):
Yeah, they look two amongst the cheaper ones for sure.
And emerging is of course very complicated with China, but
in general the rest of the world seems investible. Do
your analysis, you know, make your mistake, but it's reasonable.
So don't invest in real estate, don't invest in the US.

(43:07):
And if you have to invest in the US, and
most institutions do, I would urge you to take a
good look at quality. Quality has been the mispriced asset
for one hundred years. The triple A bond everyone understands,
will pay you one percent less. The triple A stock

(43:28):
has paid you half a percent more. Now, what the
heck is that? Actually, I can explain it. They are
performing band markets. They underperform in ball markets. Why do
they underperform in bullmarkes because they're boring. In a ballmarket,
you want to earn Tesla, You want to own Meme stocks,
you want to earn what's flying. You don't want to

(43:48):
own Coca Cola. It's just too boring. In the long run,
Coca Cola does very well in the bear markets. They
do particularly on air. But that's a free lunch. It's
the only free lunch of totally missed by the pressure
and farmers of the world. Back in the day, they
were quite correctly saying price the book wins because it's
a risk factor.

Speaker 3 (44:08):
Of course, it's a risk factor.

Speaker 4 (44:10):
Price the book is the marker's description of who's got
the junkiest, ugliest assets. Pe is the market's judgment on
who's got the flakeyst dourneys, et c. But when it
comes to quality, they have less risk of every kind.
They have less debt, they go bankrupt less, they have

(44:30):
less volatility, they have a lower beta.

Speaker 3 (44:33):
Yet they outperform. That is a free lunch.

Speaker 2 (44:35):
And they're not hideously overpriced at the moment.

Speaker 3 (44:39):
Absolutely not.

Speaker 4 (44:40):
No, they've moderately outperformed for the last year, the last
ten years, the last fifty years, and the last one
hundred years. And I'm happy to say that my firm, GMO,
has made a big fuss about them from the very beginning.
They play a big role in our value models, and
we have a fund a very good job of thinking

(45:01):
about how to treat them, which wants to buy and
what really constitutes quality.

Speaker 3 (45:07):
Quality.

Speaker 4 (45:07):
By the way, in a nutshell is your element of monopoly.
High returns, low debt. Low debt of course goes along
with the high stable returns. High stable returns is another
way of saying you're a price setter, and a price
setter is another way of saying you have a monopoly element.
And the amazing thing about the Magnificent Seven is they're

(45:31):
all global monopolies and they sprang out of the ground
pretty down quickly. And of course the Justice Department, the
anti monopoly element in the US and the UK, has
been largely sound asleep for the last twenty years. So
they've had a wonderful environment in which to operate, and

(45:52):
they had done a wonderful job of capitalizing on that
and moving very fast.

Speaker 2 (45:58):
Okay, I wanted to ask you about the investing in
the energy transition. We've been looking at the renewable stocks,
and obviously you have as well, and they've been having
a fairly torrid time recently, the wind and solar companies,
and you might have expected something rather different given the
rush to zero across the world. I wondered if you
had any thoughts on how to invest or not to
invest in the transition.

Speaker 4 (46:21):
The thing about transitions is they're very tricky, characterized by
even more booms and busts than anywhere else, and so
oil and alternative energy will will be a trickier area
than most climate resources. The same the thing about climate investing, however,

(46:44):
is that they will have an enormous top line revenue advantage.
Other things being even the countries of the world finally
have woken up.

Speaker 3 (46:55):
And maybe a few of are in the process of still.

Speaker 4 (46:58):
Waking up, to get the idea that climate is a
big problem and needs to be addressed, and they are
beginning to address it and throw money at it subsidies
mainly instead of a carbon tax.

Speaker 3 (47:10):
But you can't expect perfection, and so going back to.

Speaker 2 (47:15):
Now, I have to interrupt you there. Your preferred way
of dealing with this would be a blanket carbon tax
on everything, and that would let the market sort this
out for itself, whereas the subseas are a much more
inefficient way of doing it.

Speaker 4 (47:28):
Absolutely, I'm not a great believer in economists as general.
I think they've lost the plot for the last seventy years.
They've forgotten their job description, which is to be useful.
That they drown in assumptions and closed systems, which are
largely speaking irrelevant for everything except their reputation inside their industry.

Speaker 3 (47:48):
But they have gotten one thing right.

Speaker 4 (47:51):
They all agree that a carbon tax is the vastly
more efficient way to address climate change produce a source
of very useful government revenue, but it's supposed by a
very powerful industry which has, particularly in America, enormous political influence,
and therefore it's very hard to do it. And each

(48:14):
of the oily countries have a lot of political influence,
so Australia, Canada, the UK, and of course in spades
in the US.

Speaker 3 (48:28):
But I just wanted to finish that.

Speaker 4 (48:30):
You asked a question what to invest in, and I said,
if you have to invest in the US, look at quality.
But also climate change is going to outgrow the rest
of the economy by a lot. It's going to dominate
investing and the need for money for the next many decades.
It doesn't mean though it won't have an element of commodities.

(48:54):
Commodities break your heart because just as they're doing well,
they have a wipeout for eighteen months and then they
go roaring back to a new high. It's intrinsically a difficult,
dangerous area, but it will have enormous growth potential. And
so if you can find a competent source of investors,

(49:15):
I would of course recommend climate change over the rest
of the US market.

Speaker 2 (49:20):
Okay, And is there anything to be said for investing
in the oil companies on the basis that we're going
to need oil for many, many years to come, but
supply is constrained, and so you might get a fairly
long term supply of cash pouring off the oil companies,
possibly in the same way that you have of the
tobacco companies in the last couple of decades. That might

(49:40):
make a reasonable medium term investments people looking for income.

Speaker 4 (49:44):
Yeah, no, it's quite possible. The trouble with commodities tobacco
was never a commodity for oil is is that everything
hinges on the marginal barrel. A couple of barrels too
many and the price goes down to thirty. Couple of
barrels too few and it goes to one hundred, and.

Speaker 3 (50:03):
That will always be the case.

Speaker 4 (50:04):
Now, the takeoff of evs, which represents a lot of oil,
is moving much faster than people are twiggering onto. The
US is lagging badly, but it's just left. From three
to eight this week will be eight percent of all
cart sold will be evs. But in the world at
general it's sixteen, in Europe over twenty, and in China

(50:28):
thirty five. It's the biggest market in the world. It's
thirty five and growing rapidly, which means within five years
oil demand will take a very big hit. And since
oil is determined on the margin, that would suggest that's
too many oil companies, too much oil capability in a

(50:49):
suddenly reduced demand world, which.

Speaker 3 (50:53):
Typically would be absolute rack and ruin.

Speaker 4 (50:57):
In the meantime, however, you have the following power paradox
that the faster you ramp up EV's wind solar, battery storage,
the faster you ramp up your demand for energy. Because
wind solar and storage are all resources upfront, energy up front,

(51:19):
labor upfront, capital upfront. Once you've put them in the ground,
it's practically free for the life span of the asset twenty.

Speaker 3 (51:27):
Thirty forty years.

Speaker 4 (51:29):
And EV's of course have the element built into their batteries,
which is a very big chunk of the total.

Speaker 3 (51:36):
So they are much more money up front.

Speaker 4 (51:38):
They're incidentally more affected by the rise of interest rates,
which is the.

Speaker 3 (51:44):
Short term problem.

Speaker 4 (51:45):
But what it means is we have an enormous demand
for resources, really outside our ability to meet it consistently.
In the next few years. We have to invent our
way around. We have to substitute for these resources. We
have to find cheaper ways of extracting them, and so
on and so forth. And even so, the prices will

(52:07):
be in their usual volatile way going higher, lithium, propper, cobalt,
nickel being critical four. But energy is more important even
than that, and there will be a terrible push on
the demand for energy. And a lot of that is oil,
a lot of it is gas, a lot of it
is cold, but it will be fairly remsseless pressure. And

(52:31):
the question is where do you go ramping up from
sixteen percent evs to the global fleet being sixties, say,
somewhere in that range. The tipping point comes where the
squeeze on oil upwards becomes a consistent squeeze.

Speaker 3 (52:52):
On oil downwards.

Speaker 4 (52:54):
And I don't know, it's a sensitive business. I don't
know exactly where that inflection point will come. But you
should not be surprised if the price of oil doesn't
go over one hundred maybe once or twice in the
next five years. And you should not be surprised, No,
you should be amazed if the price of oil does
not then have a long term crutch, and it will

(53:16):
run down to a level where the Saudi's or somebody
will be able to grind out forty five dollars oil
into the setting.

Speaker 3 (53:24):
Sup. That's how I think the game will end.

Speaker 2 (53:28):
It's interesting as mat you talk about this, that she
demand for resources up front, I think is something that
people are only just beginning to grasp that in order
to get to the clean side, we have to do
a lot of really really grubby stuff first.

Speaker 4 (53:41):
Really really grubby stuff. And even in the long run,
you need a lot of metals which are grubby in
order to get to a green world. Sorry guys, sorry,
you purists.

Speaker 3 (53:54):
There is no way around that one.

Speaker 2 (53:55):
Yeah, there's no clean root to clean.

Speaker 3 (53:58):
No interesting.

Speaker 2 (54:00):
I let you go in to check out. I've catch
you longer than I promised, but I wanted to ask
you one last thing, which is when we last spoke,
you said the Foundation was putting an awful lot of
money into venture capital, and that was the place where
you still thought that American exceptionalism was absolutely on. Do
you still feel like that about the bench capital and industry?
And we talked about it a little earlier in our conversation,
but I wanted to come back to you and how

(54:21):
you've been investing.

Speaker 4 (54:23):
Yeah, no, obviously, venture capital participated in the bubble, had
a huge run up in prices twenty twenty twenty twenty one,
and we'll have a fairly high price to pay over.

Speaker 3 (54:38):
The next year or so.

Speaker 4 (54:40):
But in the long run, it is amazing the quality
of the people the American BC industry attracts. It's getting
the best and the brightest who used to go into
consulting or Goldman SAG and now they go into VC
and startups, and they come from all over the world.
At least a quarter of the bosses of all the

(55:00):
VC companies we talk to were not born in America.
And what an achievement for the US. We have the
great research universities fifteen of the twenty and most of
the rest are in the UK, but the fifteen great
research universities are the bedrock for so many of these vcs.

(55:21):
And you add that to a societal attitude taking risk
in the US is simply much better than Europe. We
will forgive people a failure. If they go into a
startup and they fail, and they come back four years
later with another bright idea, they'll get funded and it
will hang over their heads. In most parts of the world,

(55:42):
if you fail but not in the US now we
have a wonderful aggressive attitude to risk taking, and we
need to because the whole future of transferring to green
is a thousand problems.

Speaker 3 (55:55):
Need to solve it.

Speaker 4 (55:56):
We need entrepreneurs, we need research, we need break throughs,
and we need to keep moving fast. And in the end,
the theory should be that VC, because it's riskier, has
more failures. Because it has more failures and more risk,
it should have a higher return and the practices that

(56:16):
it has.

Speaker 3 (56:18):
If you look at the database for.

Speaker 4 (56:19):
The last twenty years, VC has the highest return, as
it should of any sector in the marketplace. So to
be into GREENBC is to go into the highest return
sector with the biggest support from global governments and the US.

Speaker 2 (56:38):
That's a yes, then, I think, Jered. I ask every
one of our guests.

Speaker 3 (56:44):
I ask every one of my guests recommended a warm recommendation.

Speaker 2 (56:47):
I ask every one of my guests before I let
them go, the same question. I'm embarrassed to ask you this,
but as I ask everybody, I have to ask you
as well. I hope you don't mind. If if I
was only going to give you one thing to keep
for ten years, and I gave you a choice of
only three things, gold, bitcoin, or cash on deposit, what

(57:12):
would it be?

Speaker 3 (57:14):
I take gold.

Speaker 4 (57:15):
I'm not happy with gold, but in a world where
inflation could come back, I think I'll take gold. Bitcoins
of course an elaborate scam. Really, but gold is the
least bad of the three.

Speaker 2 (57:30):
Brilliant least bad is good enough for me. Jeremy, thank
you so much.

Speaker 3 (57:35):
No, you're very welcome.

Speaker 2 (57:40):
Thanks for listening to this week's Marin Talks Money. We'll
be back next week. Catch our debrief on this week's
conversation on the Merin Talks Money after show under the
Apple subscription feed in the meantime, If you like our show,
rate review and subscribe wherever you listen to your podcasts.
This episode was hosted by me Maren Sunset Web. It
was produced by some Siety. Additional editing by Blake Maple's.
Thanks of course to Jeremy grants them and to John Steppeck. Finally,

(58:03):
be sure to sign up to John's daily newsletter, Money Distilled.
I know I always say that you won't regret it,
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