WEBVTT - Jeremy Grantham Says No One Should Invest in the US 0:00:00.200 --> 0:00:01.160 John Man. 0:00:01.440 --> 0:00:04.480 Isn't it nice when something we've been predicting for ages 0:00:05.000 --> 0:00:07.600 finally happens. When I say nice, I mean kind of 0:00:07.600 --> 0:00:11.520 intellectually satisfying. I supposed to actually nice when it comes 0:00:11.520 --> 0:00:12.040 to this week. 0:00:12.720 --> 0:00:16.800 Yeah, yeah, I was saying intellectually satisfying watching the kind 0:00:16.840 --> 0:00:20.959 of great bonding and busting of the Boind bubble, which 0:00:21.040 --> 0:00:25.920 could have actually, I suppose very massy. Consequences are low. 0:00:26.320 --> 0:00:30.080 Thankfully so far it doesn't seem to be having that 0:00:30.240 --> 0:00:31.400 many because. 0:00:33.080 --> 0:00:35.440 What you means so far, it's been a couple of days. 0:00:37.320 --> 0:00:39.800 Yes, I know that it's happening, and I'm kind of worried. 0:00:39.880 --> 0:00:40.880 That's the problem. 0:00:41.080 --> 0:00:43.040 You know, for context, You've written about this in your 0:00:43.080 --> 0:00:45.400 news letter and everyone should read your money distilled on this. 0:00:45.440 --> 0:00:46.319 What's it called? What one? 0:00:46.880 --> 0:00:49.960 It's the Boind market was in a bubble nose Boston? 0:00:51.000 --> 0:00:52.640 Or was it the Boind bubble? 0:00:52.920 --> 0:00:53.160 Okay? 0:00:53.200 --> 0:00:55.960 There, Basically there's a Boind bubble. 0:00:56.400 --> 0:00:59.040 There's a bond bubble. It's ending. It's so you know, 0:00:59.120 --> 0:01:02.000 yield yields gone to high as we haven't seen for 0:01:02.040 --> 0:01:06.120 ages across the board. Everything. You can't blame less trust 0:01:06.120 --> 0:01:08.039 because she's got nothing to do with Germany or the 0:01:08.120 --> 0:01:11.440 US as far as we know. So we're seeing bond 0:01:11.480 --> 0:01:14.360 jail's going up everywhere. That's got consequences for so many things. 0:01:14.440 --> 0:01:16.319 Is almost ridiculous. But of course one of the one 0:01:16.319 --> 0:01:18.520 of the consequences, of course is for governments, because this 0:01:18.600 --> 0:01:21.520 means that their debt payments go up and up and up. 0:01:21.520 --> 0:01:24.080 We already know that across the developed world debt to 0:01:24.120 --> 0:01:26.800 the GDPs is one hundred percent plus, you know, up 0:01:26.840 --> 0:01:29.760 from seventy to eighty percent and eight. So you know, 0:01:29.840 --> 0:01:31.959 this is this is massive. When your interest costs go 0:01:32.080 --> 0:01:33.279 up on that, you're in a lot of trouble. 0:01:33.920 --> 0:01:35.720 What do you cut? Well, this is it. 0:01:35.840 --> 0:01:38.160 And the problem is so the same time, I mean, 0:01:38.319 --> 0:01:40.000 I suppose we're seeing it here at the moment, like 0:01:40.040 --> 0:01:43.560 everyone's there talking about growth, growth, growth, But at the 0:01:43.600 --> 0:01:45.800 same time, it's kind of like, well, yeah, but we 0:01:45.840 --> 0:01:48.960 have to cut everything at the same time. And I 0:01:49.000 --> 0:01:51.440 mean with her I kind of serious kind of overhaul 0:01:51.480 --> 0:01:53.920 of the actual structure of this date, which is probably 0:01:53.960 --> 0:01:57.320 something we're talking a bit to do. But you know, 0:01:57.920 --> 0:02:03.080 all of this the hopes that by say canceling HS two, 0:02:03.160 --> 0:02:05.040 we can spend that money there. It's all kind of 0:02:05.120 --> 0:02:09.239 dancing in the edge of the volcano. Because everything every 0:02:09.320 --> 0:02:11.400 kind of country has got this massive can addate to 0:02:11.480 --> 0:02:16.240 GDP problem. It's kind of a matter of, well, how 0:02:16.400 --> 0:02:19.000 is that going to end up resolving itself? And I 0:02:19.000 --> 0:02:20.920 think that's why we're going to have to have a 0:02:20.919 --> 0:02:23.359 lot of inflation in the future, because that kind of 0:02:23.440 --> 0:02:24.560 is the only way to resolve it. 0:02:25.720 --> 0:02:28.480 We have a lot of inflation. Rates stay high, and 0:02:28.560 --> 0:02:31.680 if rate stay high, that's got consequences for every single 0:02:31.760 --> 0:02:34.560 asset class that has sowed on the back a very 0:02:34.600 --> 0:02:36.720 low rates. And we might have seen we might have 0:02:36.800 --> 0:02:39.800 seen markets fall from their highs, but they're still way 0:02:39.840 --> 0:02:42.120 too high relative to this level of bondy alderm. That 0:02:42.160 --> 0:02:45.480 goes for property markets across the board, equity markets across 0:02:45.480 --> 0:02:48.440 the board, all that private equity or that venture capital 0:02:48.919 --> 0:02:50.760 anything I haven't mentioned yet that's in trouble. 0:02:51.480 --> 0:02:53.760 No, but I guess I mean this is there's kind 0:02:53.800 --> 0:02:57.760 of two problems. I think when is the kind immediate 0:02:57.840 --> 0:03:02.600 problem of those government dat basically setting every word based 0:03:02.639 --> 0:03:05.400 on various assumptions, the assumption that it's safe, the assumption 0:03:05.480 --> 0:03:10.679 that only goes up, the assumption that is constantly highly liquid, 0:03:11.280 --> 0:03:13.560 and it's kind of embedded in an awful lot of 0:03:13.680 --> 0:03:17.359 financial models and in an awful lot of financial structures. 0:03:17.760 --> 0:03:21.080 So that's the the immediate body. And that's when people 0:03:21.080 --> 0:03:23.560 are talking about something breaking, that's what they mean. 0:03:23.720 --> 0:03:25.800 Well, remember that this is our you know, our defined 0:03:25.800 --> 0:03:29.639 benefit pension systems are shot through with the government debt 0:03:29.680 --> 0:03:32.480 and with bonds in general. And I wrote this week 0:03:32.520 --> 0:03:36.320 about the cautious portfolio that every wealth man offer you 0:03:36.680 --> 0:03:40.880 and the Adriginal sixty forty again, you know, very heavily 0:03:40.960 --> 0:03:44.080 fixed income, and everyone believes that that's safe. This is 0:03:44.120 --> 0:03:47.000 not safe. And the idea that a bond bear market 0:03:47.080 --> 0:03:48.920 can last for a long time, it's something that everyone 0:03:49.000 --> 0:03:51.080 is completely forgotten, despite the fact there was a thirty 0:03:51.200 --> 0:03:55.160 five year bond bear market after the war. In fact, 0:03:55.200 --> 0:03:56.800 if you look at the decades in which bonds have 0:03:57.520 --> 0:03:59.760 not been in a bear market, depending on how you count, 0:03:59.760 --> 0:04:01.360 it's like if you're than the ones when they've being 0:04:01.360 --> 0:04:01.960 in a bull market. 0:04:02.160 --> 0:04:04.240 Yeah, I mean, you know what I mean. 0:04:04.440 --> 0:04:05.160 Yeah, No, you're right. 0:04:05.200 --> 0:04:07.400 The Deutsche Bank study came out the other day and 0:04:07.440 --> 0:04:10.000 it was something like six or not something like eight 0:04:10.240 --> 0:04:13.720 in ten of the decades in the twentieth century Gilts 0:04:14.000 --> 0:04:17.680 actually lost your money in real terms, and you know, 0:04:17.680 --> 0:04:19.600 giving it we think it's a safe facet. You kind 0:04:19.600 --> 0:04:23.320 of like, well where did where did it get that reputation? Yeah, 0:04:23.520 --> 0:04:25.440 I mean that is and also I mean I suppose 0:04:25.440 --> 0:04:27.880 we've also seen a bit of a massive failure of 0:04:27.960 --> 0:04:30.919 the collective imagination over the past couple of years, because 0:04:31.839 --> 0:04:35.480 no one thought that bond yields could get to where 0:04:35.480 --> 0:04:40.040 they are now like six months ago. I mean, yeah, 0:04:41.200 --> 0:04:46.359 let's not brag, but yeah, so it's kind of you 0:04:46.360 --> 0:04:48.839 can see why everyone's scared. But that goes back to 0:04:48.880 --> 0:04:52.200 the second point, which is the longer term problem. So 0:04:52.200 --> 0:04:54.560 it's not just about stuff blowing up. It's about the 0:04:54.560 --> 0:04:57.560 fact that we're now moving into a kind of environment 0:04:57.760 --> 0:05:00.760 for the long run where inflation is going to continue 0:05:00.760 --> 0:05:02.760 to be an issue. And so that means that all 0:05:02.800 --> 0:05:05.480 the assumptions we're making for the past forty odd years 0:05:05.680 --> 0:05:09.400 have kind of flipped on the head, which is something 0:05:09.440 --> 0:05:10.880 everything's going to have to get used to it, which 0:05:10.920 --> 0:05:13.600 means probably the markets will be a lot warbliered as 0:05:13.600 --> 0:05:14.480 well a. 0:05:14.400 --> 0:05:18.760 Lot of volatility. Yeah, oh so so exciting. Now listen, John, 0:05:18.480 --> 0:05:23.080 on a more helpful note. We've decided, haven't we to 0:05:23.080 --> 0:05:26.279 always have a personal finance tip of the week. Yes, yeah, 0:05:26.320 --> 0:05:27.080 we've got one. 0:05:27.000 --> 0:05:28.080 Still only the jungle law. 0:05:29.160 --> 0:05:31.200 Yeah, I'm hoping you're going to come up with that. 0:05:31.680 --> 0:05:33.240 I'm working on it. I'm working on it. 0:05:33.839 --> 0:05:36.600 John's going to either sing or play an instrument next 0:05:36.640 --> 0:05:39.400 week to introduce the personal finance Tip of the week. Now, 0:05:39.440 --> 0:05:41.480 as an I'm torn on personal finance tip of the week. 0:05:41.560 --> 0:05:43.919 There are two things that are quite important at the moment. Well, 0:05:43.960 --> 0:05:46.400 it's one thing that's very important, and that's our property market, 0:05:46.400 --> 0:05:50.680 falling property prices, paralysis in exchanges. You know that there 0:05:50.760 --> 0:05:53.680 just isn't that much going through Chaine, the back change, 0:05:53.680 --> 0:05:55.560 the back. There's a house on my strap that has 0:05:55.680 --> 0:05:58.039 just sold or come close to. Somebody's depended on a chain. 0:05:58.279 --> 0:06:00.360 There as so many links that can fall through. Things 0:06:00.400 --> 0:06:03.120 can go wrong. And I didn't even know that this existed. 0:06:03.320 --> 0:06:06.120 But I've recently been reading about insurance that you can 0:06:06.160 --> 0:06:10.760 buy to protect yourself from a collapsing house purchase, and 0:06:10.800 --> 0:06:12.480 that seems to me like not a bad idea. I'm 0:06:12.480 --> 0:06:14.560 not a great one for buying pointless insurances, but you 0:06:14.600 --> 0:06:18.120 can spend a lot of money on getting into the 0:06:18.200 --> 0:06:20.480 zone of buying a house, and if it then falls through, 0:06:20.520 --> 0:06:21.960 you can be seriously out of pocket. You do that 0:06:22.000 --> 0:06:25.159 three or four times, even twice, your deposit is seriously impacted. 0:06:25.600 --> 0:06:28.240 So is it worth spending? And these insurances seem to 0:06:28.279 --> 0:06:30.720 cost KD of sixty eighty quid? Is that something worth 0:06:30.720 --> 0:06:32.080 looking at? I wonder if it might be. 0:06:32.680 --> 0:06:36.479 Definitely what's looking any because if you can easily share 0:06:36.480 --> 0:06:38.400 it a look like a couple of grind whenever you're 0:06:38.480 --> 0:06:40.240 looking to buy a host and things like selves and 0:06:40.320 --> 0:06:43.320 or so if it's all in league and a sexty 0:06:43.360 --> 0:06:45.040 or something you quite, that probably sayings worth it. 0:06:45.800 --> 0:06:47.320 The other thing I want people to look at at 0:06:47.320 --> 0:06:49.480 the moment is the offset mortgage. You and I remember 0:06:49.480 --> 0:06:52.240 the offset mortgage because we're getting old. There was we 0:06:52.320 --> 0:06:55.520 remember it that we remember another day, long long ago 0:06:55.600 --> 0:06:58.280 when interest rates were not zero, when if you had 0:06:58.320 --> 0:07:00.360 savings you could offset them against the day on your 0:07:00.360 --> 0:07:03.440 mortgage and that would bring down your mortgage payments every month, 0:07:03.480 --> 0:07:05.480 and it was kind of useful. It's time to look 0:07:05.480 --> 0:07:07.160 at those again. If you've got a mortgage and you've 0:07:07.160 --> 0:07:08.839 got savings, go have a look at some of the offsets. 0:07:08.839 --> 0:07:17.000 They're pretty useful, excellent tips. Welcome to Meren Talks Money, 0:07:17.000 --> 0:07:19.240 the podcast in which people who know the markets explain 0:07:19.280 --> 0:07:21.840 the markets. I'm merin Sumset Web. This week our guest 0:07:21.840 --> 0:07:25.239 is Jeremy Grantsam, co founder of investment firm GMO. Grantham 0:07:25.320 --> 0:07:27.320 is well known for his analysis of bubbles and for 0:07:27.400 --> 0:07:30.720 his parish forecasts that have come at pretty useful times, 0:07:30.760 --> 0:07:32.920 such as in two thousand and two thousand and eight. 0:07:33.360 --> 0:07:36.200 In our conversation, we talk about where valuations are, where 0:07:36.200 --> 0:07:38.360 we expect the market to go, and why this has 0:07:38.400 --> 0:07:42.760 been one of the greatest bubbles of all time. Jeremy, 0:07:42.760 --> 0:07:44.160 thank you so much for joining us today. 0:07:44.760 --> 0:07:45.600 That's a pleasure. 0:07:46.000 --> 0:07:49.520 Now, last time we talked, which was just over two 0:07:49.600 --> 0:07:52.040 years ago, it was the end of twenty twenty one. 0:07:52.120 --> 0:07:54.280 Later middle of aug was twenty twenty one. I think 0:07:54.480 --> 0:07:56.440 you and I had a conversation where we talked about 0:07:56.480 --> 0:07:58.600 how we were in one of the greatest bubbles in 0:07:58.680 --> 0:08:01.840 financial history, which seemed pretty obvious to you and actually 0:08:01.880 --> 0:08:03.880 pretty obvious to me at the time, not so obvious 0:08:03.920 --> 0:08:06.360 to everybody else. Out with some other people, and we 0:08:06.440 --> 0:08:09.840 talked about where investors could hide from the craziness of 0:08:09.880 --> 0:08:12.640 that bubble, although we couldn't find very many places. And 0:08:12.680 --> 0:08:15.240 the best advice you gave my listeners at the time, 0:08:15.280 --> 0:08:18.080 which was purely, absolutely brilliant, and I hope that they 0:08:18.120 --> 0:08:20.160 all took it, was to rush out and get the 0:08:20.240 --> 0:08:24.080 longest fixed rate mortgage on their house that they possibly could. 0:08:24.760 --> 0:08:29.040 So fingers crossed, lots of them did that and sitting 0:08:29.120 --> 0:08:31.360 there with a ten year mortgage of one to one 0:08:31.400 --> 0:08:33.360 and a half percent instead of six to six and 0:08:33.400 --> 0:08:34.040 a half percent. 0:08:35.120 --> 0:08:37.360 Yeah, well, if a handful of people did it, we 0:08:37.400 --> 0:08:39.000 could feel justified. 0:08:38.800 --> 0:08:41.960 I think so if we saved anybody. So let's talk 0:08:42.080 --> 0:08:45.840 about that great bubble. It was excellent timing. And hopefully 0:08:45.880 --> 0:08:48.760 the listeners also rushed out and solved their overpriced equities, 0:08:48.880 --> 0:08:52.360 because twenty twenty two so the beginning of the popping 0:08:52.520 --> 0:08:56.160 of that bubble. And I'm saying the beginning because I'm 0:08:56.360 --> 0:08:58.560 guessing that what you're going to tell me is that 0:08:58.600 --> 0:09:03.160 we are only part way through that bubble collapsing. So 0:09:03.480 --> 0:09:05.120 where are we with the whole thing now? 0:09:05.400 --> 0:09:09.680 Well, everything was proceeding perfectly well, and the great bubbles 0:09:09.880 --> 0:09:12.600 take their time quite a few years, going up quite 0:09:12.600 --> 0:09:16.840 a few years coming down, and the market suffers from 0:09:16.840 --> 0:09:20.640 attention deficit disorder, so it always stinks every rally at 0:09:20.640 --> 0:09:23.160 the beginning of the next great ball market and so on. 0:09:23.400 --> 0:09:28.760 But there were some definitely original interferences. 0:09:28.360 --> 0:09:30.720 With this deflating period. 0:09:30.800 --> 0:09:33.800 The first of them was what I call the presidential cycle, 0:09:33.840 --> 0:09:37.439 which I wrote about suggesting we would have a time 0:09:37.480 --> 0:09:43.559 out because there's never been a serious market decline between 0:09:44.080 --> 0:09:48.200 October the first of the second presidential year and the 0:09:48.320 --> 0:09:52.080 end of April in the third year, because the administration 0:09:52.240 --> 0:09:55.400 would like to have a strong labor market running up 0:09:55.400 --> 0:09:58.480 to the election, and they realized, of course that economics 0:09:58.760 --> 0:10:02.280 moves rather slowly, lot of inertia, and so they had 0:10:02.320 --> 0:10:04.240 to stimulate it a year and a quarter before, and 0:10:04.280 --> 0:10:07.360 so that's the period of stimulus. And since FDR there 0:10:07.360 --> 0:10:09.760 has never been a big decline. And the average gain 0:10:10.400 --> 0:10:14.400 in that seven month window equals the remaining. 0:10:14.160 --> 0:10:15.680 Forty one months. It's amazing. 0:10:16.080 --> 0:10:19.840 Of the four year presidential cycle, it seems impossible, but 0:10:19.880 --> 0:10:22.880 it's true. Check it, and the average gain is about 0:10:22.880 --> 0:10:25.720 fifteen percent in that window, and this time we had 0:10:25.760 --> 0:10:26.640 thirteen or fourteen. 0:10:26.679 --> 0:10:27.679 It was right on the nose. 0:10:28.320 --> 0:10:31.440 So we had a typical presidential cycle rally, and we 0:10:31.520 --> 0:10:34.640 had a strong January bounds. If you've wiped out the 0:10:34.679 --> 0:10:38.440 growth stocks the following January, you always have a great bounce, 0:10:38.520 --> 0:10:42.000 even if the bear market is not over. The perfect 0:10:42.080 --> 0:10:45.920 example would be two thousand and one. The tech bubble 0:10:46.080 --> 0:10:46.600 was huge. 0:10:46.760 --> 0:10:47.480 It got the. 0:10:47.440 --> 0:10:50.600 Growth stocks got hammered. In two thousand they were down 0:10:51.400 --> 0:10:53.520 fifty percent, and then rallied a bit at the end 0:10:53.520 --> 0:10:57.240 of the year, and then in January they had a 0:10:57.320 --> 0:11:01.720 huge rally eight or nine percent, And so we should 0:11:01.720 --> 0:11:04.840 have expected the same, and basically we got it a 0:11:04.840 --> 0:11:09.880 little bit less, but a strong January rallied. Why not 0:11:10.200 --> 0:11:12.800 because there were lots of tax losses that had been 0:11:12.880 --> 0:11:19.360 taken and people replacing their position, investing their Christmas bonuses 0:11:19.400 --> 0:11:24.040 and so on. So that was fairly normal, and so 0:11:24.240 --> 0:11:29.720 was the presidential cycle effect. What was abnormal is that 0:11:29.760 --> 0:11:32.719 they occurred in the middle of a great. 0:11:34.240 --> 0:11:36.720 Bubble that was on the way down. 0:11:37.160 --> 0:11:39.959 This had not happened in nineteen twenty nine, seventy two, 0:11:40.679 --> 0:11:43.800 or two thousand or two thousand and seven. All of 0:11:43.840 --> 0:11:48.680 them had neatly sidestepped that seven month window. But this one, 0:11:49.280 --> 0:11:52.439 it fell right in the middle of the deflating phase. 0:11:52.800 --> 0:11:54.439 So we got a bit of a reprieve as a 0:11:54.480 --> 0:11:54.960 result of that. 0:11:55.160 --> 0:11:57.560 Yeah, we got a bit of a temporary reprieve. And 0:11:57.600 --> 0:12:02.920 then I argue back to the meat grinder, but both 0:12:02.960 --> 0:12:06.920 the meat grinder had time to really get going. We 0:12:07.440 --> 0:12:14.560 ran into the artificial intelligence mini rally, and yes it 0:12:14.640 --> 0:12:17.920 was only a dozen or two stocks, but it included 0:12:18.800 --> 0:12:23.240 some very big ones and they had huge rallies, and 0:12:23.320 --> 0:12:27.559 even though the average stock didn't move, it sent the 0:12:27.720 --> 0:12:33.320 smpl oh I don't know, fifteen sixteen, seventeen percent this 0:12:33.440 --> 0:12:38.679 year year today and on the backs of these handful 0:12:38.760 --> 0:12:40.160 of huge names. 0:12:40.320 --> 0:12:42.520 Okay, so another little reprieve for the index. 0:12:43.280 --> 0:12:47.280 Yeah, his artificial intelligence for real. And my answer is yes, absolutely, 0:12:47.360 --> 0:12:50.920 it is for real. It will have huge effect. Is 0:12:50.960 --> 0:12:54.960 it big enough soon enough to stop the deflating No, 0:12:55.040 --> 0:12:57.920 I don't think it is. It's a ten to twenty 0:12:58.720 --> 0:13:02.840 multi the catal effect going off into the distant future, 0:13:02.880 --> 0:13:06.120 and it will be huge, and in what way I 0:13:06.160 --> 0:13:08.760 don't know. It's over my pay grade, but it will 0:13:08.800 --> 0:13:12.120 be potentially in vast in its effects. 0:13:12.559 --> 0:13:16.160 In the meantime, it leng the the interruption. 0:13:17.200 --> 0:13:23.520 In this deflating period, but under the surface, the economics deteriorate, 0:13:24.520 --> 0:13:30.400 debt increases, consumers spent their stimulus program. It's all gone, 0:13:30.760 --> 0:13:33.280 except that maybe the richest ten or fifteen percent that 0:13:33.360 --> 0:13:36.760 don't really count because they don't spend it as desperately 0:13:36.800 --> 0:13:41.760 as everybody else does. So, and we've taken off the 0:13:41.800 --> 0:13:46.640 moratorium on paybacks of college loans, which is a huge 0:13:46.640 --> 0:13:49.920 thing in the US, and the leting indicators, which have 0:13:49.960 --> 0:13:51.800 a terrific record, continue down. 0:13:52.120 --> 0:13:54.120 The availability of debt. 0:13:54.000 --> 0:13:59.640 For small companies becomes increasingly difficult to get. The debt 0:13:59.720 --> 0:14:03.440 level themselves at the government level are huge, and the 0:14:03.480 --> 0:14:07.679 interest rates increase, putting a real burden on the budget. 0:14:08.559 --> 0:14:15.480 And many things continue to deteriorate. And my guess is 0:14:16.800 --> 0:14:19.920 we will have a recession. I don't know whether it 0:14:20.000 --> 0:14:23.840 will be fairly mild or fairly serious, but it will 0:14:24.640 --> 0:14:27.560 probably go deep into next year, as I have been 0:14:27.560 --> 0:14:29.360 saying for three year. 0:14:29.640 --> 0:14:32.600 Okay, but there's still a general view that this is 0:14:32.640 --> 0:14:35.840 going to be a soft landing. And I think you 0:14:35.880 --> 0:14:38.520 said before that all landings are soft landings until they 0:14:38.560 --> 0:14:39.640 become hard landings. 0:14:40.240 --> 0:14:42.160 Well, every bubble has been. 0:14:44.320 --> 0:14:48.400 Greeted with a chorus of soft landing, and there's never 0:14:48.440 --> 0:14:54.480 been one Japan. The greatest bubbles, both in real estate 0:14:54.560 --> 0:14:57.680 and the stock market was followed by a last decade, 0:14:58.200 --> 0:15:02.160 arguably a last two decades, but nineteen twenty nine, of 0:15:02.160 --> 0:15:07.240 course was mishandled followed by depression. The nineteen seventy two 0:15:07.400 --> 0:15:11.000 fifty to fifty was followed by a very serious recession, 0:15:11.240 --> 0:15:14.760 and two thousand was followed by a mild recession still 0:15:14.760 --> 0:15:20.200 allowed the NASDAK to decline seventy two percent and fifty percent, 0:15:20.880 --> 0:15:24.720 and the housing bust of those seven was of course 0:15:24.720 --> 0:15:29.200 followed by a potentially disastrous recession, which was counted by 0:15:29.360 --> 0:15:33.320 biggest stimulus by far in American history up till that point, 0:15:34.000 --> 0:15:39.600 finally exceeded amazingly by the stimulus program around COVID and 0:15:39.680 --> 0:15:42.920 the after effects of which we we are now dealing with. 0:15:44.640 --> 0:15:46.880 So we have a lot of people saying at the 0:15:46.960 --> 0:15:50.320 moment that it is extraordinary and impressive how interest rates 0:15:50.320 --> 0:15:51.960 have gone up so fast. 0:15:52.440 --> 0:15:53.200 This is the. 0:15:53.160 --> 0:15:56.160 Speed of the movers has not been seen for many, 0:15:56.200 --> 0:15:58.520 well many hundreds of years. So seventeen eighty eight, someone 0:15:58.520 --> 0:16:02.160 told me the other day, so an incredibly fast move. 0:16:02.680 --> 0:16:05.400 And the extraordinary thing is that nothing very big has 0:16:05.480 --> 0:16:09.360 broken yet, but everybody expects something to break, they're just 0:16:09.440 --> 0:16:11.640 not quite sure what it will be. 0:16:12.080 --> 0:16:18.040 Well, if they think that they're being historic historically rather literate, 0:16:19.200 --> 0:16:24.960 because that is the pattern, something breaks and nobody seems 0:16:25.000 --> 0:16:28.640 to know what it is. You increase the pressure on 0:16:28.680 --> 0:16:33.720 a very complicated system until a few things snap, and 0:16:33.920 --> 0:16:38.800 each cycle is different, so each cycle something else happens. 0:16:38.880 --> 0:16:42.040 It's always a surprise, but you always have a surprise, 0:16:42.160 --> 0:16:45.440 so the idea of a surprise is totally unsurprising. 0:16:45.680 --> 0:16:48.360 Can you make any guesses as to what the surprise 0:16:48.520 --> 0:16:49.600 might be this time? 0:16:50.800 --> 0:16:53.320 Well, of course we did have an interesting kind of 0:16:53.360 --> 0:16:58.400 sneak preview. Didn't weigh with the large regional banks in 0:16:58.440 --> 0:17:02.200 America where a couple just up and went out of 0:17:02.240 --> 0:17:03.480 business in a flash. 0:17:03.680 --> 0:17:05.920 Yeah, but unlike most things, that turned out to actually 0:17:05.920 --> 0:17:08.600 be contained and containable. You know, we sat there looking 0:17:08.640 --> 0:17:11.280 at it thinking is this it is something big breaking 0:17:11.720 --> 0:17:13.960 and it turned out that that could be cleared up. 0:17:14.680 --> 0:17:18.560 It did indicate that the authorities are very kind of 0:17:18.600 --> 0:17:22.879 well aware of this something breaking effect because they moved 0:17:23.000 --> 0:17:27.679 very quickly, and one could argue open zealously gave a 0:17:27.720 --> 0:17:32.240 blanket safety net to everybody. Maybe You could argue that 0:17:32.280 --> 0:17:36.560 people should have been able to analyze the vulnerability of 0:17:36.960 --> 0:17:40.360 Silicon Valley Bank and so on to the VC industry 0:17:41.080 --> 0:17:45.520 and to the level of high years, the pain that 0:17:45.680 --> 0:17:49.920 high yels would inflict on their large portfolio of rock 0:17:49.960 --> 0:17:56.040 bottom investments. They had made a huge number, unprecedented actually 0:17:56.119 --> 0:17:59.280 in the banking industry, the percentage of their portfolio that 0:17:59.359 --> 0:18:04.120 was invested in very low yielding paper, just in time 0:18:04.840 --> 0:18:07.760 to be hit hard by an increase in rates. The 0:18:07.800 --> 0:18:13.040 combination of that very large component and the fact that 0:18:13.080 --> 0:18:17.440 they were uniquely dependent on BC and VC is itself, 0:18:17.840 --> 0:18:21.320 along with real estate, kind of guaranteed to take a 0:18:21.320 --> 0:18:25.040 lot of pain in these kinds of cycles. The VC 0:18:25.200 --> 0:18:28.160 industry has been the only part so far that has 0:18:28.200 --> 0:18:32.960 moved along at a much quicker pace and is fairly 0:18:33.000 --> 0:18:39.359 deep into a trouble. The IPOs completely ceased and the 0:18:39.400 --> 0:18:44.600 money flowing into new PC's dropped way down, fell to 0:18:45.160 --> 0:18:46.240 about a third. 0:18:47.640 --> 0:18:48.439 In a real hurry. 0:18:49.080 --> 0:18:51.440 So the VC industry acted as if there was a 0:18:51.480 --> 0:18:56.320 major bubble breaking, and the rest of the market, particularly 0:18:56.520 --> 0:19:01.760 the growth end and the artificial intelligence and had a 0:19:01.880 --> 0:19:03.399 much easier time. 0:19:03.960 --> 0:19:07.040 Yeah, does it feel like maybe it is the private 0:19:07.119 --> 0:19:09.840 equity lest VC part of the market that is most 0:19:09.920 --> 0:19:12.320 vulnerable at the moment, and you've got a lot of 0:19:12.320 --> 0:19:13.919 debt piled up in there. You've got a lot of 0:19:13.960 --> 0:19:17.040 companies that are burning cash fast and require more cash 0:19:17.080 --> 0:19:19.560 put in. We're hearing quite a lot about private equity 0:19:19.600 --> 0:19:23.280 businesses having to borrow at at unexpectedly high rates, and 0:19:23.440 --> 0:19:27.280 we're wondering what happens over the next couple of years 0:19:27.320 --> 0:19:28.040 in that industry. 0:19:28.640 --> 0:19:32.400 It's plausible that they would feel the pain quickest. Everything 0:19:32.480 --> 0:19:35.080 to do with real estate, of course, is pretty much certain, 0:19:35.400 --> 0:19:40.000 although the delays and special cases there are much more impressive. 0:19:40.040 --> 0:19:42.200 But eventually it grinds through. 0:19:43.000 --> 0:19:46.040 When you lower the mortgage, people can afford to pay more, 0:19:46.480 --> 0:19:49.240 and eventually they pay more and push out the prices. 0:19:49.280 --> 0:19:52.720 So at three percent, you're paying four hundred thousand for 0:19:52.760 --> 0:19:55.280 your house, and when the mortgage goes to six percent, 0:19:55.320 --> 0:19:57.359 you suddenly realize you can't afford to buy the house. 0:19:57.400 --> 0:20:01.439 You pull your bid, market backs off, and eventually the 0:20:01.480 --> 0:20:02.360 prices come down. 0:20:02.960 --> 0:20:05.120 So mortgages move. 0:20:05.359 --> 0:20:11.160 To fill the available affordability, and house prices do exactly that. 0:20:11.440 --> 0:20:14.560 They're not reliable in the short term, they're incredibly reliable 0:20:14.560 --> 0:20:18.320 in the long term. An over forty year period of 0:20:18.400 --> 0:20:21.560 driving down mortgage rates, of course, you drove up house 0:20:21.600 --> 0:20:26.120 prices all over the world pretty much. And now the 0:20:26.200 --> 0:20:28.560 rates have gone up, of course it will drive down. 0:20:29.200 --> 0:20:32.080 And the ones that flow through quickly, some of the 0:20:32.080 --> 0:20:36.680 Scandinavian countries side Sweden have a fairly severe housing pullback. 0:20:37.160 --> 0:20:40.840 The ones that have more convoluted system, more locked in mortgages, 0:20:40.880 --> 0:20:45.680 like the US, they take their time, but eventually people 0:20:45.720 --> 0:20:49.000 can't afford to buy a house at a high mortgage 0:20:49.000 --> 0:20:50.119 and the prices come down. 0:20:50.640 --> 0:20:51.879 So that's pretty reliable. 0:20:52.240 --> 0:20:54.320 Yeah, And you can see that happening across the world, 0:20:54.400 --> 0:20:56.280 can't you. You can see house prices coming down all 0:20:56.320 --> 0:21:00.440 over Europe, at Canada, beginning in the US, particularly in Scandina, Navier, 0:21:00.520 --> 0:21:03.359 and in the UK is increasingly obvious as well, because 0:21:03.400 --> 0:21:05.880 we're at that we're at that point where no one's 0:21:05.920 --> 0:21:08.720 buying and no one's selling. We're at the paralysis stage 0:21:08.760 --> 0:21:11.200 before you would exect prices to fall quite dramatically. 0:21:11.560 --> 0:21:14.320 And that's exactly the same in the US. Paralysis and 0:21:14.760 --> 0:21:19.560 house prices are worse for the ordinary household, they're worse 0:21:19.680 --> 0:21:24.479 for the economy than stocks because they're substantially more broadly owned. 0:21:25.040 --> 0:21:29.080 It's really an important part of the median families income 0:21:29.200 --> 0:21:33.000 picture and capital picture, and it is not stock sunning. 0:21:33.840 --> 0:21:38.080 And so the the motto should be don't mess with housing. 0:21:38.920 --> 0:21:43.080 The supermato should be never have a housing bubble at 0:21:43.080 --> 0:21:44.960 the same time as you have a stock market bubble, 0:21:45.000 --> 0:21:49.439 which is the great mistake the Japanese made with the 0:21:49.440 --> 0:21:52.240 biggest bubble in history on both frants at the same time. 0:21:52.720 --> 0:21:58.160 But although although we didn't get carried away with ridiculous 0:21:58.440 --> 0:22:03.280 subprime this time, the multiple of family income actually went 0:22:03.440 --> 0:22:07.919 higher than it did in two thousand and seven, So 0:22:08.760 --> 0:22:13.480 in terms of actual long term vulnerability posed by overpricing, 0:22:13.920 --> 0:22:18.240 this housing market was more overpriced, and it was accompanied 0:22:18.359 --> 0:22:23.480 by a much more overpriced and plastically bubbly stock market 0:22:24.600 --> 0:22:26.440 than two thousand and seven OKA. 0:22:26.520 --> 0:22:28.600 So we can see it working its way through the 0:22:28.920 --> 0:22:32.720 housing market across the world. But obviously all the stock 0:22:32.760 --> 0:22:35.159 markets are different because they've come out of this bubble 0:22:35.200 --> 0:22:37.679 at different valuation levels, with the US, foribly being the 0:22:37.680 --> 0:22:40.600 most expensive. So what can we expect to see happened 0:22:40.640 --> 0:22:42.399 to the US stock market in particular? 0:22:42.520 --> 0:22:48.040 Now the most vulnerable area in my opinion is the 0:22:48.119 --> 0:22:51.480 Russell two thousand is a good measure of where the 0:22:51.600 --> 0:22:56.800 vulnerabilities will be. The Russell two thousand often has no 0:22:56.960 --> 0:23:00.840 collective earnings at all. It has a very high density 0:23:00.840 --> 0:23:05.080 of zombies, companies that really can only pay their interest 0:23:05.119 --> 0:23:06.680 payments by issuing more debt. 0:23:08.000 --> 0:23:08.880 It has never been. 0:23:08.880 --> 0:23:12.320 Higher than it is today, and they have a very 0:23:12.359 --> 0:23:15.840 high ratio, something like forty percent, don't have positive earnings, 0:23:15.880 --> 0:23:17.640 and they have record debt. 0:23:17.680 --> 0:23:19.080 They have never had this kind of debt. 0:23:19.119 --> 0:23:22.199 So they're vulnerable on the debt front, vulnerable on the 0:23:22.240 --> 0:23:25.760 financial front, and vulnerable on a broad economic front. 0:23:26.600 --> 0:23:28.960 And this is the interesting thing. 0:23:29.520 --> 0:23:33.880 The Russell two thousand is not up in real terms. 0:23:33.880 --> 0:23:34.960 For the last year. 0:23:35.560 --> 0:23:39.680 It's not up over two years, and really surprising, it's 0:23:39.680 --> 0:23:42.240 not up over five years. It's actually down quite a 0:23:42.320 --> 0:23:46.080 bit over five years. So it is showing its vulnerability, 0:23:46.800 --> 0:23:51.160 and it brings up a kind of sidebar. Why don't 0:23:51.200 --> 0:23:54.800 people state everything inflation adjusted? We always did in the 0:23:54.880 --> 0:23:58.320 nineteen seventies, eighties and nineties, and we have now forgotten 0:23:58.359 --> 0:24:01.800 because we had a twenty five your window where inflation 0:24:02.080 --> 0:24:06.040 was dribbling down towards nothing, and we've lost the habit 0:24:06.840 --> 0:24:09.440 because people think, oh, well, the S and P five 0:24:09.520 --> 0:24:11.040 hundred's almost that it's high. 0:24:11.640 --> 0:24:12.560 The s and P five. 0:24:12.480 --> 0:24:16.720 Hundred is about eighteen percent below it's high. It's high 0:24:16.920 --> 0:24:21.040 a year and nine months ago, and there's been decent 0:24:21.119 --> 0:24:25.960 inflation in that window at least seven maybe eight percent plus. 0:24:26.000 --> 0:24:29.760 The market is down in any case about ten per cent. 0:24:30.200 --> 0:24:33.080 The markets are not doing as well as people think 0:24:33.160 --> 0:24:37.320 because they they have lost the knack of taking off inflation. 0:24:37.440 --> 0:24:40.679 Inflation is every bit as painful as any other percentage 0:24:40.680 --> 0:24:41.560 point loss. 0:24:42.240 --> 0:24:44.399 But it isn't though, is it. I mean, it isn't 0:24:44.680 --> 0:24:47.399 in people's minds. I mean, in some senses, this is 0:24:47.600 --> 0:24:50.119 a great way for things to be brought back to 0:24:50.200 --> 0:24:53.120 ground by a couple of years of relatively high inflation. 0:24:53.280 --> 0:24:55.960 So people don't feel like they're losing all their hard 0:24:56.000 --> 0:25:00.320 earned money, they don't feel as though their house prices collapse, etc. 0:25:00.600 --> 0:25:03.879 If it only happens in real terms as opposed to 0:25:03.960 --> 0:25:07.760 in nominal terms, generally, people seeming people feel happier about it. 0:25:08.520 --> 0:25:12.680 You're right, they're more easily misguided in thinking they're doing fine, 0:25:12.920 --> 0:25:15.600 except when they go to the supermarket where the reverse end. 0:25:16.160 --> 0:25:19.760 If anything, they over respond to so they come out 0:25:19.800 --> 0:25:23.399 of the supermarket thinking that inflation will crush them, and 0:25:23.440 --> 0:25:26.840 they are accept a ten pounds loss on their house 0:25:27.040 --> 0:25:30.240 from inflation without even noticing it. The other thing, though, 0:25:30.680 --> 0:25:35.320 is it it does take down their depths inflation, so 0:25:35.960 --> 0:25:38.359 there is an offset. If you have a very big 0:25:38.400 --> 0:25:42.119 mortgage and you have ten percent inflation, you owe ten 0:25:42.160 --> 0:25:45.520 percent less and that sadly has always slipped through unnoticed. 0:25:45.560 --> 0:25:48.679 Also, yeah, and then if your salary goes up at 0:25:48.720 --> 0:25:51.800 the same time, if your salary matches inflation, then in 0:25:51.840 --> 0:25:54.600 some senses, for a lot of people, an inflationary environment, 0:25:54.640 --> 0:25:57.000 as long as it doesn't get out of control in 0:25:57.040 --> 0:26:00.639 a situation like this, isn't too bad. Adver get hit. 0:26:00.680 --> 0:26:02.040 I'm just saying it's not too bad. 0:26:03.240 --> 0:26:05.800 You might say that, but if you actually ask them 0:26:05.840 --> 0:26:11.160 how they feel, the results are quite conclusively opposite. People's 0:26:11.760 --> 0:26:16.880 confidence in the economy is very low in the UK 0:26:17.000 --> 0:26:19.760 and the US. If you ask them do you feel 0:26:19.760 --> 0:26:25.359 better off than last year? Almost nobody since they feel 0:26:25.400 --> 0:26:29.160 better off, even though obviously quite a large fraction are 0:26:29.200 --> 0:26:31.960 better off in real life. The results are the rich 0:26:32.000 --> 0:26:36.400 and the poor are feeling a little squeezed in today's environment, 0:26:36.760 --> 0:26:40.360 so I think you're wrong in that sense. It does 0:26:41.280 --> 0:26:45.800 reach right through into consumer confidence. Now, if you have 0:26:46.240 --> 0:26:48.520 a lot of money in the piggybang from the government's 0:26:48.880 --> 0:26:53.040 program stimulus program, that's a huge offset, and that that 0:26:53.080 --> 0:26:57.520 has been very successful in keeping keeping spending going. And 0:26:57.600 --> 0:27:01.360 there were some other psychological factors that people were so 0:27:01.600 --> 0:27:04.840 wildly enthusiastic to come out of COVID and get on 0:27:04.880 --> 0:27:07.119 a plane and go to Spain again and so on 0:27:07.200 --> 0:27:11.000 and spread their wings and have a mail out that 0:27:11.040 --> 0:27:14.440 they have done that so enthusiastically that they've run through 0:27:14.480 --> 0:27:18.320 all their COVID savings and now they are racking up 0:27:18.400 --> 0:27:21.400 credit card debt like there's note tomorrow and building out 0:27:21.440 --> 0:27:25.360 their aggregate debt level. They've never saved less in America. 0:27:25.480 --> 0:27:29.600 You may be aware than their saving now heaven. I mean, 0:27:29.760 --> 0:27:31.840 the savings phrase has just about disappeared. 0:27:32.000 --> 0:27:36.879 But nonetheless, nonetheless, this inflation plus the folds in the 0:27:36.920 --> 0:27:39.840 market do mean that. And you wrote about this in 0:27:40.400 --> 0:27:44.240 your latest note that the meat grinder that quite a 0:27:44.280 --> 0:27:47.080 lot of the stocks that we look at have already 0:27:47.359 --> 0:27:50.719 come off very significantly in real terms. You say, for example, 0:27:50.720 --> 0:27:53.399 the lakes of Amazon, Alphabet and Meta would have to 0:27:53.480 --> 0:27:56.199 rise between seventeen one hundred and fifty percent to go 0:27:56.240 --> 0:27:58.600 back to their twenty twenty one peaks in real terms. 0:27:59.200 --> 0:28:01.600 So we've seen it awful lot of froth come up 0:28:01.640 --> 0:28:06.320 the market in real terms, and I suspect there are 0:28:06.520 --> 0:28:09.320 some groups of more enthusiastic growth infestors than perhaps you 0:28:09.400 --> 0:28:11.639 or I are looking at those prices and saying, well, 0:28:11.640 --> 0:28:13.159 this is a pactly good place to get back in. 0:28:13.960 --> 0:28:18.359 Well, they typically do that, and in a multi legged 0:28:18.760 --> 0:28:22.960 bear market, they always have plenty of people buying into 0:28:23.000 --> 0:28:25.760 each leg, and I have no reason to think this 0:28:25.800 --> 0:28:29.880 would be any exception. Once you've seen a stock sell 0:28:29.920 --> 0:28:33.520 at three hundred, even if it's intrinsically worth one hundred, 0:28:34.320 --> 0:28:37.840 you feel somehow it has a divine right to go back. 0:28:37.680 --> 0:28:38.320 To three hundred. 0:28:38.640 --> 0:28:40.480 So when it comes down to two hundred, you think 0:28:40.480 --> 0:28:44.400 it's a massive bargain even though it's intrinsic value maybe 0:28:44.440 --> 0:28:46.640 one hundred. So you go whooping in there and you 0:28:46.680 --> 0:28:48.720 buy it, and then it comes second leg down to 0:28:48.760 --> 0:28:51.840 one hundred and fifty still looks pretty good, and then 0:28:51.880 --> 0:28:54.760 eventually it comes down to one hundred and you're heartbroken 0:28:54.920 --> 0:28:56.520 and you sell it anyway, and it goes down to 0:28:56.560 --> 0:28:58.800 eighty and it's actually cheap. 0:29:00.080 --> 0:29:02.280 Can't buy it again because you've been too hurt. 0:29:02.920 --> 0:29:05.960 Yes, now you're paralyzed and hurt. 0:29:07.400 --> 0:29:12.080 And that's when I get to write to reinvesting when terrified. Yes, 0:29:12.160 --> 0:29:16.320 two thousand and nine, and when people are so paralyzed 0:29:16.320 --> 0:29:18.560 they don't care that it's the cheapest prices for twenty 0:29:18.560 --> 0:29:25.240 two years. And GMO's famously allegedly bear If Forecast had 0:29:25.440 --> 0:29:31.280 double digit real returns for seven years in everything, including 0:29:31.280 --> 0:29:32.360 the S and P five hundred. 0:29:32.720 --> 0:29:34.680 Yeah, but you had to be brave in two thousand 0:29:34.720 --> 0:29:37.400 and nine, didn't you. I mean there were several starts 0:29:37.600 --> 0:29:39.960 you were. You possibly one of the loudest voices saying 0:29:40.240 --> 0:29:42.080 you know, if you buy now, you've got an excellent 0:29:42.160 --> 0:29:45.080 chance of making extraordinary returns over the next decade. 0:29:45.240 --> 0:29:47.960 It was hard to Why do you have to be brave? 0:29:48.200 --> 0:29:50.920 I would argue you have to be brave buying when 0:29:50.960 --> 0:29:54.320 prices are extended and high, because you're much more likely 0:29:54.360 --> 0:29:55.120 to lose money. 0:29:55.800 --> 0:29:58.240 It's just the perception, But the. 0:29:58.160 --> 0:30:03.120 Real bravery requires is to buy when the market is 0:30:03.160 --> 0:30:04.880 smashed down to a bargain. 0:30:05.440 --> 0:30:06.440 Seems to me very. 0:30:06.280 --> 0:30:07.840 Little, but does not now is it. 0:30:08.320 --> 0:30:09.600 No, that is not now. 0:30:09.440 --> 0:30:11.640 If you look at if you look at the most 0:30:11.720 --> 0:30:18.400 predictive measures, and mister Hussman does the best of those, 0:30:19.200 --> 0:30:23.920 very detailed history, historical record of which ones actually do 0:30:24.040 --> 0:30:28.840 the best predictive measure. It isn't Warren Buffett's price to 0:30:28.920 --> 0:30:35.840 book compared to GDP. It's an interesting, more sophisticated measure 0:30:36.040 --> 0:30:39.720 of the earnings taking out financial companies and so on. 0:30:40.400 --> 0:30:44.400 And those measures are about as high as they have 0:30:44.480 --> 0:30:47.760 ever been today. They're in the top two or three 0:30:47.800 --> 0:30:52.280 percent of all time. There's a spike. There's a spike 0:30:52.320 --> 0:30:56.800 in two thousand, and there's a spike in twenty twenty one. 0:30:57.840 --> 0:31:01.600 And this is above two thousand, but below the spike 0:31:01.640 --> 0:31:04.360 in twenty twenty one. But we are right up there. 0:31:04.880 --> 0:31:07.680 In order to get the market down to a level 0:31:07.720 --> 0:31:12.680 where it would typically out yield the long bond by 0:31:12.680 --> 0:31:17.320 five percent, which it should, which you could argue it should, 0:31:17.720 --> 0:31:21.080 the market would just sheare arithmetic, the market would have 0:31:21.120 --> 0:31:24.000 to drop by more than fifty percent. This is not 0:31:24.120 --> 0:31:28.800 my forecast. I have a very genteel forecast. Anything below 0:31:28.840 --> 0:31:32.640 three thousand would make me think that it was reasonable. 0:31:33.000 --> 0:31:36.080 And if everything works out, badly, which it sometimes does. 0:31:36.400 --> 0:31:38.320 I would not be amazed if it went to two 0:31:38.320 --> 0:31:42.640 thousand on the SP, but that would that would require 0:31:44.840 --> 0:31:47.240 a couple of wheels to fall off, and wheels tend 0:31:47.240 --> 0:31:50.240 to fall off in the grate in the Great bubbles unraveling, 0:31:50.720 --> 0:31:54.320 but it doesn't mean they have to so, but it 0:31:54.360 --> 0:31:58.200 would be unlikely not to get to something close to 0:31:58.840 --> 0:32:00.880 three three on the S and P. 0:32:01.280 --> 0:32:03.880 Now what could turn that around, of course, is inflation 0:32:04.000 --> 0:32:06.680 falling right back, right back to two percent or below, 0:32:06.680 --> 0:32:10.720 which it was not impossible, and interest rates then falling 0:32:10.760 --> 0:32:13.200 back as well, because we know, don't we let markets 0:32:13.440 --> 0:32:16.000 really like low steady inflation. We know they really like 0:32:16.080 --> 0:32:19.000 low steady interest rates. We know that they hate high 0:32:19.080 --> 0:32:23.120 and volatile inflation. So and there is an expectation in 0:32:23.200 --> 0:32:25.240 large parts of the market, although I think that's been 0:32:25.280 --> 0:32:27.680 tested over the last couple of weeks. There has been 0:32:27.720 --> 0:32:31.040 an expectation that eventually inflation would end up back at 0:32:31.080 --> 0:32:34.440 target and that we would see rates begin to come off. 0:32:34.480 --> 0:32:36.720 Now that the higher for longer story is beginning to 0:32:36.720 --> 0:32:39.520 get a bit more traction, but that's relative the reason. 0:32:39.640 --> 0:32:42.800 So shift in the inflation or interest rate environment would 0:32:42.880 --> 0:32:43.600 change things. 0:32:44.000 --> 0:32:48.280 The model that Ben Incur and I did twenty years ago. 0:32:48.360 --> 0:32:51.720 It's got a very very high correlation explaining PE. It 0:32:51.760 --> 0:32:54.240 doesn't predict it, It just says, how do we get here? 0:32:54.520 --> 0:32:57.959 It turns out the market is really a coincident indicator 0:32:58.560 --> 0:33:02.800 of comfort. What is it to make a portfolio manager 0:33:02.840 --> 0:33:07.040 comfortable in an institution? And the answer is, as you suggest, 0:33:07.600 --> 0:33:13.520 steady inflation around two percent. It hates inflationary spines and 0:33:13.640 --> 0:33:18.120 very high profit margins, and profit margins have been drifting 0:33:18.160 --> 0:33:22.640 down and more than people realize, and inflation has been 0:33:23.640 --> 0:33:24.480 bouncing around. 0:33:24.880 --> 0:33:26.920 But it's part of the scenery now. 0:33:27.400 --> 0:33:30.800 And the model says a shillerpee should be about sixteen 0:33:30.840 --> 0:33:35.280 point eight, which is decently above average and doesn't sound 0:33:35.360 --> 0:33:39.560 ridiculously low, and that's because the profit margins are still decent. 0:33:40.720 --> 0:33:41.520 Well, what is it? 0:33:41.800 --> 0:33:46.000 Well, a few weeks ago it was twenty nine thirty, 0:33:46.520 --> 0:33:49.360 so it was not responding in the normal way. 0:33:49.760 --> 0:33:52.880 This is only the second time it had a bit 0:33:52.880 --> 0:33:53.560 of a holiday. 0:33:53.720 --> 0:33:58.160 In two thousand, our model said we should have the 0:33:58.240 --> 0:34:01.400 highest pe and history everything is perfect, and the market 0:34:01.440 --> 0:34:04.360 said you're done right and went much higher than that 0:34:04.480 --> 0:34:10.399 even for eighteen months. That's you could argue the fire 0:34:10.400 --> 0:34:16.239 and away out the outlier in speculative craziness. And the 0:34:16.280 --> 0:34:23.719 second time was when inflation spiked in twenty twenty two, 0:34:23.960 --> 0:34:26.960 or was it twenty twenty one, twenty twenty one, twenty 0:34:27.040 --> 0:34:31.600 one not in the summer of twenty twenty one, you 0:34:31.640 --> 0:34:36.920 had a rapidly rising, unexpected inflationary jag and the market 0:34:36.960 --> 0:34:40.080 continued to rise for the whole half year, and so 0:34:40.120 --> 0:34:44.279 you had a huge divergence in our model and the 0:34:44.640 --> 0:34:47.319 first half to wipe out in the first half of 0:34:47.760 --> 0:34:51.440 twenty twenty two was the biggest decline in the first 0:34:51.440 --> 0:34:54.480 half of the year since nineteen thirty nine, incidentally in 0:34:54.520 --> 0:34:59.760 real times. But it didn't close the gap because inflation. 0:35:00.320 --> 0:35:03.760 The longer it stayed there, the worse the model god, 0:35:03.960 --> 0:35:06.799 and the profit margins began to decline a bit. 0:35:07.080 --> 0:35:09.600 Well, that was interesting, profit margins beginning to decline, wasn't it? 0:35:09.600 --> 0:35:11.240 Because one of the things that we've talked about before 0:35:11.600 --> 0:35:14.440 is how extraordinary it is that something that always mean 0:35:14.480 --> 0:35:19.279 reverts profit margins did not mean revert, and a lot 0:35:19.360 --> 0:35:22.440 of us have been waiting to see profit margins that 0:35:22.640 --> 0:35:24.680 come down. They didn't, and they didn't, and they didn't 0:35:24.680 --> 0:35:26.920 and even now. It's a pretty gradual erosion. 0:35:27.960 --> 0:35:28.560 Yes it is. 0:35:29.120 --> 0:35:34.520 And if you want to further narrow that story to 0:35:34.600 --> 0:35:39.359 what they now call the Magnificence seven, there had never 0:35:39.400 --> 0:35:43.920 been ever, ever such a divergence in favor of the 0:35:44.040 --> 0:35:49.120 US in total corporate earnings since twenty ten, so this 0:35:49.200 --> 0:35:52.959 is a recent event. The US has outperformed the rest 0:35:53.000 --> 0:35:56.080 of the developed world by about. 0:35:55.760 --> 0:35:57.640 Seventy percentage points. 0:35:57.880 --> 0:35:59.920 So you could say, well, in that case, they should 0:35:59.920 --> 0:36:04.319 have done seventy percentage points better, and they did more 0:36:04.360 --> 0:36:07.640 than that because they in the market always goes in 0:36:07.640 --> 0:36:11.120 for double counting, So if you have unexpectedly good profit margins, 0:36:11.520 --> 0:36:15.279 you'd get an unexpected increase in price earnings ratio, which 0:36:15.320 --> 0:36:16.640 also happened. 0:36:17.480 --> 0:36:18.719 Any case, if you go. 0:36:18.760 --> 0:36:21.560 Back to the seventy percent hour performance and you take 0:36:21.640 --> 0:36:27.280 out them so called fans. 0:36:25.920 --> 0:36:26.799 You find that. 0:36:29.080 --> 0:36:32.479 The ninety you know, the ninety five percent or more, 0:36:32.560 --> 0:36:38.000 the ordinary American stocks looked very much like the rest 0:36:38.000 --> 0:36:41.480 of the world. Their performance was a little bit better, 0:36:41.800 --> 0:36:44.120 their earnings were a little bit better, but in the 0:36:44.239 --> 0:36:49.000 normal range. And then you have the Magnificence seven, whose 0:36:49.560 --> 0:36:54.520 performance in earnings was unprecedented by a wide margin, and 0:36:54.560 --> 0:36:57.879 whose performance in the stock market was even more unprecedented 0:36:57.960 --> 0:37:01.279 because they not only had the earning, but they had 0:37:01.280 --> 0:37:04.720 a steady rise in pe. So you've had the sudden 0:37:04.800 --> 0:37:11.640 emergence of multi trillion dollar market caps. Quite an amazing 0:37:11.719 --> 0:37:16.959 world and culminating in this year where if you took 0:37:17.000 --> 0:37:21.520 out the Magnificent seven today, the S and P would 0:37:21.520 --> 0:37:24.440 not be out for the year. It may be up 0:37:24.440 --> 0:37:31.680 a point, but little or nothing, and all of the 0:37:31.719 --> 0:37:35.560 ten or at twelve point rally is carried by carried 0:37:35.560 --> 0:37:38.520 by the Magnificence seven. There has never been such a 0:37:38.600 --> 0:37:43.719 narrow market. Now, what will happen to them is a 0:37:43.920 --> 0:37:49.719 very interesting question, is it not? Will they continue to 0:37:49.800 --> 0:37:55.279 grow and become seventy percent of the entire world's market cap. 0:37:56.040 --> 0:38:01.359 Will they be attacked by governments? Will they attack each other, 0:38:01.800 --> 0:38:05.680 grow into each other's markets and beat down their profit margins. 0:38:06.200 --> 0:38:12.360 Will new technologies arise and n run the iPhone or whatever? 0:38:13.280 --> 0:38:13.880 Who knows? 0:38:14.800 --> 0:38:18.240 I noticed back in the nifty to fifty of nineteen 0:38:18.280 --> 0:38:23.560 seventy two, that's when fifty high quality companies like Coca 0:38:23.560 --> 0:38:28.400 Cola and IBM went to a fifty percent premium in 0:38:28.440 --> 0:38:31.000 fair value against the market. It's the one time when 0:38:31.080 --> 0:38:33.839 quality stocks had a huge bubble, and one of the 0:38:33.880 --> 0:38:37.080 reasons was that none of them had failed. There were 0:38:37.120 --> 0:38:39.920 no failures in the nifty to fifty group for fifteen 0:38:40.000 --> 0:38:44.280 years prior to nineteen seventy two, and after nineteen seventy 0:38:44.320 --> 0:38:47.560 two they actually started to die off like flies. We 0:38:47.640 --> 0:38:51.920 had Avon, we had Polaroid, we had Exxon, we had 0:38:51.960 --> 0:38:56.840 Eastman Kodak, we had IBM half wounded, seriously wounded, i 0:38:56.880 --> 0:38:57.399 should say. 0:38:57.640 --> 0:39:00.880 And on it went. They lost their match, and they. 0:39:00.760 --> 0:39:04.399 Lost their huge premium uh and and they and they 0:39:04.400 --> 0:39:06.680 did not and they underperformed badly. 0:39:06.440 --> 0:39:08.040 For a decade. 0:39:08.960 --> 0:39:15.759 Will that happen to these new nifty seven That's the 0:39:15.880 --> 0:39:20.560 question that is unanswerable, I think, because each one of 0:39:20.600 --> 0:39:25.440 them depends on a completely different slice of the economy. 0:39:25.880 --> 0:39:30.520 Tesla has relatively little in common with Apple. Both of 0:39:30.560 --> 0:39:34.880 them are you know, Tesla's a metal basher. Apple is 0:39:34.880 --> 0:39:36.719 a metal basher with lots of software. 0:39:37.360 --> 0:39:42.840 And then you move into the into the. 0:39:43.560 --> 0:39:51.560 Software enterprises, the Googles and Amazons and facebooks. It's a 0:39:51.640 --> 0:39:55.480 very complicated set of issues and to which I don't 0:39:55.520 --> 0:39:58.560 have the answer, but I have pretty much faith that 0:39:58.680 --> 0:40:02.239 in aggregate when you add them to the market and 0:40:02.640 --> 0:40:05.680 you look at the price. You can't get blood out 0:40:05.680 --> 0:40:10.480 of a stone if you've sent, if you've sent the 0:40:10.560 --> 0:40:17.399 Shiller pe up towards thirty, you are unlikely to get 0:40:17.440 --> 0:40:22.040 more than a three percent real return out of that 0:40:22.280 --> 0:40:26.520 is the reciprocal of thirty. And the market really expect 0:40:26.680 --> 0:40:31.640 twice there, doesn't it? So sooner or later? The simple 0:40:31.640 --> 0:40:35.800 arithmetics suggests you'll either have a dismal return forever, or 0:40:35.840 --> 0:40:38.760 you'll have a nice bear market and then a normal return. 0:40:39.920 --> 0:40:44.080 And the nice bear market will be hopefully less than 0:40:44.120 --> 0:40:46.720 a fifty percent declimb, but it won't be a huge 0:40:46.719 --> 0:40:50.120 amount less from the peak than fifty percent in real 0:40:50.200 --> 0:40:51.120 turn in real terms. 0:40:51.360 --> 0:40:54.040 Okay, Well, I think we've established where the bubbles still are, 0:40:55.440 --> 0:40:59.000 but hopefully we can discuss some opportunities. I mean, obviously 0:40:59.000 --> 0:41:01.279 every does everyone does. Don't want to be entirely in cash, 0:41:01.320 --> 0:41:04.719 and they wouldn't be particularly healthy either. Where should people 0:41:04.760 --> 0:41:07.239 be putting their money at the moment? I suspect you're 0:41:07.239 --> 0:41:08.400 going to say value. 0:41:09.960 --> 0:41:14.839 Well, if you've spent forty years running down interest rates 0:41:14.920 --> 0:41:20.920 until recently, you've basically spent forty years pushing up assets 0:41:21.040 --> 0:41:24.880 led by real estate, as we've said, but everything eventually 0:41:24.880 --> 0:41:27.520 follows for the same for the same logic. If I'm 0:41:27.560 --> 0:41:30.000 paid a negative return in the piggy bank, I'd better 0:41:30.200 --> 0:41:34.160 reach for yield and so on, and that game has 0:41:34.200 --> 0:41:40.200 gone on. So global real estate is universally overpriced. Farms 0:41:40.239 --> 0:41:41.960 and forests, you know. 0:41:42.280 --> 0:41:47.880 Fine art universally overpriced. The aberration is the stock markets 0:41:47.960 --> 0:41:54.600 outside the US. Why were they so ordinary? Is slightly 0:41:54.600 --> 0:41:55.600 bewildering to me. 0:41:58.600 --> 0:42:01.960 I suppose two thousand the tag bubble was a bit similar, 0:42:02.480 --> 0:42:06.640 but it seems a little implausible that your typical assets 0:42:06.719 --> 0:42:11.680 like real estate would become overpriced everywhere from Canada to Australia. 0:42:11.760 --> 0:42:14.520 And yet in the stock market most of the most 0:42:14.560 --> 0:42:20.840 of the markets were kind of overpriced, but ordinary, ordinarily 0:42:21.719 --> 0:42:25.919 ordinarily overpriced, and a few were underprised then and they 0:42:25.960 --> 0:42:31.040 were investible, and not just emerging markets. But the developed 0:42:31.080 --> 0:42:35.719 world outside the US was investible and is investible, so. 0:42:35.880 --> 0:42:39.759 Japan, most of Europe, the UK there is. I mean, 0:42:39.800 --> 0:42:42.080 we always look at the UK and Japan, John, and 0:42:42.080 --> 0:42:43.960 I think they are the cheapest markets. 0:42:44.560 --> 0:42:48.560 Yeah, they look two amongst the cheaper ones for sure. 0:42:49.080 --> 0:42:52.759 And emerging is of course very complicated with China, but 0:42:53.320 --> 0:42:57.759 in general the rest of the world seems investible. Do 0:42:57.880 --> 0:43:02.200 your analysis, you know, make your mistake, but it's reasonable. 0:43:04.000 --> 0:43:07.120 So don't invest in real estate, don't invest in the US. 0:43:07.200 --> 0:43:09.080 And if you have to invest in the US, and 0:43:09.160 --> 0:43:14.400 most institutions do, I would urge you to take a 0:43:14.400 --> 0:43:18.600 good look at quality. Quality has been the mispriced asset 0:43:19.040 --> 0:43:24.719 for one hundred years. The triple A bond everyone understands, 0:43:24.880 --> 0:43:28.280 will pay you one percent less. The triple A stock 0:43:28.320 --> 0:43:31.799 has paid you half a percent more. Now, what the 0:43:31.840 --> 0:43:34.799 heck is that? Actually, I can explain it. They are 0:43:34.840 --> 0:43:37.759 performing band markets. They underperform in ball markets. Why do 0:43:37.800 --> 0:43:41.279 they underperform in bullmarkes because they're boring. In a ballmarket, 0:43:41.360 --> 0:43:44.800 you want to earn Tesla, You want to own Meme stocks, 0:43:44.800 --> 0:43:48.319 you want to earn what's flying. You don't want to 0:43:48.360 --> 0:43:52.000 own Coca Cola. It's just too boring. In the long run, 0:43:52.040 --> 0:43:54.440 Coca Cola does very well in the bear markets. They 0:43:54.480 --> 0:43:58.879 do particularly on air. But that's a free lunch. It's 0:43:58.920 --> 0:44:01.520 the only free lunch of totally missed by the pressure 0:44:01.800 --> 0:44:05.480 and farmers of the world. Back in the day, they 0:44:05.520 --> 0:44:08.120 were quite correctly saying price the book wins because it's 0:44:08.120 --> 0:44:08.880 a risk factor. 0:44:08.920 --> 0:44:10.240 Of course, it's a risk factor. 0:44:10.800 --> 0:44:14.640 Price the book is the marker's description of who's got 0:44:14.680 --> 0:44:20.920 the junkiest, ugliest assets. Pe is the market's judgment on 0:44:20.960 --> 0:44:24.120 who's got the flakeyst dourneys, et c. But when it 0:44:24.160 --> 0:44:27.279 comes to quality, they have less risk of every kind. 0:44:27.320 --> 0:44:30.840 They have less debt, they go bankrupt less, they have 0:44:30.920 --> 0:44:32.800 less volatility, they have a lower beta. 0:44:33.000 --> 0:44:35.480 Yet they outperform. That is a free lunch. 0:44:35.560 --> 0:44:37.760 And they're not hideously overpriced at the moment. 0:44:39.080 --> 0:44:39.880 Absolutely not. 0:44:40.160 --> 0:44:44.359 No, they've moderately outperformed for the last year, the last 0:44:44.360 --> 0:44:46.440 ten years, the last fifty years, and the last one 0:44:46.520 --> 0:44:52.160 hundred years. And I'm happy to say that my firm, GMO, 0:44:52.320 --> 0:44:55.360 has made a big fuss about them from the very beginning. 0:44:55.760 --> 0:44:58.640 They play a big role in our value models, and 0:44:58.680 --> 0:45:01.520 we have a fund a very good job of thinking 0:45:01.560 --> 0:45:04.480 about how to treat them, which wants to buy and 0:45:04.520 --> 0:45:06.640 what really constitutes quality. 0:45:07.080 --> 0:45:07.520 Quality. 0:45:07.640 --> 0:45:10.920 By the way, in a nutshell is your element of monopoly. 0:45:11.719 --> 0:45:16.160 High returns, low debt. Low debt of course goes along 0:45:16.200 --> 0:45:19.840 with the high stable returns. High stable returns is another 0:45:19.840 --> 0:45:22.800 way of saying you're a price setter, and a price 0:45:22.840 --> 0:45:25.760 setter is another way of saying you have a monopoly element. 0:45:27.560 --> 0:45:31.200 And the amazing thing about the Magnificent Seven is they're 0:45:31.239 --> 0:45:34.400 all global monopolies and they sprang out of the ground 0:45:34.400 --> 0:45:41.120 pretty down quickly. And of course the Justice Department, the 0:45:41.360 --> 0:45:45.680 anti monopoly element in the US and the UK, has 0:45:45.719 --> 0:45:49.680 been largely sound asleep for the last twenty years. So 0:45:49.719 --> 0:45:52.880 they've had a wonderful environment in which to operate, and 0:45:52.920 --> 0:45:56.480 they had done a wonderful job of capitalizing on that 0:45:56.640 --> 0:45:57.760 and moving very fast. 0:45:58.880 --> 0:46:01.960 Okay, I wanted to ask you about the investing in 0:46:02.000 --> 0:46:04.720 the energy transition. We've been looking at the renewable stocks, 0:46:04.719 --> 0:46:06.359 and obviously you have as well, and they've been having 0:46:06.360 --> 0:46:09.480 a fairly torrid time recently, the wind and solar companies, 0:46:09.680 --> 0:46:13.239 and you might have expected something rather different given the 0:46:13.520 --> 0:46:16.600 rush to zero across the world. I wondered if you 0:46:16.640 --> 0:46:18.680 had any thoughts on how to invest or not to 0:46:18.719 --> 0:46:19.960 invest in the transition. 0:46:21.440 --> 0:46:27.160 The thing about transitions is they're very tricky, characterized by 0:46:27.320 --> 0:46:31.640 even more booms and busts than anywhere else, and so 0:46:32.480 --> 0:46:37.080 oil and alternative energy will will be a trickier area 0:46:37.160 --> 0:46:44.600 than most climate resources. The same the thing about climate investing, however, 0:46:44.760 --> 0:46:48.480 is that they will have an enormous top line revenue advantage. 0:46:48.560 --> 0:46:52.600 Other things being even the countries of the world finally 0:46:53.560 --> 0:46:54.560 have woken up. 0:46:55.120 --> 0:46:58.120 And maybe a few of are in the process of still. 0:46:58.280 --> 0:47:03.279 Waking up, to get the idea that climate is a 0:47:03.280 --> 0:47:05.560 big problem and needs to be addressed, and they are 0:47:05.600 --> 0:47:08.920 beginning to address it and throw money at it subsidies 0:47:08.960 --> 0:47:10.480 mainly instead of a carbon tax. 0:47:10.520 --> 0:47:15.040 But you can't expect perfection, and so going back to. 0:47:15.320 --> 0:47:18.200 Now, I have to interrupt you there. Your preferred way 0:47:18.200 --> 0:47:20.920 of dealing with this would be a blanket carbon tax 0:47:21.000 --> 0:47:24.000 on everything, and that would let the market sort this 0:47:24.040 --> 0:47:26.200 out for itself, whereas the subseas are a much more 0:47:26.200 --> 0:47:27.359 inefficient way of doing it. 0:47:28.360 --> 0:47:32.080 Absolutely, I'm not a great believer in economists as general. 0:47:32.120 --> 0:47:34.320 I think they've lost the plot for the last seventy years. 0:47:34.760 --> 0:47:37.480 They've forgotten their job description, which is to be useful. 0:47:38.239 --> 0:47:43.279 That they drown in assumptions and closed systems, which are 0:47:43.520 --> 0:47:48.160 largely speaking irrelevant for everything except their reputation inside their industry. 0:47:48.640 --> 0:47:51.279 But they have gotten one thing right. 0:47:51.360 --> 0:47:56.200 They all agree that a carbon tax is the vastly 0:47:56.239 --> 0:48:00.840 more efficient way to address climate change produce a source 0:48:00.840 --> 0:48:04.319 of very useful government revenue, but it's supposed by a 0:48:04.400 --> 0:48:10.320 very powerful industry which has, particularly in America, enormous political influence, 0:48:10.800 --> 0:48:14.799 and therefore it's very hard to do it. And each 0:48:14.840 --> 0:48:20.040 of the oily countries have a lot of political influence, 0:48:20.920 --> 0:48:27.520 so Australia, Canada, the UK, and of course in spades 0:48:28.000 --> 0:48:28.640 in the US. 0:48:28.880 --> 0:48:30.520 But I just wanted to finish that. 0:48:30.880 --> 0:48:33.200 You asked a question what to invest in, and I said, 0:48:33.360 --> 0:48:36.040 if you have to invest in the US, look at quality. 0:48:36.080 --> 0:48:41.200 But also climate change is going to outgrow the rest 0:48:41.640 --> 0:48:45.000 of the economy by a lot. It's going to dominate 0:48:45.080 --> 0:48:48.840 investing and the need for money for the next many decades. 0:48:49.680 --> 0:48:54.000 It doesn't mean though it won't have an element of commodities. 0:48:54.000 --> 0:48:57.959 Commodities break your heart because just as they're doing well, 0:48:58.000 --> 0:49:01.279 they have a wipeout for eighteen months and then they 0:49:01.320 --> 0:49:04.759 go roaring back to a new high. It's intrinsically a difficult, 0:49:04.880 --> 0:49:10.200 dangerous area, but it will have enormous growth potential. And 0:49:10.280 --> 0:49:14.640 so if you can find a competent source of investors, 0:49:15.239 --> 0:49:18.600 I would of course recommend climate change over the rest 0:49:18.680 --> 0:49:19.800 of the US market. 0:49:20.120 --> 0:49:23.560 Okay, And is there anything to be said for investing 0:49:23.560 --> 0:49:25.560 in the oil companies on the basis that we're going 0:49:25.600 --> 0:49:28.120 to need oil for many, many years to come, but 0:49:28.360 --> 0:49:32.520 supply is constrained, and so you might get a fairly 0:49:32.600 --> 0:49:35.600 long term supply of cash pouring off the oil companies, 0:49:35.600 --> 0:49:37.239 possibly in the same way that you have of the 0:49:37.280 --> 0:49:40.440 tobacco companies in the last couple of decades. That might 0:49:40.480 --> 0:49:44.160 make a reasonable medium term investments people looking for income. 0:49:44.880 --> 0:49:50.280 Yeah, no, it's quite possible. The trouble with commodities tobacco 0:49:50.480 --> 0:49:55.040 was never a commodity for oil is is that everything 0:49:55.160 --> 0:49:58.000 hinges on the marginal barrel. A couple of barrels too 0:49:58.040 --> 0:50:00.799 many and the price goes down to thirty. Couple of 0:50:00.800 --> 0:50:03.479 barrels too few and it goes to one hundred, and. 0:50:03.400 --> 0:50:04.760 That will always be the case. 0:50:04.960 --> 0:50:09.800 Now, the takeoff of evs, which represents a lot of oil, 0:50:10.840 --> 0:50:14.200 is moving much faster than people are twiggering onto. The 0:50:14.360 --> 0:50:17.719 US is lagging badly, but it's just left. From three 0:50:17.760 --> 0:50:20.520 to eight this week will be eight percent of all 0:50:20.560 --> 0:50:23.359 cart sold will be evs. But in the world at 0:50:23.360 --> 0:50:27.600 general it's sixteen, in Europe over twenty, and in China 0:50:28.360 --> 0:50:31.879 thirty five. It's the biggest market in the world. It's 0:50:31.880 --> 0:50:37.000 thirty five and growing rapidly, which means within five years 0:50:37.719 --> 0:50:40.640 oil demand will take a very big hit. And since 0:50:40.719 --> 0:50:45.160 oil is determined on the margin, that would suggest that's 0:50:45.320 --> 0:50:49.560 too many oil companies, too much oil capability in a 0:50:49.680 --> 0:50:53.320 suddenly reduced demand world, which. 0:50:53.760 --> 0:50:56.680 Typically would be absolute rack and ruin. 0:50:57.120 --> 0:51:00.520 In the meantime, however, you have the following power paradox 0:51:00.880 --> 0:51:07.200 that the faster you ramp up EV's wind solar, battery storage, 0:51:08.280 --> 0:51:11.560 the faster you ramp up your demand for energy. Because 0:51:12.960 --> 0:51:18.800 wind solar and storage are all resources upfront, energy up front, 0:51:19.000 --> 0:51:22.600 labor upfront, capital upfront. Once you've put them in the ground, 0:51:23.000 --> 0:51:27.400 it's practically free for the life span of the asset twenty. 0:51:27.120 --> 0:51:28.120 Thirty forty years. 0:51:29.000 --> 0:51:33.800 And EV's of course have the element built into their batteries, 0:51:33.840 --> 0:51:35.959 which is a very big chunk of the total. 0:51:36.400 --> 0:51:38.840 So they are much more money up front. 0:51:38.960 --> 0:51:42.840 They're incidentally more affected by the rise of interest rates, 0:51:42.880 --> 0:51:44.040 which is the. 0:51:44.000 --> 0:51:45.000 Short term problem. 0:51:45.640 --> 0:51:48.920 But what it means is we have an enormous demand 0:51:49.000 --> 0:51:53.399 for resources, really outside our ability to meet it consistently. 0:51:54.239 --> 0:51:56.680 In the next few years. We have to invent our 0:51:56.719 --> 0:52:00.759 way around. We have to substitute for these resources. We 0:52:00.840 --> 0:52:03.560 have to find cheaper ways of extracting them, and so 0:52:03.640 --> 0:52:07.040 on and so forth. And even so, the prices will 0:52:07.080 --> 0:52:12.640 be in their usual volatile way going higher, lithium, propper, cobalt, 0:52:12.719 --> 0:52:16.799 nickel being critical four. But energy is more important even 0:52:16.880 --> 0:52:21.080 than that, and there will be a terrible push on 0:52:21.120 --> 0:52:25.040 the demand for energy. And a lot of that is oil, 0:52:25.120 --> 0:52:26.759 a lot of it is gas, a lot of it 0:52:26.800 --> 0:52:31.440 is cold, but it will be fairly remsseless pressure. And 0:52:31.480 --> 0:52:36.040 the question is where do you go ramping up from 0:52:36.440 --> 0:52:42.120 sixteen percent evs to the global fleet being sixties, say, 0:52:42.560 --> 0:52:47.120 somewhere in that range. The tipping point comes where the 0:52:47.160 --> 0:52:53.200 squeeze on oil upwards becomes a consistent squeeze. 0:52:52.760 --> 0:52:53.799 On oil downwards. 0:52:54.800 --> 0:52:57.799 And I don't know, it's a sensitive business. I don't 0:52:57.800 --> 0:53:01.080 know exactly where that inflection point will come. But you 0:53:01.120 --> 0:53:03.440 should not be surprised if the price of oil doesn't 0:53:03.440 --> 0:53:06.360 go over one hundred maybe once or twice in the 0:53:06.400 --> 0:53:10.080 next five years. And you should not be surprised, No, 0:53:10.600 --> 0:53:13.080 you should be amazed if the price of oil does 0:53:13.120 --> 0:53:16.319 not then have a long term crutch, and it will 0:53:16.440 --> 0:53:20.080 run down to a level where the Saudi's or somebody 0:53:20.160 --> 0:53:23.720 will be able to grind out forty five dollars oil 0:53:24.080 --> 0:53:24.800 into the setting. 0:53:24.880 --> 0:53:28.680 Sup. That's how I think the game will end. 0:53:28.920 --> 0:53:30.920 It's interesting as mat you talk about this, that she 0:53:31.120 --> 0:53:33.239 demand for resources up front, I think is something that 0:53:33.719 --> 0:53:36.520 people are only just beginning to grasp that in order 0:53:36.560 --> 0:53:38.799 to get to the clean side, we have to do 0:53:38.840 --> 0:53:41.440 a lot of really really grubby stuff first. 0:53:41.840 --> 0:53:45.240 Really really grubby stuff. And even in the long run, 0:53:45.719 --> 0:53:48.920 you need a lot of metals which are grubby in 0:53:49.040 --> 0:53:52.560 order to get to a green world. Sorry guys, sorry, 0:53:52.719 --> 0:53:53.480 you purists. 0:53:54.320 --> 0:53:55.680 There is no way around that one. 0:53:55.719 --> 0:53:57.120 Yeah, there's no clean root to clean. 0:53:58.280 --> 0:53:59.680 No interesting. 0:54:00.000 --> 0:54:01.359 I let you go in to check out. I've catch 0:54:01.400 --> 0:54:02.960 you longer than I promised, but I wanted to ask 0:54:03.000 --> 0:54:05.280 you one last thing, which is when we last spoke, 0:54:05.960 --> 0:54:07.880 you said the Foundation was putting an awful lot of 0:54:07.880 --> 0:54:10.200 money into venture capital, and that was the place where 0:54:10.239 --> 0:54:15.320 you still thought that American exceptionalism was absolutely on. Do 0:54:15.360 --> 0:54:17.600 you still feel like that about the bench capital and industry? 0:54:17.640 --> 0:54:19.719 And we talked about it a little earlier in our conversation, 0:54:19.800 --> 0:54:21.759 but I wanted to come back to you and how 0:54:21.800 --> 0:54:22.640 you've been investing. 0:54:23.880 --> 0:54:29.480 Yeah, no, obviously, venture capital participated in the bubble, had 0:54:29.520 --> 0:54:34.040 a huge run up in prices twenty twenty twenty twenty one, 0:54:34.360 --> 0:54:38.640 and we'll have a fairly high price to pay over. 0:54:38.480 --> 0:54:39.799 The next year or so. 0:54:40.239 --> 0:54:43.360 But in the long run, it is amazing the quality 0:54:43.600 --> 0:54:48.000 of the people the American BC industry attracts. It's getting 0:54:48.040 --> 0:54:50.080 the best and the brightest who used to go into 0:54:50.080 --> 0:54:53.560 consulting or Goldman SAG and now they go into VC 0:54:54.160 --> 0:54:56.800 and startups, and they come from all over the world. 0:54:57.360 --> 0:55:00.200 At least a quarter of the bosses of all the 0:55:00.280 --> 0:55:04.760 VC companies we talk to were not born in America. 0:55:05.680 --> 0:55:09.560 And what an achievement for the US. We have the 0:55:09.600 --> 0:55:13.880 great research universities fifteen of the twenty and most of 0:55:13.920 --> 0:55:16.960 the rest are in the UK, but the fifteen great 0:55:17.000 --> 0:55:21.319 research universities are the bedrock for so many of these vcs. 0:55:21.480 --> 0:55:25.160 And you add that to a societal attitude taking risk 0:55:25.239 --> 0:55:28.640 in the US is simply much better than Europe. We 0:55:29.120 --> 0:55:32.120 will forgive people a failure. If they go into a 0:55:32.160 --> 0:55:35.080 startup and they fail, and they come back four years 0:55:35.120 --> 0:55:39.640 later with another bright idea, they'll get funded and it 0:55:39.680 --> 0:55:41.919 will hang over their heads. In most parts of the world, 0:55:42.000 --> 0:55:44.239 if you fail but not in the US now we 0:55:44.280 --> 0:55:47.839 have a wonderful aggressive attitude to risk taking, and we 0:55:47.880 --> 0:55:52.200 need to because the whole future of transferring to green 0:55:52.920 --> 0:55:55.120 is a thousand problems. 0:55:55.480 --> 0:55:56.160 Need to solve it. 0:55:56.440 --> 0:56:00.600 We need entrepreneurs, we need research, we need break throughs, 0:56:01.400 --> 0:56:04.839 and we need to keep moving fast. And in the end, 0:56:05.600 --> 0:56:09.960 the theory should be that VC, because it's riskier, has 0:56:10.000 --> 0:56:13.080 more failures. Because it has more failures and more risk, 0:56:13.120 --> 0:56:16.600 it should have a higher return and the practices that 0:56:16.680 --> 0:56:17.200 it has. 0:56:18.120 --> 0:56:19.839 If you look at the database for. 0:56:19.800 --> 0:56:24.000 The last twenty years, VC has the highest return, as 0:56:24.040 --> 0:56:28.799 it should of any sector in the marketplace. So to 0:56:28.880 --> 0:56:32.000 be into GREENBC is to go into the highest return 0:56:32.120 --> 0:56:38.440 sector with the biggest support from global governments and the US. 0:56:38.880 --> 0:56:42.680 That's a yes, then, I think, Jered. I ask every 0:56:42.680 --> 0:56:43.400 one of our guests. 0:56:44.280 --> 0:56:47.480 I ask every one of my guests recommended a warm recommendation. 0:56:47.800 --> 0:56:49.759 I ask every one of my guests before I let 0:56:49.840 --> 0:56:52.480 them go, the same question. I'm embarrassed to ask you this, 0:56:52.560 --> 0:56:54.719 but as I ask everybody, I have to ask you 0:56:54.760 --> 0:56:58.239 as well. I hope you don't mind. If if I 0:56:58.320 --> 0:57:00.960 was only going to give you one thing to keep 0:57:01.040 --> 0:57:04.120 for ten years, and I gave you a choice of 0:57:04.480 --> 0:57:12.440 only three things, gold, bitcoin, or cash on deposit, what 0:57:12.440 --> 0:57:12.920 would it be? 0:57:14.360 --> 0:57:15.080 I take gold. 0:57:15.239 --> 0:57:18.920 I'm not happy with gold, but in a world where 0:57:18.960 --> 0:57:23.080 inflation could come back, I think I'll take gold. Bitcoins 0:57:23.120 --> 0:57:28.600 of course an elaborate scam. Really, but gold is the 0:57:29.040 --> 0:57:30.760 least bad of the three. 0:57:30.760 --> 0:57:33.919 Brilliant least bad is good enough for me. Jeremy, thank 0:57:33.920 --> 0:57:34.479 you so much. 0:57:35.280 --> 0:57:36.800 No, you're very welcome. 0:57:40.240 --> 0:57:42.360 Thanks for listening to this week's Marin Talks Money. We'll 0:57:42.360 --> 0:57:45.480 be back next week. Catch our debrief on this week's 0:57:45.480 --> 0:57:48.120 conversation on the Merin Talks Money after show under the 0:57:48.160 --> 0:57:50.919 Apple subscription feed in the meantime, If you like our show, 0:57:51.000 --> 0:57:53.720 rate review and subscribe wherever you listen to your podcasts. 0:57:53.920 --> 0:57:56.400 This episode was hosted by me Maren Sunset Web. It 0:57:56.440 --> 0:57:59.560 was produced by some Siety. Additional editing by Blake Maple's. 0:58:00.080 --> 0:58:03.640 Thanks of course to Jeremy grants them and to John Steppeck. Finally, 0:58:03.760 --> 0:58:06.760 be sure to sign up to John's daily newsletter, Money Distilled. 0:58:07.000 --> 0:58:08.760 I know I always say that you won't regret it, 0:58:08.800 --> 0:58:11.640 but trust me, you really really won't. The link is 0:58:11.680 --> 0:58:12.520 in this show notes