Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg,
Speaker 1: now Maldonna Higher across asset reporter with Bloomberg, and this
Speaker 1: week on the show. Well, as you probably know by now,
Speaker 1: the stock market fell into a nasty bear market last year,
Speaker 1: with the SMP five hundred dropping about twenty five percent
Speaker 1: from its high in January to it's low in October.
Speaker 1: But since then that October low has actually held and
Speaker 1: the index has gained more than ten percent. That's led
Speaker 1: some to speculate that maybe the worst is over and
Speaker 1: we're actually at the beginning of a new bowl market.
Speaker 1: Well not so fast, says this week's guests. There's likely
Speaker 1: more pain ahead and you'll probably want to listen to
Speaker 1: him because he happens to be one of the most
Speaker 1: well known and experienced investors around and he knows a
Speaker 1: thing or two about spotting bubbles. But first, let's stock socks. Yes, first,
Speaker 1: let's suck sucks with our guests, who I know, especially
Speaker 1: terminal readers, they love to hear from him. They want
Speaker 1: to know what he's thinking. It's Jeremy Grantham, He's the
Speaker 1: co founder and long term investment strategist of GMO. Thank
Speaker 1: you so much for joining us. You're welcome, pleasure. We're
Speaker 1: really happy to have you. So you and I actually
Speaker 1: just so readers are aware. You and I spoke a
Speaker 1: couple of weeks ago. We talked about some of these things,
Speaker 1: and I was hoping you could maybe just start with
Speaker 1: you warning about a plunge in the stock market for
Speaker 1: twenty twenty three. How do your views align with what
Speaker 1: we've seen so far this year, and maybe layout for
Speaker 1: our listeners what you're predicting for the remainder of the year. Yeah. No,
Speaker 1: it's doing fine. It behaving traditionally. My last paper was
Speaker 1: called after a time out, back to the meat Grinder,
Speaker 1: and well, l is a vegetarian German. You gotta watch.
Speaker 1: Do you want to hear that? No, it's meant to
Speaker 1: sound painful and brutal. And the idea was that I, personally,
Speaker 1: I'm a great respect of January as an unusual month.
Speaker 1: And what January does is it tends to be pretty
Speaker 1: kind to small small cap and value. Indeed, more than
Speaker 1: one hundred percent of all the small cap effect so
Speaker 1: called has occurred in January for the last one hundred years.
Speaker 1: So it's huge for small and value. But it's also
Speaker 1: has this rather more complicated thing, and that is it
Speaker 1: does very well for stocks that got utterly hammered the
Speaker 1: year before. That's pretty obvious. What happens. You lose forty fifty, sixty,
Speaker 1: seventy or so, you take your losses to reap the
Speaker 1: tax loss effect, and then you have the money in
Speaker 1: your hand, and you have a year end bonus, Christmas
Speaker 1: bonus and so on, and you look out into the
Speaker 1: new year. You can you can see them as bargains
Speaker 1: sat down a lot, in this case the growth stocks,
Speaker 1: and so you buy it. So I was kind of
Speaker 1: fearful of that were the Grantham Foundation cut back its
Speaker 1: short position in NASDEK. Didn't eliminate it, by the way,
Speaker 1: but it cut it back in honor of the January rally.
Speaker 1: And we look back at what happened in two thousands.
Speaker 1: There are only a handful of great bubbles that look
Speaker 1: like this one, and the one that looks most like
Speaker 1: it is the great tech bubble of two thousand and
Speaker 1: During two thousand, the blue chips continued to go up,
Speaker 1: and they shot the dot coms, and then they shot
Speaker 1: the junior growth stocks, and then the meat im growth stocks,
Speaker 1: and finally the great ciscos of that era. And by
Speaker 1: the end of the year, the NAS deck was down,
Speaker 1: and a lot of the growth stocks, because the NAZ
Speaker 1: deck is a little more diverse by a lot of
Speaker 1: the growth stocks were probably down about an average of
Speaker 1: fifty or sixty. It was a blood and that pretty
Speaker 1: much sums up what happened to highly speculative speculative stops
Speaker 1: last year. Don't you think I mean they were They
Speaker 1: were taking all manner of grief. Kathy woods portfolio was
Speaker 1: down I don't know sixty so and so what happened
Speaker 1: in two thousand and one. January two thousand and one
Speaker 1: was up twelve percent, led by the specs that had
Speaker 1: been wiped out the previous year. This seems, you know,
Speaker 1: so boring as to hardly be worth commenting on, but
Speaker 1: that is a exactly what happened this year. And one
Speaker 1: of the proofs is if you take the Order of
Speaker 1: Horror last year and flipped it, that is precisely the
Speaker 1: Order of Heroics this year. And I own one of
Speaker 1: these by accident. Eight years ago. The biggest investment I
Speaker 1: ever made was in quantum escape, brilliant research enterprise doing
Speaker 1: solid state battery work, but it doesn't have a product
Speaker 1: yet and won't for a couple of years and so on.
Speaker 1: So it was right at the top of the list.
Speaker 1: And it did utterly, brilliant, brilliantly in twenty twenty, and
Speaker 1: it came out at ten as a spack four times
Speaker 1: my money. Yeah, not bad over eight years, not great,
Speaker 1: but pretty good. And then it went to one hundred
Speaker 1: and thirty one fifty two billion dollars for a second
Speaker 1: bigger than General Motors or Samsung as a battery company,
Speaker 1: no sales over venues for a few years to come.
Speaker 1: It had become a meme stock, but I was too
Speaker 1: close to it and too heavily involved to really see that.
Speaker 1: I understood the meme stocks, and I thought this was
Speaker 1: pretty impressive at one hundred and thirty fifty two times
Speaker 1: my money. And suddenly I had a holding that was
Speaker 1: worth six hundred and twenty five million, far and away
Speaker 1: the biggest, I mean by more than ten times the
Speaker 1: biggest holding I ever had, probably twenty five times the biggest.
Speaker 1: And then it started to decline, and it was the
Speaker 1: first one to decline. Why not that's how the great
Speaker 1: bubbles start. By the way, they don't start with Coca Cola.
Speaker 1: They start with the craziest, most advanced stock, and that
Speaker 1: was Quantum Scale. It started down in December twenty twenty.
Speaker 1: Early in twenty twenty one, the meme stocks joined it,
Speaker 1: and Cathy Woods's portfolio got into step, and they all
Speaker 1: started to go down. Everyone said, well, it's a great ballmarkt.
Speaker 1: The SMP was going up, but anyone who won't stops
Speaker 1: news differently, and they went down handsomely. And then into
Speaker 1: twenty twenty two they continued to go down, and by
Speaker 1: December twenty twenty two, Quantum Escape was five point one.
Speaker 1: Now this is pretty a pretty good trip. Comes at ten,
Speaker 1: goes to one hundred and thirty one, and it's now
Speaker 1: five point one in December of last year. So what
Speaker 1: did it do in January? Yeah, that led the way,
Speaker 1: went up one hundred and twenty percent, not bad for
Speaker 1: four or five six weeks, and then right behind it
Speaker 1: at Kathy Woods's portfolio, I don't know, up forty percent,
Speaker 1: and then the meme stops thirty forty fifty sixty percent
Speaker 1: rallies all the way down the line. It was it
Speaker 1: was perfect. It was almost too good to be true.
Speaker 1: It was eerie in its orderliness. Anyway, that's what happens,
Speaker 1: and it didn't stop the decline. In two thousand and one,
Speaker 1: they had a brilliant twelve percent January. The year was
Speaker 1: down twenty The nasdack, which had been down in two thousand,
Speaker 1: went down twenty percent the following year and thirty percent
Speaker 1: in two thousand and two. That is what happens in
Speaker 1: the great bubbles. They have wonderful rallies. They can have
Speaker 1: spectacular January rallies because they have more tax lost selling
Speaker 1: than any other situation. And this has been following the
Speaker 1: lead of two thousand perfectly. Cheremy, I wonder um. First off,
Speaker 1: I heard those sirens coming. I thought the bulls had
Speaker 1: sent some some police to pick Cheremie up there for
Speaker 1: a minute. I don't know where. But you're still I
Speaker 1: didn't even I didn't even hear I think, but well,
Speaker 1: that parallel to the dot com bubble, do you think, well,
Speaker 1: that go from peak all the way to trough? Because
Speaker 1: you know, I don't have a chart in front of me,
Speaker 1: but I believe the bottom wasn't until two thousand and three, right,
Speaker 1: So you know, the bottom was in late two thousand
Speaker 1: and two, two thousand and two, Okay, but that would
Speaker 1: still mean we've got, you know, quite a long you know,
Speaker 1: the forget about the Y access, that X access has
Speaker 1: got quite a bit of runway left till the bottom.
Speaker 1: Is that? Is that how you're thinking about it? Yeah?
Speaker 1: Mostly the great bubbles when they break, they take a
Speaker 1: long time. There there's an exception, but they typically take
Speaker 1: a couple of years, three years, and every now and
Speaker 1: then they get rid of it in a real hurry.
Speaker 1: But my guess was this was going to be a long,
Speaker 1: a long one. The buy into the idea that stocks
Speaker 1: only go up, and the amount of speculative craziness that
Speaker 1: was set in train by the by the COVID supplement
Speaker 1: payments meant the individual participation was actually off the scale,
Speaker 1: bigger than two thousand, bigger than the dot com And
Speaker 1: so this looked like it would have a whole lot
Speaker 1: of by the dip from day one, and it's had
Speaker 1: a lot of by the dip. But but two thousand
Speaker 1: had some wonderful rallies and even in nineteen twenty nine
Speaker 1: it rallied almost forty five percent off the lows of
Speaker 1: twenty nine until April of nineteen thirty. Hell of a
Speaker 1: rally must have made people feel that the worst was over.
Speaker 1: And then it rolled over and went down, as you know,
Speaker 1: infinitely almost down well over eighty percent on the SMP,
Speaker 1: and most of the speculative index went down ninety five
Speaker 1: give or take anyway. Let's hope we don't go there,
Speaker 1: but it just gives you an idea. Great bear markets
Speaker 1: can have wonderful rallies. Great bear markets can take their time.
Speaker 1: And we have a very very recent one where quite
Speaker 1: a few players in today's market experience two thousands and
Speaker 1: it went on for three painful years, and and and
Speaker 1: the housing bust, you know, was a quick one, but
Speaker 1: not that quick, you know, it took over a year
Speaker 1: of pretty steady declines. So my guess is this one
Speaker 1: will not bottom until deep into next year. Well so,
Speaker 1: h three straight years of losses, do you think? I
Speaker 1: do think? I think there is a biting chance that
Speaker 1: this year will not be down that much, and a
Speaker 1: very good chance, as I said in my letter, that
Speaker 1: that through April it might easily be up. And that's
Speaker 1: the presidential cycle, right, yeah, yeah, talk talk to us
Speaker 1: about that. I don't think many people quite appreciate that signal. No,
Speaker 1: you don't have many professionals talking about presidential cycles. It
Speaker 1: sounds too simple. It doesn't sound like something you could
Speaker 1: charge a good feed for. The January effects and the
Speaker 1: January rally jitter. These are considered far too simple to
Speaker 1: talk about, and it's probably why they work so well.
Speaker 1: Our first account at DMO forty five years ago involved
Speaker 1: both the January effect and the presidential cycle. It would
Speaker 1: worked for forty five years before that, and it's worked
Speaker 1: for the forty five years of dmo's career. And we
Speaker 1: typically have not used it, however, for the same reason
Speaker 1: that no one else does. But it's been a pet
Speaker 1: of mind forever. The presidential cycle is about as simple
Speaker 1: and straightforward and as understandable as anything in the stock market.
Speaker 1: What it says is that administrations like to be reelected
Speaker 1: and they like to help their party. So you worked out, eventually,
Speaker 1: what is it that appeals to the elector. It's the
Speaker 1: state of the labor market in the sixth month run
Speaker 1: up to the election. Anything that happens before that is forgotten.
Speaker 1: You can be brilliant for the first two years, terrible
Speaker 1: for year three, and your toast. It really doesn't matter.
Speaker 1: It's the run up to the election for six months now.
Speaker 1: The economy, as we've all discovered over and over again,
Speaker 1: it's a kind of lagging instrument. You kick it and
Speaker 1: it takes a year or so before it says out.
Speaker 1: So you better start stimulating quite a bit before the
Speaker 1: six months running up to the election. You want to
Speaker 1: get the labor market improving. You want to start when
Speaker 1: the presidential cycle effect starts, which is October, approximately October
Speaker 1: of the second year, last October through April of this year.
Speaker 1: That window of eight months, seven months is what it takes,
Speaker 1: because that gives you a little over a year to
Speaker 1: have it grind through and then start pushing up on
Speaker 1: the labor market. And would you believe that that's exactly
Speaker 1: what happens since nineteen thirty two, This is not yesterday.
Speaker 1: Since nineteen thirty two, those seven months have equalled the
Speaker 1: remaining forty one months of the presidential cycle. Don't believe me.
Speaker 1: Check it take you a while, but it's worth it.
Speaker 1: Those seven months therefore have seven times the monthly power
Speaker 1: of the rest of the cycle. Seven times. Wow. So
Speaker 1: what is happening this time? Would you believe since October
Speaker 1: the first markets up decently. My guests, through April it
Speaker 1: will stay up. I know that unexpected bears that Morgan
Speaker 1: Stanley and so on are talking about Apelli immediate decline
Speaker 1: that may occur, but my guest, it's hard to get
Speaker 1: this market really down until we get rid of April.
Speaker 1: And as the old saying goes selling may and go
Speaker 1: away and don't come back to a labor day, the
Speaker 1: old kind of nineteen twenties saying goes back. It's the
Speaker 1: midst of time about the stock market. And this is
Speaker 1: part of the reason it works, because in year three
Speaker 1: it really really works. And after April you're on your own.
Speaker 1: It's a kind of normal market through the election, and
Speaker 1: then year one and two typically our tough years where
Speaker 1: a sensible administration recycles to keep the whole thing going
Speaker 1: again the next time. You take some pain when it
Speaker 1: doesn't matter political in order to be able to stimulate
Speaker 1: when it does matter in year three. So that's what
Speaker 1: I think is going to happen. That's the timeout. Those
Speaker 1: two influences together created my point about the time up.
Speaker 1: After a timeout, back to the meat grind. It now
Speaker 1: all of the original problems rising rates, relatively slow burning inflation,
Speaker 1: intractable inflation. It's always intractable, bearing down on the market.
Speaker 1: The war, of course, like many wars, doesn't easily go
Speaker 1: away either. So we and COVID has a long reach.
Speaker 1: We have a lot of little bottle on e effects
Speaker 1: that are still echoing through the system, and it brings
Speaker 1: it up, brings up another important theory of mind, and
Speaker 1: that is our next paper, which will be called the
Speaker 1: Long Term is Now. Because we have been harping on
Speaker 1: long term problems sometimes for fifteen twenty years, like climate change,
Speaker 1: one day will bite you. It'll be a huge influence
Speaker 1: on your portfolio. The growth rate of the economy is
Speaker 1: slowing down steadily. It will eventually start to impact profit margins.
Speaker 1: One day. We're running out of resources. Whether you like
Speaker 1: it or not, We're going to have rolling series of
Speaker 1: shortages and bottlenecks in resources. And finally we're running out
Speaker 1: of people. And we're running out of people even faster
Speaker 1: than I picked up ten years ago. It seems to
Speaker 1: be accelerating now. If you run out of people, that
Speaker 1: means you run out of labor. It feels inflationary, doesn't it.
Speaker 1: Do you run out of resources. You run out of
Speaker 1: cheap copper and you run out of cheap lithium, it
Speaker 1: feels inflationary, and if COVID is hanging around, it feels inflationary.
Speaker 1: If you're deglobalizing global trade. Some of the reasons for
Speaker 1: doing that security are really very good reasons. But deglobalizing
Speaker 1: is an inefficient, inflationary process. Anything that's inefficient tends to
Speaker 1: push out the prices. Compared to a world where if
Speaker 1: you are globalizing, you're outsourcing your jobs to the cheapest
Speaker 1: pool of money and the cheapest pool of workers in
Speaker 1: the world. When you're onsourcing, you're doing the reverse. Great
Speaker 1: for the workers as long over the due, but it's
Speaker 1: not great for profit margins, and it's not great or inflation.
Speaker 1: So I think all of these long term factors are
Speaker 1: beginning to buy this will make this particular down leg
Speaker 1: more dangerous and perhaps worse than we anticipated, and perhaps
Speaker 1: make it go on the long So before we get
Speaker 1: to more of those long term factors that you were
Speaker 1: just about when you and I spoke a couple of
Speaker 1: weeks ago, you said, the range of problems we have
Speaker 1: right now is greater than it usually is. And obviously
Speaker 1: you have decades of experience. So it is it those
Speaker 1: things that you you were just talking about, the war
Speaker 1: in Ukraine and some of the supply chain issues that
Speaker 1: we're still that are still lingering. Is that what you're
Speaker 1: you're referencing or what is it about the current times
Speaker 1: that's so different or difficult? It's those two things coupled
Speaker 1: with global politics, the Cold War coming back and the
Speaker 1: deglobalizing that we will we are embarking on. And compounding
Speaker 1: that is, the running out of resources, running out of people,
Speaker 1: and climate change are all biting into that equation, interacting
Speaker 1: with it, making it worse. And in that sense, you
Speaker 1: could not have at a worse time. And all of
Speaker 1: this is occurring on the down leg of one of
Speaker 1: the great bubbles breaking. They have never been very good
Speaker 1: two thousand. By the way, it was a very benevolent
Speaker 1: bubble in that sense. It didn't have a savage recession.
Speaker 1: It didn't have any wars, it didn't have any deglobalizing,
Speaker 1: It wasn't running out of anything. The nazteck went down
Speaker 1: eighty two percent, the SMP went down fifty percent. There
Speaker 1: was a recession. There was a huge recession after nineteen
Speaker 1: twenty nine, there was a huge recession after the nifty
Speaker 1: fifty run up of nineteen seventy two, and there was
Speaker 1: the biggest bubble of all time. By the way, is
Speaker 1: Japan who did a duel bubble in land real estate
Speaker 1: and the stomacht in picking in nineteen eighty nine. And
Speaker 1: what was that followed by? It was followed by twenty
Speaker 1: last years. If you look at the fifty years in
Speaker 1: Japan before nineteen eighty nine, it was like Para guys,
Speaker 1: one of the fastest growing countries on the planet, if
Speaker 1: not the fastest. And then you look at the thirty
Speaker 1: years since then, they have barely grown that That double
Speaker 1: barreled bubble and the land was the biggest bubble in history.
Speaker 1: It was worse than the Tulip bubble. It was worse
Speaker 1: than the Sausa bubble. It was the biggest, most spectacular
Speaker 1: bubble of all time. And the land under the Empress
Speaker 1: Palace really did sell for more than California. I mean,
Speaker 1: it was valued at more than the entire state of California.
Speaker 1: It was crazy. It was more than ten times downtown Manhattan,
Speaker 1: in downtown Tokyo, and you pay a high price, and
Speaker 1: happily this bubble is not as bad as that, but
Speaker 1: it has more ancillary and negatives coming in. And the
Speaker 1: first phase of a bubble is pretty simple. You take
Speaker 1: out the pin for whatever reason. All you have to
Speaker 1: do is convince people that it's not pared ice forever,
Speaker 1: which is what they believe at the top of the bubble,
Speaker 1: and so it goes down pretty fast. Leg one always
Speaker 1: has a terrific rally, and then it gets into the
Speaker 1: much more complicated phase three, which is the fundamentals. The
Speaker 1: fundamentals have been artificially inflated by crazy optimism and by
Speaker 1: a long drawn out perfect economy, and all of that
Speaker 1: is turning against you. And the question is how bad.
Speaker 1: Is it going to be mild like two thousand, Is
Speaker 1: it going to be tragic like nineteen twenty nine. Is
Speaker 1: it going to be long and drawn out like Japan?
Speaker 1: Is it going to be very painful? Indeed, like the
Speaker 1: housing bubble that will need unprecedented daylight. It's bad news.
Speaker 1: You don't want to mess with bubbles. I hold it
Speaker 1: against the Federal Reserve. Of course, they created an environment,
Speaker 1: pushed up the price of all assets, all every asset
Speaker 1: on the planet, and then they step back as just
Speaker 1: something to do with them when these bubbles eventually break,
Speaker 1: as they have done in two thousand and the housing
Speaker 1: bubble of two thousand and six, two thousand and seven,
Speaker 1: and oh my god, no one could have seen this coming.
Speaker 1: These events they stick out of the database like him
Speaker 1: Alayan peaks out of a playing Guys, do not kid yourself.
Speaker 1: You couldn't miss nineteen twenty nine, You couldn't miss nineteen
Speaker 1: seventy two. You could not possibly miss two thousand, thirty
Speaker 1: five times earnings. Anyone knows that thirty five times earnings
Speaker 1: is pretty high. The previous high in nineteen twenty nine
Speaker 1: it was twenty one times. Thirty five is significantly higher
Speaker 1: than twenty one. In Japan, it actually got to sixty
Speaker 1: five times earnings, of course, the biggest one in history. Well, Jeremy,
Speaker 1: let me let me interrupt real quickly, because you did
Speaker 1: mention the FED policy and the role it played in
Speaker 1: creating this bubble. So just to bring that into the
Speaker 1: present tense, you know, this week Jerome Palets testified before Congress.
Speaker 1: He was a little bit more hawkish than you know,
Speaker 1: the markets had expected, or at least the market response
Speaker 1: to it suggests that he surprised markets with his hawkishness.
Speaker 1: You know, the thinking is now the FED funds rate
Speaker 1: could get as high as five and a half six percent.
Speaker 1: Talk to us about what pal is doing. Is he
Speaker 1: being aggressive enough? Not aggressive enough? Um? And will it work?
Speaker 1: You know, will we he? You know this, the Fed
Speaker 1: alone be able to normalize inflation or or all those
Speaker 1: other things that you're talking about, deglobalization, a lack of
Speaker 1: resources of course not No, they don't have that kind
Speaker 1: of pilot. They yeah, well they can mess around with interest, right.
Speaker 1: They have hardly gotten anything right since Alan Green's been
Speaker 1: first arrived. Paula Boca knew what he was doing, but
Speaker 1: since then it's been a long continuous horror ship. They've
Speaker 1: engaged in policies to drive up the prices of assets,
Speaker 1: other things being even, and create spectacular overpriced bubbles. They
Speaker 1: then break, because that's what bubbles have to do. They
Speaker 1: simply break of their own extreme overpricing, and we pay
Speaker 1: a very tough price. And then the Fed racist to
Speaker 1: the rescue. Oh dear, the wreckage of two thousand. They
Speaker 1: came in and they prevented it, the SMP from going
Speaker 1: down more than fifty percent, which it would have done.
Speaker 1: They with moral hazard, lots of aggressive language, and reduction
Speaker 1: in rates. They managed to curtail that at fifty. They
Speaker 1: couldn't stop a recession. They didn't stop the nazdec going
Speaker 1: down eighty two. They threw the kitchen sink at it.
Speaker 1: And then what happened to Bananche? He's facing a housing bubble,
Speaker 1: he says, Oh, the US housing has never declined. It
Speaker 1: never had it isn't ever had a bubble before. It
Speaker 1: didn't have to decline. It was famously diversified between California
Speaker 1: going up and Florida going down, etc. Or vice versa.
Speaker 1: And then he said, the US housing market merely reflects
Speaker 1: the strong US economy. The US housing market has a
Speaker 1: long historical record. You could measure it. It was a
Speaker 1: three segment event, which is the kind of event in
Speaker 1: a normal series that would occur every hundred years. And
Speaker 1: all his staff could see that. No one apparently plucked
Speaker 1: up the courage to tell him, so he could apparently
Speaker 1: believe that the housing market was unremarkable. The housing market
Speaker 1: back then was beautifully well behaved as a bubble. It
Speaker 1: went up and then it came down in a beautiful
Speaker 1: round trip, symmetrical, perfect, The best one I ever saw
Speaker 1: so were three years up, three years down. They sucked
Speaker 1: in an extra three or four people to owning houses,
Speaker 1: three or four percent of the public. It went from
Speaker 1: a normal sixty two percent sixty five or six the
Speaker 1: first time in history. And then painfully for the marginal buyers,
Speaker 1: that went all the way back to sixty one sixty two.
Speaker 1: The housing market went all the way back to trend
Speaker 1: and actually overcorrected, which is typical for two or three years.
Speaker 1: That's a lot of pain. It was all their fault,
Speaker 1: and why would we believe that they know what they're doing.
Speaker 1: And then they stoked the fire again, and this time
Speaker 1: it's real estate. It went to a higher multiple family
Speaker 1: income for a house than the housing bubble in late
Speaker 1: late last year, after the biggest year in history twenty
Speaker 1: the last year, the biggest move including the housing bubble, forestry, farming,
Speaker 1: fine art, you name it, bonds of course, legendary, the
Speaker 1: lowest rates in the history of economics, and the stock
Speaker 1: market way back up. Why would they do this? It's
Speaker 1: always the same. They always break and everyone says, oh,
Speaker 1: it's fine this time. It never has been. Everyone says
Speaker 1: there won't be a hard landing, it will be a
Speaker 1: soft landing. None of the great psychological bubbles have ever
Speaker 1: had anything other than an ordinary recession or a savage recession.
Speaker 1: There are normal ones and there are terrible ones. There
Speaker 1: are no soft landings in my little universe of super
Speaker 1: bubbles that you can see statistically as easy as pie.
Speaker 1: So why don't more people see them? Because it's not
Speaker 1: good for business. The commercial understanding is you're always bullish
Speaker 1: and that maximizes your money. Why Morgan Stanley is so
Speaker 1: verish this time? And a little bit of Goldman sence
Speaker 1: on this is actually perplexing me. It's as if someone
Speaker 1: hasn't read them chapter two of the Banking Investing Commercial
Speaker 1: Maximizing your Bumbits Manual. It has gone miss. It's bothering
Speaker 1: you that, you know, the contrarian view seems to be
Speaker 1: the consensus these days, right, Yeah, it bothers me. I
Speaker 1: do know as a historian that once in a while,
Speaker 1: almost everybody gets things right. It doesn't last long, but
Speaker 1: it does happen from time to time, just enough to
Speaker 1: bamboozle contrary and I am certainly expecting that this is
Speaker 1: one of those relatively rare occasions when almost anyone with
Speaker 1: the brain is being pretty bearish because, as they say,
Speaker 1: almost to a man, they say, the current stock prices
Speaker 1: do not reflect the high probability of profits coming down,
Speaker 1: and that is part of the story. And they're not
Speaker 1: even looking at the long term is now. They are
Speaker 1: not looking at all those longer term factors that we
Speaker 1: were talking about before. They're not looking really at the
Speaker 1: long term problems with the climate change and resource shortages
Speaker 1: and above all people shortages. This people thing, you know,
Speaker 1: it's massive, it's happening so fast. Jeremy, can I ask
Speaker 1: you then, when you foresee a US recession because obviously
Speaker 1: a lot of the data that we've seen coming in
Speaker 1: has been very, very strong. And we're taping this podcast
Speaker 1: before the job's number comes out for February, but a
Speaker 1: lot of people are expecting a really hot number once again.
Speaker 1: Economics complicated, lots of cross currents, lots of leaves and
Speaker 1: lots of flags. And I have tried to avoid spending
Speaker 1: too much time over analyzing the short term data. First
Speaker 1: of all, they change it two or three times. Secondly,
Speaker 1: it's never as important as you think. The things that
Speaker 1: really matter are the broad sweeps of events, the forming
Speaker 1: of the great bubbles, the breaking of the Great Bubbles,
Speaker 1: et cetera, the rising of inflation, the falling of the inflation.
Speaker 1: This ridiculous concentration on the nuances of the Federal Reserve,
Speaker 1: who never get anything right. Why would we believe and
Speaker 1: exaggerate every little nuance? The market rows up, the market
Speaker 1: ralls down. It is all ridiculous posts. It is really ridiculous.
Speaker 1: Try and concentrate on them. You saying that makes me
Speaker 1: feel better about my my everyday angst. You've got confirmation rong, Yeah,
Speaker 1: I can, I can shill a little. Journalists have a
Speaker 1: terrible job. You have to come up with a reason
Speaker 1: why the market goes up or down on a daily basis,
Speaker 1: which would if you've got it right, we'd have to
Speaker 1: burn you as a witch. I mean utterly impossible. Creative,
Speaker 1: creative writing. You think that's h yeah, yeah, I mean
Speaker 1: it's filling up space. Actually it doesn't ac create us.
Speaker 1: There every argument for why the market goes up has
Speaker 1: been used for rick dumes and going down. Jeremy, I
Speaker 1: wanted to get back to that notion of climate change.
Speaker 1: I know you've been spending a lot of your time
Speaker 1: studying the issue, but I want to talk to you
Speaker 1: about it from the role of the investment industry. Obviously,
Speaker 1: there's been a big backlash against the notion of ESG
Speaker 1: you know, investing through the lens of environmental, social and
Speaker 1: government governance issues. Uh, you know, some on the right
Speaker 1: wing really want to do away with that whole strategy
Speaker 1: of investing. How do you think about it? Is there
Speaker 1: a role for investing to actually mitigate climate change if
Speaker 1: it's done properly, or is it you know, a marketing
Speaker 1: gimmick for for Wall Street to extract higher fee to
Speaker 1: make people feel good about the way they're spending their
Speaker 1: investment money. All about you from my point of view
Speaker 1: is humans are not great at these things. We've been
Speaker 1: bred over millions of years, like every other organism, to
Speaker 1: be incredibly short term and incredibly aggressive to grow and
Speaker 1: multiply period And anything that gets in my way gets
Speaker 1: trampled on. And capitalism is very much kind of an
Speaker 1: extension of survival of the fits. It's very much an
Speaker 1: extension of the natural process, and that's probably why it's
Speaker 1: worked pretty well. And capitalism does millions of things brilliantly well.
Speaker 1: I mean, balancing the complexities of supply and demand is
Speaker 1: beyond well. Maybe who in a few years artificial intelligence
Speaker 1: will be up to it. But that is why the
Speaker 1: central governments had such a hard time. It's infinitely complicated.
Speaker 1: The problem is capitalism does not do those things that
Speaker 1: aren't in its immediate self interest. If it's long term,
Speaker 1: get round to it in a couple of years, if
Speaker 1: it's the commons, If it's something that I'm not getting
Speaker 1: charged for and I'm inflicting my pollution on someone else,
Speaker 1: why would I stop doing that out of the goodness
Speaker 1: of my heart? You know, try and maximize your short
Speaker 1: term gains is what runs capitalism, and it's what makes
Speaker 1: it efficient. Most of the time. It only does these
Speaker 1: few things badly. It does not deal with with the
Speaker 1: climate change. It cannot deal with climate change. It cannot
Speaker 1: act out of the goodness of its heart to forego
Speaker 1: profits in the interest the collective grand children. It's pretty
Speaker 1: bizarre actually that everything is career risk in life. You know,
Speaker 1: you're protecting your job, you're protecting your firm, protecting its image.
Speaker 1: Very few people can actually say what they really want
Speaker 1: to say, what is really symbol and straightforward that we're
Speaker 1: all caught up in in basically protecting something or other
Speaker 1: and when when it comes to climate change, we're really
Speaker 1: not interested in anything other than looking good. We want to,
Speaker 1: for the lowest possible price, be seen to be the
Speaker 1: most civic minded. We are not going to give up
Speaker 1: anything out of altruism. We can't capitalize in general, can't
Speaker 1: spell the word altruism or patients by the way, they
Speaker 1: want quick response, they want profits, and climate change is
Speaker 1: not their cup of tea. However, dang heavens. Along with
Speaker 1: being a short term aggressive, grow while you can species,
Speaker 1: we are very creative, very inventive, and so we have
Speaker 1: a terrific record in dealing with new inventions, coming up
Speaker 1: with new solutions. If we make it through climate change,
Speaker 1: and I use the word if deliberately, there's a decent
Speaker 1: chance that this will be existential, that it will remove
Speaker 1: a reasonably stable global civilization before it's finished. But if
Speaker 1: we make it, it'll not be because we're altruistic and
Speaker 1: we see our civic duty. It's because it will be
Speaker 1: good for business. It's because the inventions of wind, solar
Speaker 1: and storage are simply going to be much cheaper than
Speaker 1: burning fossil fuels, and we will gradually replace everything and
Speaker 1: it will pay. We will have silent electric helicopters that
Speaker 1: are getting you there at one third the running cost
Speaker 1: and half the maintenance cost, and so on and so forth.
Speaker 1: And the technology improvements are merciless. They grind ahead, and
Speaker 1: today's battery constraint will not last, and they will have
Speaker 1: twice the power to weight ratio, and with a little
Speaker 1: bit of what based on the latest and greatest ideas,
Speaker 1: perhaps even four times the power to weight ratio. So
Speaker 1: we'll be able to fly perhaps even to Chicago before
Speaker 1: this is finished, and all transportation will be electrified, and
Speaker 1: we will have plenty of cheap green energy before this
Speaker 1: is over. If we can just hold the global society
Speaker 1: together and withstand the shark to food and immigration of
Speaker 1: climate change and terrible weather and so on, that's that's
Speaker 1: a big if, Jeremy, that's a big if. That sounds
Speaker 1: like Unfortunately, it is a big if, and there's nothing
Speaker 1: we can do about it. And we phrase we framed
Speaker 1: this issue as the race of our lives, that the
Speaker 1: bad news is getting worse at an accelerating rate. We're
Speaker 1: actually still putting up carbon dioxide particles at an accelerating rate,
Speaker 1: although it's just beginning to flatten out now. And the
Speaker 1: good news is that I think the technology is moving
Speaker 1: at an accelerating rate. No one fifteen years ago thought
Speaker 1: the cost of wind, solar and storage would be it's
Speaker 1: lower than building a coal plant. Today, almost everywhere in
Speaker 1: the world, and in most places with decent wind or sun,
Speaker 1: you can build and operate wind and solar cheaper than
Speaker 1: you could operate a coal plant if you were given it,
Speaker 1: built and ready to go. In other words, the full
Speaker 1: total cost of building and running a solo plant is
Speaker 1: less than the day to day operating cost of digging
Speaker 1: the coal, shipping it, and burning it. Wow, that's remarkable.
Speaker 1: That is that is amazing. Well, that sounds like a
Speaker 1: nice little teaser of your next note, so we look
Speaker 1: forward to that, and we'll have to have you back
Speaker 1: to discuss that when it comes out. Vildonna. Jeremy there
Speaker 1: reminded me of a good Homer Simpson quote. You know.
Speaker 1: It's that beer is the cause of and solution to
Speaker 1: all of life's problems. And it sounds like capitalism is
Speaker 1: very similar to jeremy the cause of and solution to
Speaker 1: all of our problems. Perhaps, but Jeremy, really really great
Speaker 1: to hear your thoughts. I feel like we could go
Speaker 1: on for two or three hours. So I hope you
Speaker 1: do come back some day and unpack some of these
Speaker 1: issues further. But before we let you go, we've got
Speaker 1: to do our tradition Vildanna. I'm gonna go first with
Speaker 1: the craziest thing I saw this week. It's from Stephen
Speaker 1: Balaban and it's about a perpetual bearer bond. Now I'll
Speaker 1: tell you what that is, because your eyes are starting
Speaker 1: to fog up there. That So a perpetual guy. A
Speaker 1: perpetual bond is a bond that pays interest every year
Speaker 1: but never actually repays the principle bearer bond is an
Speaker 1: old fashioned bond where whoever owns the paper and presents
Speaker 1: it to the UH the bond issue where gets that payment.
Speaker 1: So Yale University has a perpetual bearer bond issued by
Speaker 1: a Dutch agency that basically dug the canals in UH
Speaker 1: sixteen forty eight. Sixteen forty eight, Jeremy, a perpetual bear
Speaker 1: bond from the Dutch government owns this bond. Yale owns
Speaker 1: this bond. They are still collecting payments on this bond
Speaker 1: from sixteen forty eight. The bond was actually written on
Speaker 1: goat skin. Oh, but they filled up. You know, every
Speaker 1: time they issue, they pay the payment they market on
Speaker 1: the bond, so they ran out of space. So there's
Speaker 1: a piece of paper now that the folks at Yale
Speaker 1: every few years take to the Dutch Water Agency and
Speaker 1: get and get their payment clip their coupon. Basically. So, Jeremy,
Speaker 1: I hate to tell you, but you're now a contestant
Speaker 1: on a game show. We call the prices precise and
Speaker 1: the question is what do you think the interest rate
Speaker 1: on that sixteen forty eight Dutch bond pays to Yale?
Speaker 1: And if it helps, I'll tell you that the current
Speaker 1: Dutch ten year yield is about three percent. It doesn't
Speaker 1: help at all. I didn't think it would. But this
Speaker 1: was issued in sixteen forty eight. It's a compliment complicate things.
Speaker 1: They actually rescheduled it. They redid the yield on it
Speaker 1: shortly after it was issued, so it's not the original yield.
Speaker 1: It was changed. But you have to guess what four
Speaker 1: in a quarter? Four and a quarter? Oh, okay, I'm
Speaker 1: glad you went for I was going to say something higher,
Speaker 1: but I'll go with three percent. Yeah, you think I
Speaker 1: was tipping my hand there with the correct answer is
Speaker 1: two and a half percent, but they did the original
Speaker 1: rate was five percent, So maybe Jeremy's looking at that
Speaker 1: that chart, So how much have they baked in over
Speaker 1: the year five percent? So the story says, Um, a
Speaker 1: few years ago, one guy from Yale went and collected
Speaker 1: twelve years of interest on the bond. You know what?
Speaker 1: His payment was one hundred and fifty three dollars. Oh no,
Speaker 1: So I don't know why it's worth the flight to
Speaker 1: go over there. But Jeremy, if I'm showing a perpetual
Speaker 1: bond at two and a half for you a buyer,
Speaker 1: so I know I'm an issue. Yeah, that's smart, smart, right, great,
Speaker 1: all right, that's a good one. You like that one.
Speaker 1: I think that's the craziest thing I've seen all year. Actually, yeah,
Speaker 1: you're set, you're you don't you never have to come
Speaker 1: up with another one. Um, I'll go, I'll go next.
Speaker 1: This is a Bloomberg story. New York, New Jersey signed
Speaker 1: a sister city that doesn't exists. Its sister city, I know,
Speaker 1: but it's not markets related, So I didn't go with it.
Speaker 1: Then what I'm going with? And Jeremy actually brought up
Speaker 1: he brought up the you know, in the future, maybe
Speaker 1: having silent helicopters driving around for cheap. But we have
Speaker 1: a Bloomberg story that says Elon Musk is so busy
Speaker 1: his private jet is taking thirteen minute flights, and we
Speaker 1: lay out all of these different flights he's taken. I
Speaker 1: think it's over the last year, and just it's so
Speaker 1: counterteen minute flights. Yes, from like that's like the Kardashians
Speaker 1: do that, don't they from one side of yeah, but
Speaker 1: it's so counter to his ethos or to his you
Speaker 1: know climate, yeah, clean en, yeah, clean energy. Thirteen minute
Speaker 1: flights and he he has taken out of all the billionaires,
Speaker 1: he takes the most number of flights. Wow, if that
Speaker 1: was electric, if everything under two hundred miles was electric,
Speaker 1: we probably wouldn't even bother to say that. Yeah, exactly right.
Speaker 1: It doesn't use It only uses about twice to gasoline
Speaker 1: equivalent of the taxi ride, right, and quite remarkable. Anyway.
Speaker 1: The thing is, if you value your time at a
Speaker 1: hundred times average, then of course these things make a
Speaker 1: lot of sense. Right, He's running five companies, right, He's
Speaker 1: going from yah from the Yahoo I'm having a senior
Speaker 1: movement from Twitter headquarters to to Tesla's plant, and anyway,
Speaker 1: it is a couldn't Jeremy. It's pretty close though, So
Speaker 1: maybe that's what I'm thinking. I get to give you
Speaker 1: my weirdest little next. Okay, Well, we spent a lot
Speaker 1: of time working this out, and we think that the
Speaker 1: parts pamillion in the atmosphere that have risen from two
Speaker 1: eighty to a current four twenty will peak at about
Speaker 1: five twenty five five fifty, and we have to get
Speaker 1: it back to two eighty, and that will mean the
Speaker 1: removal of three trillion tons of CO two has to
Speaker 1: be removed one day, let's say, over the next hundred years.
Speaker 1: And if we get it down to fifty dollars, which
Speaker 1: we will fifty dollars a ton, that is one hundred
Speaker 1: and fifty trillion dollars to remove the CO two after
Speaker 1: we have gotten to carbon neutral to zero carbon, what
Speaker 1: are our chances that is equal to one percent of
Speaker 1: GDP globally smoothed out over the next hundred years. Wow. Well,
Speaker 1: if we get some goat skin and issue a perpetual
Speaker 1: bond at two and a half, that's it. That would
Speaker 1: papers They would take a lot of goats though, and
Speaker 1: that would not be environmentally, that would not be all right.
Speaker 1: Jeremy Grantham of GMO, what a absolute treat to hear
Speaker 1: your thoughts. And like I said, we could go on
Speaker 1: for hours, so I hope you do come back. It
Speaker 1: was It was really an honor and APPROPLI it was fun.
Speaker 1: Thank you for having me. Thank you so much for
Speaker 1: joining us What Goes Up. We'll be back next week
Speaker 1: and so then you can find us on the Bloomberg
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Speaker 1: you next time. That that you mean