[00:02:41] Jeremy Grantham: 1968 was when I got into the business in terms of a professional career. I’d done quite a bit of investing as an amateur before that. And I got into the business out of consulting, which is fairly boring business by asking around my classmates from business school, who was having the most fun and a very sophisticated approach to career planning and by a wide margin, the guys in the stock market were having the most fun.

[00:03:05] Jeremy Grantham: And one of the reasons they were having a lot of fun was there was a super bubble in micro cap. It hardly got noticed in the serious market, but the little stocks were doubling quadrupling and then blowing up fairly regular intervals. And a group of us in Boston from various mutual fund groups would get together for lunch, and they were all pros, because they’d spent the first two years out of business school in the stock market, and I’d been wasting my time, and so I kept relatively quiet, listened to the conversations, and would buy the suggestion of the day and hold it for a few weeks.

[00:03:38] Jeremy Grantham: One year, the story was American Raceways. And that was going to introduce Formula One Grand Prix racing, which incidentally, 50 years or so later is now finally creeping in a little bit. But it seemed power, noise, risk, the odd death, crashes, it seemed very American to me. And American Raceways had bought one track, Michigan Speedway.

[00:04:02] Jeremy Grantham: And they were going to have a proper race and they did. And because of the novelty, everyone and their dog came and they camped out on the hillsides watching the cars racing around this track and generating the feeling that, wow, if we could have that number show up 15 times a year, we were rich. And so the stock did very well.

[00:04:23] Jeremy Grantham: And the first launch, when I met it, it was 7 a share and I bought 300 shares and went on my summer vacation. My wife’s German. I’m English. So we squeezed out three weeks and we went to Europe and we came back and it was 21 in three weeks it had tripled and I like to joke that I did what any serious value manager would do.

[00:04:45] Jeremy Grantham: I sold everything else. I hadn’t tripled up. So now I had 900 shares. Everything I had was in this stock and it was 100 by Christmas and we were rich. We had enough money. We could have bought a nice house in England with no mortgage and a BMW. You know that kind of comfortable amount of dough and this was two years out of business school so I was pretty pleased with myself and then I didn’t get out and down it went I scrambled out scrambled out at forty down from a hundred and went into a similar brilliant idea market monitor data systems which was going to trade options.

[00:05:20] Jeremy Grantham: And it was putting a box, a strange looking box where you push the buttons and you got the price of the option and you traded it. And it was a brilliant idea. It was just about 15 to 20 years too early. So people had the box, but there were no options. Then they had a few options, but not enough people had the box.

[00:05:39] Jeremy Grantham: And it was a pretty good lesson that you can be too early for the marketplace. And I scrambled out of that, paid off my leverage at the bank, and had a couple of thousand down from about 60, 000. From that day on, I tended to be much more conservative and pretty much a dedicated, serious value manager for the rest of my career.

[00:05:59] Clay Finck: Well, it’s pretty humbling that even some of the greatest bubble historians can get caught in some type of bubble and it can be said that it’s probably better to get caught in them earlier than your career than later.

[00:06:12] Jeremy Grantham: Definitely.

[00:06:13] Clay Finck: If we fast forward to today, you’ve been on the show discussing what you call the super bubble in today’s markets.

[00:06:20] Clay Finck: And I wanted to talk about your views of the market today a little bit. We’ve seen a massive rally in us stocks overall that S&P 500 in particular since the fall of 2022. And we saw the S&P 500 hit a local peak in January of 2022. Before declining by 25%, and then saw over a 50 percent rise to today.

[00:06:43] Clay Finck: We’re recording here in July of 2024. So how about we just open this up and just get your general view on what’s fueled this rally in the market?

[00:06:53] Jeremy Grantham: Well, I’ll get around to that, but let me say, my main interest in the market has been as a historian, and therefore I’m cursed with a much longer horizon, 99 percent of the players, and I’ve done my best to tailor to that and live with it.

[00:07:09] Jeremy Grantham: But as a historian, you have to say, if you look at the broad sweep of history, You have to be impressed with how incredibly bad the marketplace is as a judge of the future. So, if you’ll bear with me for a second, just let’s go back to 1929. It’s the highest P. E. on trading earnings up till then in history.

[00:07:29] Jeremy Grantham: By today’s standards, pretty modest 21 times trading. The earnings, however, have spiked. They’ve done brilliantly well. The economy is booming like it was China in its heyday, probably the most rapid period of growth in American history. Double digit increases in industrial production, that kind of thing.

[00:07:47] Jeremy Grantham: And it peaked in September 1929, September, October. 21 times trading and how good was that? It was the highest price in American history. What was it projecting? It was projecting not just ordinary times, not just not good times. It was projecting the worst 10 years in American economic history. So you had the highest PE.

[00:08:10] Jeremy Grantham: The greatest bull market not a few years before, a few days before the beginning of the biggest wipeout in fundamentals. Not the stock market. Yes, the stock market went down colossally, but the economy collapsed. The global economy, international trade, currencies, everything went to hell immediately following the greatest bull market in history.

[00:08:32] Jeremy Grantham: So you have to ask yourself, what was the market doing? That it not only couldn’t see trouble coming, but it apparently saw heaven coming. It could not possibly have been more wrong. So you fast forward to Japan, which is, in a way, the mother and father of all bubbles. Japanese market had never sold over 25 times earnings until it did in 87.

[00:08:55] Jeremy Grantham: By 89, it was put to us that it was 65 times earnings. As far as we could tell, the Japanese market was 65 times trading earnings, never having sold above 25. And this is what should put the fear of God in anyone trying to time the market. This had gone up 150 percent more than it ever had in history.

[00:09:14] Jeremy Grantham: What did it predict? From the day it hit its peak in late 89, you had a lost decade, arguably a lost 20 years. The Japanese growth went from sensational to miserable. The Japanese market for eight minutes sold at a larger value than the U. S. market. For an economy a third as big, it was incredible. And again, we had a sensational P. E., not predicting good times, but predicting the worst times that you could possibly have wished for Japan for the next 20 years. If you think about the great financial crash, it wasn’t the highest P. E. in history, but it was pretty darned high. The other day in 08, in early 08. And again, from a very high level, third only to 1929 and 2000 tech bubble.

[00:10:03] Jeremy Grantham: Instead of predicting good times, it predicted the worst financial crisis in modern history. Which nearly brought the entire developed world to its knees and needed the most sensational bailouts and injection of liquidity, et cetera, to save our bacon. Incredible. So, if you look at the three great events or three of the four great events of the 20th century, you have to say, absolutely spectacularly wrong.

[00:10:30] Jeremy Grantham: Peak multiples projecting the worst periods of our history. Well, I often quote Hussman. I’ve actually never spoken to him, but he produces very good data. And it’s free, which I always like. And the model that he uses that has the highest predictive value, measuring the value of the market, is slightly higher today than it was at its two previous peaks, 1929 and 2021 December, just before the fairly decent decline of 2022.

[00:11:01] Jeremy Grantham: And now we’re slightly higher. This is on the most predictive measure of value that he has produced and he’s worked at that. As far as one can tell. Constantly for 30 years this is the most vulnerable market there has ever been and given the incredible record of the past that the highest multiples do not predict good times which you learn a business school but have historically predicted the worst times.

[00:11:29] Jeremy Grantham: It should give you cause for some concern and some caution. And of course, the market does not feel concerned or cautious. It didn’t in 1929. It didn’t in Japan in 89. It didn’t in the U. S. before the housing bust of 708. That’s the way the market is. So, dear listener, get used to it. You will not be warned.

[00:11:53] Jeremy Grantham: The very best of times, it will feel like the highest possible pricing, the highest possible PEs will be followed, not just by tough times, but some of the worst times that occur. That’s the historical precedent. Okay, now, let’s get back to your question.

[00:12:11] Clay Finck: Thank you for that wonderful high level overview. I feel like we all get caught up in what the market has done this month or this year, not recognizing where we might sit in the grander scheme of things.

[00:12:21] Clay Finck: So getting back to that original question, we’ve seen yet another rally in the broader market since late 2022. So are you viewing this, you know, as continued enthusiasm for the magnificent seven and the AI stocks, or what are you seeing from your perspective?

[00:12:36] Jeremy Grantham: Everybody kind of knows because it was so clear, blatant, if you will, market peaks in December 21 is coming down pretty steadily, the stock market, the bond market, the worst decline in the first half of 22 since 1939 in terms of loss of percentage value of the U. S. market. And then in November, ChatGPT comes out, and yes, to the insiders, that was spiking for a couple of years in terms of developments, but in terms of the stock market, it was like a bolt across the sky. We knew nothing, and suddenly, there it was, ChatGPT, AI was everywhere. And the Magnificent Seven kind of sprang to life, and the rally that took place for the first 10 months was just that, just the seven, Magnificent Seven, almost all making a claim on AI, and the balance of the S& P wasn’t actually going up at all.

[00:13:29] Jeremy Grantham: And then in the fall of 23, the rest of the market was won over by the sustained gain, and it’s had a very nice rally, but nothing compared to the rally in the Magnificent Seven. And that extreme concentration has been a factor in several great bull markets. It was in 2000, was in 29 to a lesser degree, but spectacularly in 2000, and here it is again.

[00:13:54] Jeremy Grantham: So, AI played a very big role. AI is serious. Whether people will actually make real money is another matter, but is it serious? Yes, it is. It will change the nature of warfare completely. It will know who you are. It will have face identification. It will be an alarming tool for governments to know what you’re doing, who you are, where you are, and if necessary, in warfare, destroy you.

[00:14:21] Jeremy Grantham: So it will change some very important aspects of life. Whether it will change mundane corporate matters enough to make good money, I think a lot of people, including me, have serious doubt. So, it’s a very important development. It’ll be with us forever and it will change life in many ways. I’m not convinced it makes the market that attractive, but at the moment, we’re in the selling shovel mode where you sell the chips to people who think they probably can use them and they should be seen to be using them.

[00:14:54] Jeremy Grantham: And everyone’s putting a lot of money into developing AI products. And so the chip seller is brilliant and it’s not clear yet whether the people paying for the chips will ever get a return on them and we’ll find out. I don’t think it’s inconceivable, but it’s clear that that produced the umph to take this market that was dwindling down and produce some fairly spectacular performance, particularly of seven stocks, and to produce such broad based enthusiasm eventually that it drags the broader market with it to a pretty decent degree.

[00:15:25] Clay Finck: So I think many people expected higher interest rates and the feds pivot in 2022 to lead to a recession in the U. S. after a decade of artificially low interest rates in an economy that was very dependent on those interest rates and all the refinancing that happened and such. And one piece that I thought was interesting from your previous appearance on the show was that Most of the decline in the great bear markets only happen after the first interest rate cut.

[00:15:53] Clay Finck: So the Fed, they haven’t cut rates quite yet, but they’ve been signaling that rate cuts are likely coming in China. On the other hand, just announced rate cuts as they’re on the verge of deflation and facing a lot of issues with real estate and debt levels. So I’m curious to get your take on interest rate cuts.

[00:16:07] Clay Finck: It appears that the market rally and declining levels of inflation with that market seems to be pricing in a soft landing for the economy.

[00:16:17] Jeremy Grantham: One of the best indicators of recession is a modest upturn in unemployment. And if you see that in a long term chart, you’d be impressed. When the market ticks up 50 basis points, half a percent in unemployment, 70 percent of the time it’s followed by a recession.

[00:16:34] Jeremy Grantham: When it ticks up 0. 6 percent, it is followed 100 percent of the time historically with the recession. Today it’s 0. 7. Today it is nicely, I mean visibly, above the level that historically has always predicted a recession. Recessions have this slippery habit of taking a little longer than you would like.

[00:16:56] Jeremy Grantham: It’s not unique, by the way. They’ve done that a couple of times in the past. What they haven’t done is wriggled off the hook. Once you get the leading indicators, such as the gap between the 90 day and the 10 year bond, the early warning indicators, and then you get the tick up and inflation, you have always had a recession.

[00:17:15] Jeremy Grantham: And that is the phase that we’re in. So I would strongly bet, as a historian, I would just say, You’ve always had a recession in these conditions, perhaps you’ll get lucky, perhaps this time will be very different from history, but this isn’t one or two times, this is eight or nine times out of eight or nine.

[00:17:33] Jeremy Grantham: You have always had a recession in modern times, and perhaps this will be an exception, I wouldn’t hold my breath.

[00:17:40] Clay Finck: One of the other things that I think has really duped a lot of people is just the level of stimulus and support from the Federal Reserve and the US government in 2020. For example, for anyone that owns real estate, they are just hanging on to their homes because they have a 30 year, 2 percent mortgage that they can just sit on and that’s it.

[00:18:01] Clay Finck: They’re not feeling the effects of higher interest rates in real estate. In that example, it sort of brings to the question of the federal reserve has tightened economic conditions and raised rates. And the US federal government is running trillion dollar deficits, which stimulates the economy. So I’m almost curious if this sort of dynamic resembles any bubbles you’ve studied in the past.

[00:18:22] Jeremy Grantham: Each bubble is different. We have to agree that the government policy of being stimulatory has gotten more and more intense with the passage of time. Even the great financial crash was nothing like the stimulus delivered for COVID. And once you break out of any historical reference point, it’s hard to know what will happen.

[00:18:40] Jeremy Grantham: But one of the things as a kind of long term fundamentalist, I should emphasize here, is that there’s no strong connection between low rates and economic growth. We had a magnificent experiment conducted really by Greenspan, and in the 1986, 87 period, we started to increase the level of debt. And the idea is interest rates work because they allow you to take more debt.

[00:19:05] Jeremy Grantham: And the idea about debt is it stimulates the economy. Well, starting in 87, after 100 years of drifting up in debt to GDP ratio, that’s all debt, government debt, corporate debt. It had drifted up for a hundred years, and then it came to the 45 degrees, and went shooting up from 89 until the other day, and it tripled.

[00:19:24] Jeremy Grantham: It tripled the ratio. So you have the biggest country in the world, biggest economy in the world, I should say, tripling its debt to GDP ratio. What an interesting scientific experiment. That should reveal something. And the growth rate of its GDP slowed clearly and considerably. The growth rate after 89 is two thirds of what the growth rate is since the war from 1945 to 89.

[00:19:46] Jeremy Grantham: So you had a magnificent experiment. Increasing the level of debt did not apparently stimulate the economy, it slowed considerably. Now, of course, there are many other factors. It’s a very complicated issue, but you would think if debt is so wonderfully helpful to economic growth, it might have at least shown better results than that.

[00:20:06] Jeremy Grantham: An interest rate is a second derivative. The only significance of a low interest rate is it allows you to borrow more money. But if borrowing more money clearly in the macro level has not had the effect of increasing GDP growth, why would we get so excited with a lower interest rate? Secondly, why would we always forget that most of a market decline occurs after the first rate decrease, as you referred to?

[00:20:29] Jeremy Grantham: I mean, that takes talent, because that goes over and over again. We get enthusiastic about the first rate, oh, just hang on, guys, wait for the first rate cut, and then we’re back to the races. And history is pretty clear. Most of the decline occurs after the first rate cuts. Why do we forget it? Because that’s who we are.

[00:20:47] Jeremy Grantham: We travel optimistically. Why? And we like to forget unpleasant features. Let me just say, I have spent my entire life being early in the stock market. The most important one probably was Japan. We were one of the early firms into international investing, and we knew that Japan had never sold over 25. And by the time it got to 45, we felt it was almost immoral to be in Japan.

[00:21:10] Jeremy Grantham: But Japan was 40 percent of the benchmark. So in the institutional world, you take your life in your hands when you get out of something that’s 40 percent of the benchmark. But we did, we got out 100 percent and we watched it go to 60 percent of the benchmark. And Japan was like a monster, it just wouldn’t stop growing in the stock market, and so on.

[00:21:29] Jeremy Grantham: I was three years early, but when the market broke at 65 times earnings, today, by the way, it’s just another country, it’s back in the normal range, and it’s magnificently underperformed. It gave every penny back that we paid with a lot of profit. The easiest way to make money for 15 years was just to underweight Japan, and I’m happy to say we did.

[00:21:49] Jeremy Grantham: And then the next big event in my life was the tech bubble of 2000 and the tech bubble that was based on something very real also like AI that was based on the Internet and the Internet we can all agree is very serious development full of potential. But there’s always limits to how much you should pay.

[00:22:08] Jeremy Grantham: And in early 98, the P. E. reached the peak of 1929. 21 times earnings, which had been, through history, the highest ever reached in 1929, became 21. 1 in January 98. And we became extremely nervous. And by mid 98, we had lowered our exposure to the U. S. market and Tried to beef up our positions in emerging markets and international markets and debt and cash.

[00:22:36] Jeremy Grantham: And we watched it rise and rise all the way through 98, 99 and the first quarter of 2000. And it went from 21 to 35 times earnings. And that is a painful leap when you are very conservative and we dramatically underperformed. Not as much as Japan. Japan was 10 points a year for three years, all regained with profit.

[00:22:56] Jeremy Grantham: This was about six points a year for two and a quarter years. And that was enough to cost us an arm and a leg and a great bulk of our asset allocation accounts left. And our business in a great bull market went from 30 billion to 20 billion, which is pretty hard to do. And then the market was trashed.

[00:23:14] Jeremy Grantham: We made money and in the decline, we made money in 2000. We made a decent amount of money in 01 and we scraped home with a tiny, tiny positive return in 02. But by the end of that 2 and 3 quarter year bear market, one of the longest incidentally, we made about 20 percent and the S& P was down 50 and the NASDAQ was down 72.

[00:23:34] Jeremy Grantham: So that was a very handsome difference. We didn’t suffer much in the financial crash. I, for once, tended to get that more right than wrong, and we had a very heavy position in emerging markets, which brilliantly outperformed it, it tripled the performance of the U. S. market over a six, seven year window.

[00:23:51] Jeremy Grantham: And then that leaves us with this one. And once again, once the market reached the top few percentage points of history, I was telling people to watch their tails. And of course, once again, just like Japan and the tech bubble, and even the housing bubble, it keeps going. I was three years too early in Japan, two and a quarter years too early in the tech bubble, and clearly a couple of years too early here.

[00:24:14] Jeremy Grantham: Yes, this is unusual, and every time the markets are a bit different. And we had a really interesting decline in 22. But when you look at the new highs now, you’d have to say that if you’re blowing the whistle, In 21, and saying, watch out, this is a bubble peaking, you’ve been pretty handsomely early. And I just want the listeners to know that this is par for the course for me.

[00:24:36] Jeremy Grantham: This is not anywhere near as brutal as Japan, and it’s not as brutal as 2000. And it’s extremely painful, and one doesn’t like to be early. And the problem with being too early is when it gets to a historical level, I tend to blow the whistle and say, look, this is historically very dangerous. And this is what’s happened historically several times.

[00:24:56] Jeremy Grantham: And there’s no rule against the market going up more. And Japan is the mother and father, as I said, and a warning to anyone. You’ve never been over 25 times earnings. You go to 65. You have to be ready with some part of your brain for the market to keep going. Having said that. Bear in mind that it didn’t change the outcome.

[00:25:13] Jeremy Grantham: It changed the timing of the outcome, but Japan went all the way back and gave up every inch of ground that it had made just because it kept going for three extra years. Changed nothing.

[00:25:25] Clay Finck: There’s a lot to touch on there. I guess the other thing I would mention is that you haven’t always called for an overvalued market either. It was actually in March of 2009, you put out an article that you expected the S&P500 to produce double-digit returns. Then just by happenstance, that was actually the day the stock market bottomed-out during the great financial crisis.

[00:25:45] Jeremy Grantham: I’d like to embroider that a little because one has to realize that the 21st century has been a very much higher level PE than the 20th century. The 20th century averaged 14 times earnings and we’ve averaged more like 20. It’s over 50 percent higher in the 21st century. This is not a small change. If you’ve learned your trade and you’ve learned your history book in the 20th century, you are going to think that most of the time.

[00:26:11] Jeremy Grantham: In the last 24 years has been overpriced. And I do think that I think most of the time for a variety of reasons, a shift in monetary policy, a shift in stimulus, an enormous increase in willingness to take debt at the government level, etc. has been important differences. Also, the level of monopoly that the US has allowed there is a concentration increase in every industry in America and some of them fairly brutal.

[00:26:39] Jeremy Grantham: The magnificent 7 really are international monopolies. They have kind of death grips on their programs on their telephones. You name it. On their procedures that they’re offering and of course now on chips to produce a I this is not a highly competitive market with 7 giant companies fighting it out.

[00:26:58] Jeremy Grantham: This is not the oil industry. This is a window of history where 7 or let’s say a couple of handfuls of US huge. Instant monopolies dominate the planet in terms of finance and stock market. This is not your father’s stock market. This is a very different state of affairs. Now it may go on, but it may be that Europe.

[00:27:23] Jeremy Grantham: And eventually the U. S. will say enough is enough, as it did back in the oil days when they broke up the Super Exxon Standard Oil into, you tell me, five or six pieces. And other industries too, telephone company, swapped into many pieces. We may, however, allow the big corporations to kind of run the game.

[00:27:44] Jeremy Grantham: And that’s one flight path. Or we may interfere and require a greater level of competition, and that is another flight path. There’s great uncertainties lurking around.

[00:27:56] Clay Finck: One more question before we transition to climate here, if you’ll allow me to spout a bullish and optimistic viewpoint. So, you’re highly, highly familiar with quality businesses and quality companies performing well.

[00:28:10] Clay Finck: Having a tendency to outperform the market and oftentimes justify higher PE levels. So I think a lot of bulls would argue that we shouldn’t be using something like a Schiller PE to compare today’s market to the past. Maybe something like comparing apples to oranges for lack of a better analogy.

[00:28:26] Clay Finck: So when I look at like the AI darling NVIDIA, for example, in 2023, they saw revenue growth of 125%. Today, it looks like they have a PE of around 70. And then much of the big tech firms are growing in the mid teens in terms of revenue growth. You mentioned many of these companies are some of the greatest monopolies the world has ever seen and potentially maybe justify higher multiples.

[00:28:52] Clay Finck: I’m curious how you would respond to this point.

[00:28:55] Jeremy Grantham: Well, as I say, there’s a fork in the road. There’s a world where you allow monopolies to get stronger and stronger and a rule of a few handfuls of companies on a global basis. And there’s a world where the EU or other countries start to interfere and push back.

[00:29:10] Jeremy Grantham: And the game is completely different. But let me just make the point that every great bull market was accompanied by claims that it was entirely different that due to the development of radio and the automobiles in 1929. And the world was completely different. Electricity, telephones, all of the good things were finally getting broadly distributed.

[00:29:30] Jeremy Grantham: They’d been discovered earlier, but now they were being commercialized, and the giant AT& Ts were taking shape, and so on. And the same in the tech bubble. Times were different. Tech was taking over the world, the internet would change everything. Drive away the dark clouds of ignorance, said Greenspan. It’s quite poetic.

[00:29:48] Jeremy Grantham: And it was important. They were both important. But in between, the market became, once again, quite mundane and quite boring. And let me just talk about Amazon. Amazon went up multiple times in 99. And Amazon is a terrific successful firm and one of the players now, but it went down not a lot in 2000 and that bear market, it declined by 92%.

[00:30:13] Jeremy Grantham: I mean, just think about that a successful company, not disputing it brilliantly managed, et cetera, et cetera. went up, let’s say 10 times in a real hurry and then declines 92 percent before rising from the dead again and inheriting the world. That is the nature of the beast. If you go back in history, you find there was a huge bubble around the canal building in Europe.

[00:30:36] Jeremy Grantham: Then there was a huge, a huge bubble around railroads, both in the U. S. and particularly in the U. K. and Europe, where they built, or planned to build, six, seven railroad systems between Manchester and Sheffield, you know, I mean, absolutely loony tunes. And, of course it was huge, it changed the economy, it changed the world.

[00:30:56] Jeremy Grantham: But there was a huge financial bubble, and it broke. And it didn’t wash away the railroads. It just washed away the investors. The railroads were left. They changed the world. They allowed a great surge of economic growth, but they bust the internet. It’s a real idea. It was serious and it bust Amazon, brilliant company, and it bust.

[00:31:18] Jeremy Grantham: Try owning a stock that goes down 92 percent and you’ll know what I mean by bust. So, to have AI be serious, and it is serious, anyone can see that it’s a very serious idea, but if it doesn’t have a glorious bubble up front, and then bust, and then regroup, and be serious, it will be the first such event in history.

[00:31:38] Jeremy Grantham: It will probably happen. Now, there’s always the odd thing that is different and new, and maybe this will be it. But history says, that’s the pattern. Brilliant new idea does not mean the path is smooth. Brilliant new idea typically means the more brilliant, the more real it is, the more dollars get behind it, the bigger the bubble, the bigger the bust, and then you dig it out and you make your serious progress.

[00:32:02] Jeremy Grantham: It is not clear how many people will make any money in AI. And how do you sell chips to lots of people when, for a year or two anyway, they’re reeling back from the fact they’ve spent tons of money and they’ve had no return on it? It’s a very, very lively possibility that one day in the next couple of years, there will come a day when it will not have done well at all and be advised.

[00:32:29] Clay Finck: So nowadays, Jeremy, you’re much more focused on what you do need to be much bigger issues, which is studying and investing in the climate and green energy space. So when I first started learning about investing, I was taught about the power of compounding. So 1 today, it gets invested one day, it’ll be worth 2, 5, 10 or more from your perspective.

[00:32:53] Clay Finck: What’s the danger or flaw in assuming compounded growth of the economy into the longer term future?

[00:33:00] Jeremy Grantham: Just to start again, the very long end, which no one is interested in where mathematics and reality rules the waves. You cannot have sustained compound growth on a finite planet. And one of the tests I run is, just imagine you tried to compound the growth rate of population at 1 percent a year.

[00:33:20] Jeremy Grantham: It’s done considerably more than that in my life. When I was born, it was 2. 2 billion. It’s now 8. 3 or 4, 3. 6 times in my lifetime. Let’s assume a more moderate 1%, but for a long period, the lifespan of the Egyptian empire, 3, 000 years. It doesn’t just expand the population a lot, it expands by seven trillion times.

[00:33:43] Jeremy Grantham: That’s incredibly unintuitive, isn’t it? A lousy 1 percent for 3, 000 years is, in simple, non compound interest, 3, 001%. I mean, not 7 trillion times. You cannot compound. And that’s what we’re doing. We’re compounding the use of fossil fuels. We’re compounding the use of fuels. All the way up to lithium copper cobalt that we use for greening the world.

[00:34:09] Jeremy Grantham: These are rare metals. They’re 0. 002 to 0. 006 percent of the Earth’s crust. They’re very scarce. We can’t keep on growing like this. In the last 10 years, we’ve produced as many chemicals as the previous 100. And before that, there were no chemicals produced at all. You can’t compound like this. You generate enormous waste, enormous stress, you drive out nature, and in the end you discover that nature is pretty significant.

[00:34:38] Jeremy Grantham: The real experts, for example, are not sure if we can even survive as a system without insects. And the biomass of insects is down somewhere between 50 and 75 percent. Just the weight of all those bugs that recycle the soil in the forest, that pollinate 70 percent of what we eat, of the species that we eat.

[00:35:00] Jeremy Grantham: And to give you an example of how all growth of this kind. Compound growth is squeezing the life out of our very agreeable planet. It’s 20, 000 years ago. You had basically a fraction of 1 percent were human beings in biomass of mammals and a few pet dogs. And that started to grow in terms of humans compounding from a couple of million to eight plus billion and armored with giant blocks of sheep and herds of cattle and dogs and cats.

[00:35:31] Jeremy Grantham: Do you know what they amount to today? Ninety six percent of all mammal life is humans and their pets, and four percent is all the wild animals, all the elephants, and deer, and rabbits, added together of four percent. If we continue to grow, the four becomes two, becomes one, and we find ourselves engaged in a very interesting experiment, can we really make it without the insects pulling their weight, without nature doing its thing?

[00:36:00] Jeremy Grantham: We’re crushing nature, plastics in the ocean, plastics in our brains, plastics in the bloodstream. PFASs that are never destroyed by nature are in the water, in the rain, in our systems, in unborn babies. And they cause all manner of ailments, but the one that’s most interesting to me is they interfere with fertility.

[00:36:20] Jeremy Grantham: PFASs interfere with fertility, plastic in the system in general interferes with fertility. I think, above all, pesticides interfere with fertility. Pesticides consumed on fruit and vegetables by pregnant women are, I believe, the most dangerous component that we deal with. Pesticides are designed to kill plants.

[00:36:41] Jeremy Grantham: They’re designed to kill insects. They’re designed to kill fungus. This is not an accident, you know. Plastics interfere with fertility. An unfortunate accident, but they weren’t designed to. But pesticides are designed to kill, for heaven’s sake. And we slather them on much increased quantities, at least five or six times more than we did in as recently as 1980.

[00:37:02] Jeremy Grantham: We slather it on the fruit and vegetables, and we recommend that pregnant women eat lots of fruit and vegetables, and we wonder why bad things happen. And the population, for many reasons, is going to bust. And no one, they begin to talk about it. The odd book is written. The odd book doesn’t, Empty Planet, perfectly good book, doesn’t mention toxicity.

[00:37:23] Jeremy Grantham: And toxicity is a game changer. There are, you know, 50 good reasons, nothing to do with toxicity, where women are deciding not to have children. They’re expensive, they’re time consuming, very difficult to deal with, and the style these days is to do it very intensively, very seriously, takes up your whole life, makes you exhausted, interferes with your career.

[00:37:43] Jeremy Grantham: And women do not get a fair deal. Why would we be surprised that they think they would rather be a full term participant in the benefits of capitalism? There are many reasons not to have children. But then, in the future, rather than the past, we have toxicity. What does it do? The sperm count in the developed world, since hunter gatherers, is down about 60%.

[00:38:05] Jeremy Grantham: Not 8%, 15%, 60 percent decline. And according to the experts, who look at all the studies ever done, They say that the decline is accelerating. The decline rate in the 21st century is 2. 5 percent a year, and the decline in the last century since World War II was 1. 5 percent a year. So here we are, we’re down 60%, we’re dropping at 2. 5 percent points from that level every year. And the other day, 20 years ago, a few technical problems with giving birth, but there was not a serious level of problem. And today, the World Health guys are saying that 15% of young couples need help. It’s been an enormous increase and it’s all in the last 15 or so years.

[00:38:46] Jeremy Grantham: 20 years from now, it’s going to be a third or more of all young couples. And if you just look at the statistics. It is going to make it very unlikely that even when you decide to have children, when you’ve gotten over the 60 reasons not to have them, and then when you try, you find that your ability to have children, your fecundity, is also down.

[00:39:06] Jeremy Grantham: And there is another component that no one talks about, and that is that chemicals are doing a job on our hormones and are interfering with our desire to have sex. Every study you see, every age group, every country, there is less sexual activity. So, just think about this. You’re not that interested, and there are cultural reasons also to be less interested.

[00:39:28] Jeremy Grantham: And then finally, there are 60 reasons not to have children anyway. And then when you finally get over all those hurdles, your ability has been interfered with by chemicals. This is a fairly disastrous outlook. I will guarantee you, almost 25 percent of all countries now have declining population. Every developed country in the world has a declining cohort of babies, except Israel.

[00:39:50] Jeremy Grantham: And India is now below replacement. So yes, we’re growing, but we’re growing because we have lots of old fogies like me who have to be carried around and have disproportionate share of babies. Medical treatment and so on. We’re an expensive lot in general, and we are accumulating vast quantities of over 60s, over 80s that we never had before, and we’re going to have to pay for it with a much reduced cohort of 20 year olds and 30 year olds.

[00:40:17] Jeremy Grantham: You know, in Japan who’s 20, 30 years ahead of us, the cohort of 18 year olds is not down 5%, not down 10%, it’s down 50 percent from its peak, 50%. If we were down 50 percent in America, we would be freaking out. It changes everything. Japan has an amazing social contract, an amazing culture. They can deal with things like this.

[00:40:37] Jeremy Grantham: Do not kid yourself. I joke that my rule 21 in investing is never extrapolate from Japan. They are a completely different yeah. Interesting, strange society seen through Western eyes, and they can do things and they can cope with things that we cannot cope with.

[00:40:55] Clay Finck: So you’ve stated that a large percentage of your wealth is invested in early stage venture capital, things like presumably green energy, climate change.

[00:41:04] Clay Finck: And one of your previous comments that stuck out to me was that capitalism has produced amazing things for society, but it can’t even begin to spell altruism. To help accelerate the transition, you’ve advocated for things like a carbon tax to encourage the use of alternative energy sources. So in light of what you’ve seen, sort of in this venture arena, do you foresee just more intervention outside from like government forces is going to be needed?

[00:41:31] Clay Finck: Or are you seeing, you know, seeing a lot of hope in terms of innovation and human ingenuity and whatnot?

[00:41:38] Jeremy Grantham: Yeah, I see a lot of hope in terms of ingenuity. We’re a pretty dopey species and very inept at thinking about long term problems. But my god, we’re inventive. And if you go back 20 years, I think every honest climate change person would have to admit that the progress in wind, the progress in solar, the progress in storage, particularly, jeepers creepers, that’ll soon be down to 5 percent of the cost of 20 years ago.

[00:42:03] Jeremy Grantham: Far, far more profound progress than anyone ever guessed. Electric vehicles, plug in vehicles in China today approach 50 percent of the total. And they’re ingenious, they’re dripping in functions, and they make 90 percent of the electric buses in the world, and they have over 90 percent now of their buses are electric.

[00:42:22] Jeremy Grantham: No, the progress has been sensational and far broader than I mentioned. The damage has been sensational as well. Well, we phrase this as the race of our lives because both sides are racing. I mean, we produced more in the last three years, more increments of particles of CO2, which are outrageously effective at trapping heat.

[00:42:42] Jeremy Grantham: We produce more in the last three years than any three years in American history. We have not even started to tip the increase of CO2 yet. I think we will. I think in 20 years from now, the annual output will be down. I think. China, Europe, and the U. S. will all peak and be declining. The problem is, and why it’s a race, is we don’t have a lot of time.

[00:43:02] Jeremy Grantham: We’re doing so much damage. And you can see it. Anyone who doesn’t suffer from a strong belief of political principles gets in the way of looking at data, can see that the weather is going to hell. We have far more floods, which was predictable at least 30, 40 years ago. Hotter air will carry and carries 5 percent more water vapor than it used to.

[00:43:22] Jeremy Grantham: So you will get more serious downpours. And we are seeing it everywhere. But the temperature is going up, so it will dry out the countryside quicker, and you will have more droughts, and you will have more forest fires. And if you look at the billion dollar accident, it’s a chart that goes from low on the left of the chart to way high on the right of the chart.

[00:43:42] Jeremy Grantham: Steady, dramatic increases in billion dollar plus weather accidents. In a real sense, they’re not accidents, they’re part of the deal that we have going on here. You create particles of CO2, methane, and nitrous oxide, you trap the heat. And we’re trapping it at the rate of an old Hiroshima nuclear bomb every few seconds.

[00:44:03] Jeremy Grantham: That is the incremental heat trapped equivalent every few seconds. I mean, it is absolutely shocking. And you think, think of all the energy you get from burning fossil fuels. That isn’t the energy that gets trapped. Because of the fact that the process is quite different, it generates CO2 by horrible accident.

[00:44:21] Jeremy Grantham: CO2 is an incredible heat trapper. If it wasn’t, by the way, we’d be living on a frozen planet at minus 25 degrees centigrade. So thank God CO2 is an efficient trapper of heat. But when you start increasing that, you don’t go up by the energy that you just released. You go up way over 10 times that. CO2 is such an efficient trapper, that you get one calorie of energy, but the trapped heat goes up by way over ten times.

[00:44:48] Jeremy Grantham: So we are roasting ourselves, and better take it seriously very fast. But, is there a way out of this? I think if everybody takes it seriously, we can do it. The trouble with capitalism, I think basically capitalism does everything, almost everything better than any other system. I would be happy to leave 99 percent of everything to capitalism.

[00:45:10] Jeremy Grantham: Profit motive turns everybody on. As I was quoted as saying, it can’t spell the word altruism. It profit maximizes. It can’t deal with tragedies of the commons. Everybody gains profit by pumping out CO2 into the air and not being charged for it, by polluting and not being charged for it. And so they do it.

[00:45:29] Jeremy Grantham: Milton Friedman said the moral imperative, basically, of a capitalist enterprise is to maximize its profit. Get away. If it’s legal, do it. And it’s legal to pollute the world and not be charged for it, so they do it. You cannot expect a corporation to volunteer to lower its profits just in order to save Homo sapiens in the long run.

[00:45:47] Jeremy Grantham: It’s not what they do. And so they don’t. You can hardly find any corporation that has ever volunteered to give up a significant chunk of profits in the interest of society. It’s an unreasonable expectation, given where capitalism is today. It simply has no machinery to address climate change, no machinery yet to adjust toxicity.

[00:46:10] Jeremy Grantham: If we don’t clean up toxic chemicals out of the system in the next few generations, we definitely cease to exist. So we have got to produce a way of handling these tragedies of the commons. And the only way to do that is by regulation. Sorry, guys. Capitalism is wonderful. Libertarians are wonderful. But there’s no machinery.

[00:46:30] Jeremy Grantham: to save our bacon. If we do not address problems of the commons, climate and toxicity, we are toast. And we better do it fairly quickly. I don’t see it as philanthropy, by the way. I’ve put up 90 percent of my net worth and I’ve committed another 5%. I see it as sensible defense of a wonderful planet for my children and grandchildren, etc.

[00:46:52] Jeremy Grantham: And everyone else, as far as I’m concerned, gets a free load. But other people better help because we are way collectively underfunded and under researching. And we can do this. We are magnificent at doing it when we have the researchers and the money. But we are outgunned by the massive spending of the capitalist system.

[00:47:13] Jeremy Grantham: They are still generating more fossil fuel, more pollution, and more chemicals than they did the year before. And we better stop it in the next 10 or 20 years or we’re out of business.

[00:47:25] Clay Finck: One of the difficulties that crosses my mind with respect to the green energy transition is making some of these sources of energy economically viable relative to the traditional sources, but you help shed light for me in terms of decarbonization is coming and these costs are dropping.

[00:47:42] Clay Finck: But what also comes to mind is if the cost of when the cost of solar is just constantly dropping, you’d think that, you know, all these players are just going to be lowering prices and there’s going to be. Little to no margin left for a lot of these companies. So how do you see sort of the profit incentive in a lot of this space?

[00:48:00] Jeremy Grantham: Well, I mean the good news bad news is it’s an incredibly competitive business by the way That’s how capitalism is meant to work You’re meant to compete and and the ones who do it cheaper make some money and the ones who are a bit sloppy Don’t make any money and it’s working and the progress of wind and solar just spectacular Solar in particular is a couple of percent of what it was 30 years ago in cost. And it will get better.

[00:48:23] Jeremy Grantham: There are endless research improvements in the works now for further progress in the efficiency of the panel and the cost of the panel, the same to a lesser degree with wind. But there’s also other areas like geothermal. If we could take the technology of fracking, where we drill 200, 000 wells in the U S and produce the most amazing, impressive ingenuity engineering tricks.

[00:48:48] Jeremy Grantham: Just bear in mind, it’s solid rock fracking. You’re squeezing oil out of solid rock and you’re getting it out at a price you can afford. That is amazing. If we could take that ingenuity and persistence and engineering competence. And move it to geothermal. It is quite likely, I think, 50 50 anyway, that come back in 30 40 years, You will be able to drill fairly deep wells and tap into the more or less infinite supply of heat below the crust.

[00:49:18] Jeremy Grantham: And that will be a game changer because that, unlike the sun and the wind, which needs storage, is permanent. It’s all 24 hours. But wind and solar is going to get so cheap, and storage is going to get so cheap, that we may not need these other things. But fusion also, there are 40 new firms, second generation fusion.

[00:49:37] Jeremy Grantham: Again, it seems like a pretty decent chance, eventually in a few decades, maybe even as little as a couple. We will have early generation fusion. I worry that it will never be competitive because of huge capital costs, but it’s a wonderful backup, and we may need it, and it may be a pleasant surprise. And there may be other energy forms will come along to help us.

[00:49:58] Jeremy Grantham: We will not be short of cheap green energy, by the way. That will not be what brings us to our knees. I think toxicity is a much bigger problem, and I think decarbonizing heavy industry is a much bigger problem than cheap green energy.

[00:50:13] Clay Finck: Well, Jeremy, I want to be mindful of your time. Is there anything else we should touch on before I give you a final handoff to any resources you’d like to share?

[00:50:21] Jeremy Grantham: I could say that why the population bust is such a dangerous element is that if it falls too fast, it will shock the economic system, the whole structure, and we will feel poor. The GDP will not be growing like it used to. We will feel too poor to have the resources to solve for climate change, et cetera, and detoxifying completely the system.

[00:50:44] Jeremy Grantham: What I hope for is that over, say, five or six generations, the population will decline. Kind of a Goldilocks rate at about 1. 5 fertility rate. 2. 1 is replacement for five generations and then move back up to 2. 1. So you have a stable system in perpetuity. And we have six generations to detoxify the planet.

[00:51:05] Jeremy Grantham: And we can do that. We can do it faster, but we tend to move very slowly and things like this. And there’s a very well organized resistance. Chemical producers who have never met a chemical like DDT that they didn’t love and was good for us and we should be eating for breakfast. They have never volunteered to take chemicals off the market because they found that they were poisonous.

[00:51:23] Jeremy Grantham: No, they find that they’re poisonous and they keep quiet about it. Though DuPont and Triple M know that PFASs are deadly and they’ve been cranking them out for decades. I mean, they might as well be walking down the high street and shooting you with machine guns. Just like the tobacco companies, they knew also they were giving us cancer.

[00:51:39] Jeremy Grantham: No one ever went to jail in the tobacco company. Even though they inflicted millions of deaths on the general public knowingly in the name of making profit and the chemical companies and oil companies will do exactly the same. That’s how capitalism works and somehow we the system have to decode that and live with it and make it work and it will not be easy.

[00:52:00] Jeremy Grantham: I think it’s about 50 50. I think it’s a weird race in which we have these incredible talents and these incredible deficiencies. And a weird system that does not generate anywhere near logical, rational behavior. I’ll tell you one thing I’ve missed. Everyone likes to kick China. And of course, being a fairly single minded environmentalist, I have to say, dudes.

[00:52:24] Jeremy Grantham: They have got a death grip on everything to do with greening the planet. You may know that they produce 80 percent of the solar panels. They produce 90 percent of the material that goes into the solar panels. They produce way over 50 percent of all the refined lithium and cobalt that goes into the solar panels greening batteries and so on. And they produce more EVs than the rest of the world added together now. Last year, they put in more solar than the U. S. had ever put in cumulatively. I mean, just think about that. It’s almost inconceivable. And if you want to get really worried, in 2003, China wasn’t 1 percent of the peer reviewed articles of leading journals and citations and patents.

[00:53:05] Jeremy Grantham: Last year and the year before, they overtook the U. S. The U. S. back in 2003 was like 40 percent plus of all the world’s peer reviewed articles, and now China is slightly ahead. How is that possible in 20 years? To go from nothing in peer reviewed, serious science to being the world leader? That is scary.

[00:53:24] Jeremy Grantham: They produce many more patents than the U. S. or the E. U. added together. They are moving at the rate of warp speed. And they’re dominating all the green new technologies and we better put our best foot forward.

[00:53:39] Clay Finck: Well, Jeremy, I myself know, I certainly appreciate you joining me on the show here. And one of the things that I sort of took away and kind of preparing for this interview, as you mentioned, you’d like to see yourself as a realist, somebody that looks at the world the way it is and not the way that you’d like it to be.

[00:53:54] Clay Finck: And I really appreciate you sharing your thoughts with the audience and really putting yourself out there with regard to many of these issues that are very pressing to the world today. I want to give you a chance to share any resources or hand off to your firm GMO and anything else you’d like to share or point the audience towards.

[00:54:13] Jeremy Grantham: In terms of GMO, I draw your attention to quality where exchange traded fund ETF. We have a very successful product. We’ve been studying quality for 30 years at GMO, actually 45 years. Now I think about it and we’ve taken it more seriously than most people. And I think we understand it better and quality is a very interesting characteristic, you know, a triple a bond that delivers a percent less than

[00:54:37] Jeremy Grantham: The AAA stock does not. The AAA stock is actually a long history of outperforming. It’s a free good. It’s an aberration, one of many, many aberrations in the market. The market is not efficient. Quality stocks tend to be, I think, a little, considered a little boring. When you’re in a bull market, you want something a little sexier, and that may be the reason.

[00:54:55] Jeremy Grantham: But in any case, going back into time immemorial, the last hundred years, quality stocks have been a free good. They have outperformed by somewhere between half a percent and a percent a year for being the triple A bond equivalent. I mean, how good is that? And that is what we offer.

[00:55:11] Clay Finck: We’ll close it out there, Jeremy.

[00:55:13] Clay Finck: Thank you again so much. It’s really an honor having the opportunity.

[00:55:17] Jeremy Grantham: Yeah, thank you. It’s a pleasure. And I consider it my job.

[00:55:21] Clay Finck: All right, everybody. Thanks so much for tuning in to today’s episode with legendary investor, Jeremy Grantham. If you’re interested in collaborating with TIP hosts and other vetted members of our audience, you may be interested in joining our TIP mastermind community.

[00:55:34] Clay Finck: The TIP Mastermind Community is the community we put together for portfolio managers, high net worth individuals, and private investors who want to network with others, talk stocks, and join or tune into our weekly live zoom calls. We record or attend our live events in Omaha, New York city, and London to join the waitlist.

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