06 April 2023

On today’s episode, Trey Lockerbie welcomes back billionaire and legendary investor Mr. Jeremy Grantham. Jeremy has a reputation for accurately predicting future events, including nearly every single bubble bursting over his career. During their conversation, Jeremy shares his thoughts on recent bank failures, Fed policy, and other world issues.

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  • Jeremy’s general thoughts on recent bank failures and Fed policy.
  • A look at history and how long bear markets typically last.
  • How Apple and Microsoft are eating the S&P 500?
  • And other significant global concerns that are of interest to Jeremy.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Trey Lockerbie: Today, we welcome back a very special guest, and that is billionaire and legendary investor, Mr. Jeremy Grantham. I have been continuously amazed at how accurately Jeremy has been predicting future events over the last couple of years that we’ve been chatting, but it should be no surprise as he’s been one of the few who have accurately predicted nearly every single bubble bursting throughout his career.

[00:00:26] Trey Lockerbie: In this episode, you will learn Jeremy’s general thoughts on recent bank failures and the Fed policy, a look at history, how long bear markets typically last, and why that data is probably very irrelevant for the situation we’re in currently. How Apple and Microsoft are eating the S&P 500, the bigger issues that are really concerning Jeremy, and a lot more with all the noise.

[00:00:53] Trey Lockerbie: I mean, news going on constantly, it can be challenging to keep an eye on the bigger picture. Well, that’s exactly what makes Jeremy so great. While I was focused on banking issues, Jeremy takes us 40,000 feet above to refocus on some of the world’s largest issues, which I have to admit are more concerning when Jeremy Grantham sounds an alarm.

[00:01:18] Trey Lockerbie: It’s important we all pay attention. So with that, please enjoy this conversation with the one and only Jeremy Grantham.

[00:01:26] Intro: You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:01:38] Trey Lockerbie: Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie and as I said at the top, I’m here with Jeremy Grantham. Jeremy, we’re so excited to have you back on the show. Thank you so much for coming back. 

[00:01:49] Jeremy Grantham: It’s a pleasure. Good to be here. 

[00:01:51] Trey Lockerbie: Well, I was really excited to talk to you because this bubble that we’ve been talking about, and you’ve been really opening on since I, gosh, maybe two years ago when we first started talking, and all your predictions have just been coming true to this unbelievable degree, and I wanted to kind of gauge where you think we are now because, at the same time as we’re seeing big things happening and banking in a lot of other areas, the market is only down 16, 17%.

[00:02:26] Trey Lockerbie: So there’s a lot to kind of gauge as to how far along into this thing we are. So I also have noticed that a lot of market participants are really haunted by 2008 and the GFC and they’re often quick to point out events that resemble that collapse, especially over the last few years. And since we just had the second-largest bank failure in US history, it’s feeling eerily similar to 2008, almost in a new way. What are your general views about the recent banking crisis, and what can history tell us of the events unfolding in the banking system and, I guess, the overall markets today? 

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[00:03:10] Jeremy Grantham: I was reminded of the old aphorism that the Fed keeps on tightening them until something breaks and in a situation like this. And it reminded me of a conclusion that I had come to on the study of the great bubbles, the, the hand folder, the five or six, including Japan in the last, uh, hundred years, because it seems to be the same when you come down from a high, the ultimate sugar high of a super, almost infinite optimism, a belief that good things will go on forever, that record profit margins, etc.

[00:03:49] Jeremy Grantham: And it’s always, the bubbles always form at the end of a long, heroic economy, and everything in the garden is perfect, and it always has taken cooperation on the part of the Fed and the administration. So everything is perfect. And then when something pricks that confidence and it begins to leak out, there is a long way down to go from the peak of optimism to at least mild panic, if not severe panic. It’s a long drop. And at the top, people have always, in their competence, have always expanded their debt levels. So they’re always at the all-time peak in 1929 or 2000 housing bubble and so on. And in Japan in ’89, and as they were this time, this time, you had a record

[00:04:40] Jeremy Grantham: Levels of debt to GDP, all over the world, but certainly including the US, and so as things unravel, of course the pressure, the combination of declining confidence and peak debt, this is a very bad one. My question really is, does it take the Fed or would it find the weak spot anyway, sooner or later, and maybe the Fed raising rates accelerates the breaking point? And I think of it as like water behind a dam. You’re never going to be able to predict which brick goes first. In fact, you should expect the unexpected. By its very nature, it’s a complicated financial system, a complicated economic system, and you build up the pressure and you build up the pressure as your confidence comes down and the debt begins to hurt. And particularly if the Fed is raising rates and then something blows. And each time it seemed to be unexpected. Who imagined Bear Stearns would go? Hey, the Bear, as we used to call them, they were the guys that always inflicted the nasty paper on other people. And when the music stopped, they always had one of the chairs. So when Bear Stearns went [00:06:00] in ’07, it was a major surprise. And Silicon Valley, until you think about it and look at the balance sheet, it did appear to strike the world as a complete surprise. And maybe that is my point from 60,000 feet, is that is the nature of the beast. You should expect that the first thing that goes will, generally speaking, be a surprise. And then how it cascades is virtually unknowable. But let it be said, after the handful of the great bubbles, there has always been a recession. If people behave well, the leaders are sensible, then there will be some mild recession. 2000 was about as mild as it comes. If they behave very badly and get unlucky, like 1929, you get depression. If they’ve behaved badly and refused to regulate subprime instruments in the housing bubble, where Larry Summers and the boys lent on Brooksley Born, who had the legal right to control subprime, regulate it on the ground, you didn’t need to regulate banks.

[00:07:07] Jeremy Grantham: They, by their nature, are capable of self-regulation. This was the Federal Reserve levered at the SEC, and Larry Summers, I’m wrestling to make sure that they were not regulated. I love to bring that up because I call those guys the Teflon man, and it doesn’t seem to stick with them. They brought the system to its knees on the mistaken belief that capitalism could self-regulate, and what a horror show it was. And anyway, here we are back again, and we are going to find out how good the regulations have been since the housing burst, how effective the whistling of the corporations was to push it back. We all know now how the Silicon Valley CEO personally lobbied the lobby really to roll back the regulation so that  they could be unregulated on the supposition once again that capitalism is responsible enough to regulate itself. Well, it just ain’t so. And capitalism needs a policeman at the corner of Broad and Wall as FDR said. And in recent times, some of the policemen have been taking time off or being regulated off their beat

[00:08:22] Trey Lockerbie: I just pulled up a chart here. And for those who are only listening to this, what it’s showing is called “Past bubbles suggest this should take a while” or it could take a while. And what it says is basically the percentage from peak to trough and the trading days. So, if we count January 1st of ’22 as the pop of this bubble, because that’s where the markets really started to turn, that would suggest that we’re at about roughly 300 trading days or so. If you count holidays in there, it’s probably give or take around 300 days since the pop, and this is showing that the only other times something’s taken over 300 days would be 2007, 1968, 1973, and 2000. So, for those who are listening, 2007 took 350 days, peaked at 68, a little bit more, 1973 about 450, and 2000 was the longest. It took about a little over 650. Does this mean anything? Right, because with the idea that history doesn’t repeat itself, but it does rhyme, would this be any indicator in your mind that we are, say, somewhat towards the end or more like halfway?

[00:09:41] Jeremy Grantham: People make a big mistake to average full markets and bear markets, that is not about that. This is about something quite singular and different that happens on rare occasions. In the Great Bubbles, the two and a half Sigma ultimate euphoria episodes, it’s like  a phase change. People go from fairly sensible behavior in an ordinary bull market to absolutely crazy as it could be in these great bubbles and throw the rest of the data away and look at the bubbles, and the data is clear.

[00:10:16] Jeremy Grantham: First of all, they’re always easy to spot, and it is always claimed that they are not, but they stand out in terms of the data on the market, like a Himalayan peak out of the plane, two and a half standard deviation events of the calendar that occur every 5,200 years. These are not hard to spot. In 1929, you had to try to miss it. In 2000, Lord knew you had to try. It went to 35 times earnings, beating everyone on the head with a hammer. The housing bubble was even bigger than that. The US housing bubble in oh six, that was a three. That was literally over a hundred-year event. It had never happened before. Most unlikely, it took the undivided attention of Greenspan and Bernanke, pushing and pushing interest rates down to finally get the entire US housing market to go into Warp Drive simultaneously.

[00:11:17] Jeremy Grantham: Famously, it had been diversified before that it would bubble in Florida, crash in Chicago, and so on. So it never is. Until it got their undivided attention. And so just concentrate on these few. They always have a recession, and when they want to take their time, they really take their time. Most of the decline in these great bear markets only happens after the first interest rate cut. So you tell me when the first interest rate cut is, and I will tell you when the second half of the pain is going to start, and it would be unlikely from a historical point of view that this stock market event would not run deep into next year. And that’s what it looks like.

[00:12:07] Jeremy Grantham: It’s not a hurry, but let me bring up another point on your chart. We have forgotten to adjust inflation because we haven’t had inflation for 20 years. In the old days, all data was like this. Everything you read in the Economist, et cetera, was always inflation adjusted. We have had, for example, over 10% inflation.

[00:12:25] Jeremy Grantham: The market isn’t down 15%, the market is down 25. In the housing bubble, there was no inflation. In 2000, there was no inflation. You can’t compare this one with 10% inflation. With that one that had a couple and 25% is a. Decent down payment on this bear market. I would say the passage of time against a market that has a trend line and in an economy that has inflation, the passage of time is pretty painful.

[00:12:51] Jeremy Grantham: If you even stay flat, you are losing money at a decent speed and people have forgotten that. 

[00:12:57] Trey Lockerbie: One question that comes to my mind when you mention the longevity that we might be looking at here is just the actions of the last week or so. What I see happening is the banking sector almost tightening for the Fed to some degree. You had PAL this week actually just come out and say they don’t really expect to keep hiking rates because, you know, they’re seeing obviously some instability. But what’s also interesting is that banks are choosing to use the Fed’s discount window to a degree that’s even more than 2008. So they’re at, just recently having gone to the Fed for about 150 billion compared to only 12 billion for this new BTFP, otherwise known as the Bank Term Funding program that was just introduced. And the reason I guess that’s interesting to me is because the BTFP is a better deal for banks. It takes a certain kind of collateral, but they’re getting more money for that collateral, whereas they’re going to the discount window and selling a bunch of assets they have at a discount. And I guess what that tells me is that the banks are needing that cash and are willing to take a haircut because they’re in a more desperate place than we thought. And that just leads me to believe that tightening is going to continue on the lending terms, which might exacerbate a recession a little bit quicker. Is there anything to that, in your opinion, as far as outside elements that might progress this thing forward in a more aggressive fashion?

[00:14:44] Jeremy Grantham: The blunt truth here? I don’t really care. I try to concentrate on what I consider the realities, which are profits and growth. And I assume that if you’re patient, that the paper side of it will wash through the system.

[00:15:01] Jeremy Grantham: And we had a very obvious first phase of the bubble. We prick the confidence. It’s easy. All you have to do is shake that complete euphoria. We did that. It popped nicely. Then you have a classic bear market rally and we knew from the beginning, didn’t we, that we would have more by the dip this time than almost ever before because of the trillion dollars plus lurking around in the piggy bank from COVID stimulus and from the behavior of the meme stocks we knew.

[00:15:36] Jeremy Grantham: This was not going to melt away too quickly. And so we had a spectacular rally and we may very well have more. And then you get into the third phase, and that is the fundamentals and that’s the difficult one. How long and how painful will the actual reality, the adjustment phase be? How badly will the economy slow down? How badly will profit margins shrink? Let me point out the most Gentile one was 2000. We had a very mild recession. We’ve never had anything like a soft landing, but that was the closest, that was the least hard landing. And what happened? NASDAQ went down 82%. S&P went down 50%. Real estate was cheap. It was not involved. The bond market was cheap. It was not involved. Everything that. What’s favorable could be favorable and still it drowned down for three years and the NASDAQ went down 82%. That is what I’m interested in. Profit margins got hammered and the growth rate slowed down moderately in the housing bubble. The GDP slowed down even more. Profits basically disappeared completely. 1929 of course was even worse. So we’re going to have an unknowable bad time. It will depend on how effective the administration is and so on. But the truth is we come into it with very high profit margins. We came into it with a form of capitalism that was raising prices for the first time ahead of the workers so that in unexpected inflation, very quickly, profit margins went up and real wages went down.

[00:17:20] Jeremy Grantham: This is not what happened in the seventies. I can assure you, profit margins went down and real wages went up. But this is a corporate system that we could talk about, really quite interesting. The American corporate system has developed a style that makes it almost possible to break the law legally.

[00:17:41] Jeremy Grantham: The way to make a lot of money is to get on the telephone, call up your competitors, and withhold production. The bad news is if they catch you, you go to jail. And what we have today, increasingly now for 20 years, is a style of capitalism where the stockholders are leaning on the corporations to take it easy on CapEx. Why? I mean, basically, it generates an economy of mild shortage all the time. If you want to make money, that is the world to live in. There was a mild shortage all the time, pressure on the workers in the good old days. They always built an extra plant. It was the bane of stock analysts like me.

[00:18:29] Jeremy Grantham: In the sixties and seventies, whenever things started to improve, eight paper companies would all start to build a giant plant at the same time, and they would crash. The prices were great for jobs, great for GDP growth, pretty good for productivity, terrible for stockholders. And now we CapEx has dropped as a fraction of the total, pretty steadily for 20 years. The degree of concentration or monopoly, if you prefer, has risen pretty steadily for 20 years, and it’s all legal.

[00:19:02] Jeremy Grantham: Because it’s the stockholders breathing down your neck saying, dudes, buy your stock back. Don’t build a risky new plant. It might work well, it might be mistimed. In any case, it’s risky. Better to wait and see which of the hundreds of VC firms work out well and then grab one or two of the best ones. It’s a capital transaction, and doesn’t go into the income statement.

[00:19:29] Jeremy Grantham: All that dangerous volatility that you used to have associated with your own endeavors, you can now smooth out and wait to see who wins in any case. So the profit margins have risen steadily, and even in adversity, they are good. Even in COVID, they’re good. Even as the economy slows down, even as inflation unexpectedly first comes to the scene, you suddenly find yourself, “oh, what a surprise,” in a world of mile shortage. Any surprises? And we are short capacity, and this is wonderful for profits, terrible for equality and the wage rates of the workers who basically are still stuck back in the level of hourly rate adjusted for inflation of 1975 to 1980. That is not an exaggeration. Check it out. And yet we have grown as fast as other countries about, say, France. I’d like to say whose bottoms we have been apparently kicking for the last 40 years if you read Business Week because of Euro sclerosis because too much government control their average wage. Our work has increased its remuneration by 160% in Japan by just shy of a hundred. The dopey Brits by 60 or 70%, and the hard-driving capitalists in the US less than 10. I mean, basically our workers have been royally screwed, have not participated in the substantial productivity since the mid-1970s, and the main culprit is now completely legal. That is the stockholders bullying management into doing what management always wants to do anyway, which is live in a world where you control everything, you buy your own stock back. And Warren Buffet has said some very interesting things about stock buybacks recently, like anyone who suggests there’s any damage done as an enumerator or a villain. Of course, he did say all buybacks. Anyone who says all buybacks are damaging, of course, that word all can be used to make. There’s always some exceptions. There’s always some part of anything that is useful. But what start buybacks do is facilitate this world that I’m talking about. You don’t want to do any CapEx. You want to live in a world of shortage. So you just buy your stock back instead of building a new plant.

[00:21:56] Jeremy Grantham: And let me just point one thing out to people who think it’s identical to a dividend. When you pay a dividend, you distribute it evenly between your most enthusiastic stockholders and the one who’s disgusted with you and is about to sell you on Monday morning. A stock buyback does not do that. The stock buyback says, who is the least enthusiastic about my stock?

[00:22:23] Jeremy Grantham: Here’s the pseudo dividend: you hand him cash and you take his eager stock. You are constantly retiring the least enthusiastic shareholders. And if you think that that does not remorselessly push up the price of stocks, you are not exactly enumerated, but unimaginative. Of course, it does.

[00:22:42] Jeremy Grantham: Secondly, it was illegal for the first 15 years of my career and forever before that, since FDR, because they argued that the insiders and the company knew everything and going out into the market and buying from the uninformed was stock manipulation. How ridiculous! How ridiculous to think that the corporate insiders know more than you do as an institution buying from the outside. Of course, they know more. Of course, it is facilitating stock manipulation. And in my opinion, of course, it should be illegal.

[00:23:17] Jeremy Grantham: People say, “Well, it’s the same as dividends.” Well, in that case, whoopee, pay a dividend and nothing has changed. You pay out a dividend, I’m happy, and apparently you’re happy, and Warren will have to pay some taxes. I’m sorry about that. But it is much healthier in the long run for the total economy to have corporations paying simple dividends, and then some of the incentive to stock back rather than build a new factory disappears, and there will be a little bit more growth in CapEx, which is really bad. GDP growth has slowed in the US for the last 30 years as this new fashion came in. Productivity has irregularly, but obviously slowed down. The state of US capitalism is not that healthy with the exception of, I believe, the VC industry, which is still pretty good. 

[00:24:14] Trey Lockerbie: What you’re talking about, I’ve seen mostly in things like oil-producing companies, and there’s definitely a lack of supply there. So much that we’ve, I think, liquidated probably half or so of our SPR at this point, at a ridiculous amount. Munger has said spending $1 over intrinsic value on a buyback is immoral, and I know that much at least is true. And I tend to be in the same camp as you. I’ve brought this up with multiple people on the show, like Michael Moison and others. This is such an interesting debate. I guess my question is, if this economy where we’re kind of always living in scarcity to some degree, why would we have not seen inflation sooner than we have now?

[00:25:04] Jeremy Grantham: I came across an expression this morning: greed inflation. We’ve had inflation in profits, but not so much in wages. And yet, we’ve managed to create the impression that somehow we should be terrified of wage inflation, and we haven’t complained as corporations raised their prices so quickly amidst all the problems of COVID and the war.

[00:25:27] Trey Lockerbie: I agree that something you said earlier also reminded me of this idea that it’s like capitalism on the way up, and socialism on the way down. Seems to be this backstop that is just continuously solidifying itself.

[00:25:42] Trey Lockerbie: And I’ll tell you what I’m scared about. Janet Yellen was giving testimony to Congress, and there was this really interesting exchange between her and Senator Langford of Oklahoma. He pressed her on this idea that if the regional banks aren’t fully insured, that would incentivize this migration to all the larger banks that aren’t insured because they’re too big to fail. And that would essentially create, you know, four too big to fail banks and make them even larger than they are today.

[00:26:16] Trey Lockerbie: And my fear is that that kind of gets us on this path of national banking, if I’m going to the extreme. But at the same time, you’re seeing new papers coming out about the government’s central bank digital currency and all these things that would kind of align with this motive of nationalizing that banking system.

[00:26:39] Trey Lockerbie: So it’s starting to feel like a runaway train to me. Does this give you any concern as far as just the hedge money of the dollar or just the overall overreach of the government when it’s entering into capitalism more and more?

[00:26:56] Jeremy Grantham: Most of that is over my pay grade. That’s easy. My attitude really is to leave as much as you can to capitalism. It does a million things really very well, balancing supply and demand better than maybe, interestingly, artificial intelligence in 10 years will be so clever that it will enable a state-controlled authority to balance supply and demand. But at least in the past, it was hopelessly inadequate and capitalism was much better. The trouble with capitalism is it can’t spell the word altruism. It’s really not part of its language. It’s not designed to do that. It’s not designed to look out for the long-term wellbeing of society or humans. So toxic waste, get away with what you can. Climate change obfuscates, as the oil companies probably did.

[00:27:48] Jeremy Grantham: Try and confuse people so that you can pump out more CO2, more fossil fuels. For longer, the oil companies probably cost us 10 or 15 years that we may or may not be able to afford. It’s going to be a very closely run race. And they may have cost us, in the long run, a stable society. It will be revealed to my children and grandchildren, but it won’t be that long in the future.

[00:28:19] Jeremy Grantham: So you’ve got this efficient, profit-maximizing machine capitalism, and Schumpeter used to worry back in the forties and fifties that the trouble with capitalism was it was so damn successful that it would become more powerful. It would become political, it would be able to influence the economy to change in a way that was beneficial for itself.

[00:28:42] Jeremy Grantham: And so there, I was looking around last week and I came across a study of small versus large companies in the US. In 1990, the companies under 1 billion made 8% return on sales, and the ones over 10 billion, the big companies, made 12%. Eight to 12, that’s exactly what I would expect. They make 50% more than the little guys. And in 2021, the guys who used to make eight now make four. And the guys who used to make 12 now make 18. This was in The Economist. They usually get it right. I hope they adjusted for inflation. Not entirely certain, but in any case, there’s plenty of room in that data.

[00:29:30] Jeremy Grantham: An eight to 12 relationship is more or less how you expect the benefit of large scale. Four to 18 is what you expect to see when the system is being run for the benefit of large corporations, and I believe American capitalism is just that. It’s run for the benefit of large corporations, and Citizens United has a lot to answer for. The idea that somehow spending the stockholder’s money to influence politics is a measure of free speech is up there with several other rather loony conclusions.

[00:30:05] Jeremy Grantham: So the Supreme Court has come in recent years, and it makes me rather sad for the wellbeing of small companies. And you know that today we have half the number of people in companies one or two years old that we had in the seventies. So we are not, broadly speaking, as ambitious and enterprising as we used to be because the big companies basically have so much power that they create an unlevel playing field.

[00:30:36] Jeremy Grantham: This is what we have to worry about, of course. It’s been wonderful for profits in recent years, and there’s no question that the fangs have gone out there and created great companies. Some of the greatest new quick companies in the history of capitalism, monopolies or near monopolies, all of them, and hugely profitable, and by and large, brilliant.

[00:31:00] Jeremy Grantham: And that accounts for 80-90% of all the superiority between the US system and the last 20 years and the rest of the developed world. So yes, the balance has done okay, and the balance is also more monopolistic than it used to be with a higher concentration in almost every industry. But the fangs have been superstars.

[00:31:23] Jeremy Grantham: Let me just add that every one of them came out of the VC industry. The VC industry is dismissed sometimes as being small. Well, it’s small in one sense, but in another sense, it created the fangs, which are the great monsters of the Western world. And it did so pretty recently. Only two of them were around when we started Afra. All the rest are newbies, and even the two that were around, Apple and Microsoft, were barely around. We hired away what would’ve been employee 26 at Microsoft.

[00:32:00] Trey Lockerbie: Well, speaking of Apple and Microsoft and then growing to be the size they are, they now account for over 13% of the SMT 500 and making up roughly 15 to 25% respectively.

[00:32:13] Trey Lockerbie: We haven’t seen two stocks make up that level since IBM and AT&T in 1978. So what is the sudden appeal of these two? You’ve mentioned the FANGs, but a lot of those, some of these letters are falling away, just becoming MA at this point. Why are people flocking to these stocks in particular, would you say?

[00:32:36] Trey Lockerbie: And especially in this new high-interest rate environment that we’re currently in?

[00:32:41] Jeremy Grantham: I think it’s just the epitome of what I’ve been almost ranting about. They are virtual monopolies, each of them, and I speak while I look at my giant iPad, and actually I can see my medium-sized iPad and my iPhone. It’s all here within touching distance. I mean, amazing implements. And they got there with the best capabilities and the best styling. They got there with the most and the first, and they made a lot of money, and they own that market just as M. Road. It’s really, it’s one initially, one program to glory and Apple is in its way even more amazing because, in the end, it’s a producer of goods even though it ostensibly subcontracts out to the cheapest, cost-effective labor in the world that they can find. I don’t criticize it for doing that. It’s legal, and it’s what a sensible capitalist would do. But they are kind of living proof of what a really effective monopoly can do for you, and good luck to them in a sense. But at some level, a sensible society develops rules and regulations for how big is too big and what to do. [00:34:00] It was pretty tough back in the day when they decided, Teddy Roosevelt, I guess, that Standard Oil owned the world and so divided it into half a dozen pieces, which then could amuse themselves for the following 18 years, putting themselves back together. Basically, what Exxon Mobil and so on did, they undid dirty Roosevelt’s. You have to say brilliant work because it was much healthier to have for a while eight powerful oil companies rather than one or two.

[00:34:32] Trey Lockerbie: What’s kind of interesting is that AT&T and IBM have gone on to do quite well, even since the late 1970s when they were making up to such a large degree. So it kind of makes you wonder where we’ll, Apple and Microsoft even 30-40 years from now.

[00:34:52] Trey Lockerbie: I pulled up this report mainly for you because I know you’re such a student of history, and you alluded to this earlier, but I went back and saw these headlines from different papers in this report. In 1973, there was one that said “Economists see a soft landing when boom ends,” 1978 “Soft landing. Economy scene,” 1989 “US economy seems to be heading for a soft landing,” 2000 “Soft landing in sight for economy, rate cut next,” 2007 “Fed chairman projects soft landing for US economy.” So we all know how those worked out. And you said earlier that there has been no soft landing. Why do you think this keeps happening, this narrative, right? I mean, I understand they’re trying to instill confidence to some degree. With this kind of track record.

[00:35:45] Jeremy Grantham: It’s long been a part of my stump speech, almost as long as I can remember, the commercial imperative to be bullish. Just try and work out an alternative. You’ll never make as much money of being bearish if you’re one of the great investment banks, sir.

[00:36:04] Jeremy Grantham: Commercial banks or investment companies, you’re selling stocks to the world or stock advice to the world. The optimal fly path to long-term profit is to be resolutely bullish and pump out as many new instruments and as many new funds and products as you can on the way up, and then be a little quicker and sicker on the way regroup as quickly as you can.

[00:36:31] Jeremy Grantham: Try and make a bit of money on the downside if you’re smart enough, and then make a long, drawn-out fortune being bullish again. There’s no edge in being bearish for them. And so they never are. You tell me why the Morgan Stanley guy today is so bearish. I don’t know. And he hasn’t read the secret little book of advice that comes with those jobs, which says, never be  bearish.

[00:37:00] Jeremy Grantham: This is about as bearish as any guy in a firm like that has ever been in my career. The only other example was UBS Brinson after they’d done a deal with Gary Brinson, who was a suitable value-oriented investor going into the two-event. And they pumped out rather cautious advice like we did at the time, but they were the 8,000 pound gorilla. Fortunately, they changed their battle plan to get religion and go into the growth stocks just before the end, somewhat leaving the field to us. They weren’t that there weren’t a lot of other value managers around; they just weren’t standing on the table shouting like we were. And in a way, Gary Brinson was for a while. So with that one exception, there are almost no bears in the established industry, permanent bullishness. And one of the things that really irritates them consequently is when any others are bearish and they immediately say, “Oh, PERMA Bear, PERMA Bear, PERMA Bear.” If you look at their records, there’s a lot of PERMA here, but it’s PERMA bulls. The entire industry is permeable, and any good propagandist going back to the Nazis knows what you do is you accuse the enemy of what you’re doing. So Perma Bear is a good way of dismissing people who are trying to irritate you by making some of your clients nervous on the way up. But they make tons of money.

[00:38:36] Jeremy Grantham: It makes absolute sense. I even sympathize with them. The commercial interest is clear but do not expect any clear cut bearishness from the institutional world, from the financial world in general. It just never happens, never will happen. 

[00:38:52] Trey Lockerbie: I have a couple of questions around VC since you mentioned it. A lot of people are waking up to the idea of fractional reserve banking with this whole bank crisis, and there are a lot of VCs in the news surrounding Silicon Valley Bank and almost being blamed for the bank run. Then there was blame thrown at depositors for not knowing that they were at risk. What was your take, knowing that Silicon Valley Bank was such a staple, the 16th largest bank, helping all these burgeoning companies that you yourself are looking into to some degree to fight climate change or what have you? What could have been changed there, in your opinion? Was there anything to the argument around VCs sparking this out of fear? Just your general take would be interesting.

[00:39:46] Jeremy Grantham: Yeah, I just see what you see and it did look like the big end of the VC market. The VC operators did absolutely nothing to help, but I accelerated the damage and maybe, if you knew it better than I do, you would conclude that it was inevitable that they would’ve failed. And I can’t conclude that. I just don’t know.

[00:40:11] Jeremy Grantham: And the top end of the big VC firms have got a great record and they’ve done a really good job over decades. My real admiration, though, is for the startups themselves. These really are some of the best people around.

[00:40:28] Jeremy Grantham: And in the green VC world, which we specialize in, we have our own team and we’ve done 65 deals, 70 deals, and we have half our foundation in early stage green VC, which is quite a lot. My admiration is for the guys. I mean, these are, I talk about capitalism, can’t spell altruism.

[00:40:50] Jeremy Grantham: These guys actually can spell altruism. They’re either Oscar-winning performers or they actually care. Amazing, isn’t it? They actually care about being useful and helping a planet in distress. You know, they think it’s worthwhile what they’re doing in the green world of technology.

[00:41:07] Jeremy Grantham: And if we get through this unpleasantness, and I’m far from sure that we will, but if we do, it will be because we’re a very inventive species. And in America, in particular, we take risk pretty quickly and easily, and we support risk-takers. And the combination, with the great research universities which is so important to the equation, now we have a really impressive rate of invention, engineering, and cost reduction. And it may get us through this, not because we’re going to do what is right, because it’s what is right. To hell with that.

[00:41:46] Jeremy Grantham: It’s because they will make it to do what we have to do, and eventually it will be cheaper to have an electric car than a regular car, if it is not already. It [00:42:00] will be cheaper by far to run it and have cheap green electricity and cheap green power, which we will have. We will have plenty of cheap green power into the indefinite future.

[00:42:12] Jeremy Grantham: It does remind me of a topic that we have not talked about, that is, we’re writing a paper, my colleague and I. I think it’s gonna be called “The Long-Term is Now,” because the issues that I worry about, which is under-recognized long-term problems, is my job description. And that’s climate change, running out of resources, running out of people, and toxicity.

[00:42:38] Jeremy Grantham: And you know, for 15 years, the potential clients have been rolling their eyes at me because these are boring topics. And then suddenly in the last two years, everything is climate. And in the last… You can pick up The Atlantic or Business Week, and you can read about resource shortage, and you can read about people shortage. No one breathed the word about people shortage. This is the most dramatic collapse. We have been growing pretty much the population of the world for hundreds of thousands of years ever since Homo Sapien was homo sapien, and very, very slowly at first, and then accelerating to warp with the Industrial Revolution, and in my life, in particular, we tripled the global population, but…

[00:43:27] Jeremy Grantham: This year, global babies will be the same as in 2000. For the first time in human history, we will have peaked out a few years ago in terms of the baby’s born. And a population grows because people live longer and you have more old fogies. But in the end, everything depends on the baby’s birth. The fertility rate replacement is 2.1, and you’re talking about in China, 1.3, in Korea, 0.8, in Japan, 1.3 or 4, in Italy, 1.2  or Hungary, and so on. And in the US, 1.7, in the UK, 1.65. I mean, these are incredible numbers. You know, the cohort of young men presenting themselves for the military in Japan is down by 30%. In 20 years, it will be down by almost 50%. And you know, this has powerful implications. The economic world is pretty uncertain, but one of the few certainties is that for the next 20 years, we’ll have fewer workers presenting themselves for inspection as potential workers.

[00:44:33] Jeremy Grantham: And we know that for absent certainty, cuz they’re born. And my guess is that the baby cohort will continue to shrink and that China, for example, is really the pointy edge of this problem because it’s not only that they had 1.3 or four last year in fertility, it’s that they have very few fertile women as a percentage of the total.

[00:44:58] Jeremy Grantham: The one child policy bears particularly on the 20 to 40 year old category, which are the people who have babies, and it tilted 15% to men, which doesn’t help your number of fertile women. So they are desperately short of fertile women times those that they… times 1.3 or a, a miserable fertility rate. This is kind of a double jeopardy.

[00:45:22] Jeremy Grantham: It means that within 20 years they will have to deal with the kind of pressures of retirement, looking after old bogies, lack of workers at such a scale that they will have really serious problems, and they will need to use their considerable brains to start working on this now in order to head off a destabilized society.

[00:45:46] Jeremy Grantham: And an echo of that is going to be in South Korea, Japan, and so on, and rapidly spreading around the development. Well, there is a growing concern, but it’s tiny compared to what you might have. These are all bearing down on us now, so we have a long-winded recessionary period coming any minute and into that period, we have much accelerated climate damage.

[00:46:12] Jeremy Grantham: Probably knocked off half a percent of global GDP probably for the first year. A measurably large amount of floods, fires, interrupting agriculture, flooding when you’re meant to be planting and when you’re reaping and so on. Too hot for certain crops, chronic droughts, hurting other crops, just to drag on growth, particularly in the developing world, but also a push on prices. It is inflationary.

[00:46:38] Jeremy Grantham: Then we have resource shortages. Part of the problem with no CapEx for the last 20 years is we don’t have wonderful minds itching to come on the market as we had in 2011, 2012 when the last peak occurred. Most of the big miners had their last desperate giant new mines to bring on, which they did all together, like the good old days.

[00:47:04] Jeremy Grantham: And this time there’s no CapEx. There are no great mines waiting. We are on a flight path. If we mean to green the global economy, we don’t have anything like the amount of copper, lithium, cobalt, and nickel that we will need to get the job done. So one of the jobs of the venture capitalists now should be looking at where the bottlenecks and problems will be reaching forward and trying to do something about it.

[00:47:35] Jeremy Grantham: So, lithium-ion batteries can be replaced by sodium-ion, and can be improved by using half the lithium or half the… And they will be, but there simply is not enough lithium to do the job the old-fashioned way. Typical of last year, we have to keep changing everything. And this is a fairly relentless pressure on prices, and it came out in the Wall how quickly that can flare up.

[00:48:03] Jeremy Grantham: Of course, with potash, which Russia and Belarus control 40% of the global sales, and this is not going away for the rest of any listener’s life. We are going to have rotating bottlenecks and shortages, and then they’ll get over that one and it will pop up over here. And in general, the era of declining resource prices, which went on for a hundred years from the beginning of good data until 2002, the price of the average important commodity dropped by 70%, which is pretty handy for getting rich.

[00:48:40] Jeremy Grantham: And now that index, which went from a hundred to 30, is back to 91 or 92, which means it’s tripled since 2002. The average important commodity in real terms has tripled since 2002. The world has changed. The age of plentiful resources and declining prices has gone forever. As the title of my piece in 2011 said, it has gone forever. And that is inflationary, is it not? If you’re dealing with the world that’s having to pay out for resources, there is nothing more inflationary than that. And it doesn’t arrive like a clap of thunder, like a thunderstorm.

[00:49:20] Jeremy Grantham: It creeps in three steps forward, 2.7 back, but it’s there forever. So you’re running out of people, you’re running out of resources, and the climate is turning against you, and that seems… Inflationary, inflationary, inflationary, all three of them and anti-growth. And they’re all biting now to my surprise.

[00:49:40] Jeremy Grantham: And the damage from climate far accelerated above my original fears, and the speed with which the fertility rate has continued down has surprised everyone in the last 10 years. And the final issue, if you can bear with me, is toxicity, and toxicity could be argued is a bigger problem than climate change.

[00:50:02] Jeremy Grantham: We have just created a world that is toxic to life for a variety of reasons. Mainly, you could argue by chopping up all of the natural habitat so that all over Europe, you don’t have any large stretch of forest, that you have pockets here and there. And then by the introduction of massive chemicals after World War II still growing like a weed, which are in the air in particulate matter, deadly for humans, but also deadly for many varieties of other living creatures, and chemicals in the water.

[00:50:38] Jeremy Grantham: The net result is that the biomass of insects appears to have dropped 50 to 75% since World War II. The sperm count in the developed has dropped less than half, and it’s showing no sign of deceleration, and it appears to be running at almost 2% a year. In both cases, loss of insects, loss of sperm count, 2% a year.

[00:51:02] Jeremy Grantham: I would argue it’s quite plausible that we’re already in what EO Wilson, the great ant man, would call the cascade effect. In other words, even if we started to behave miraculously brilliantly tomorrow, it’s too late. That insects, for example, are simply not as fitted for our environment as they used to be, and so irregularly every second to third generation, they have a much smaller offspring, and the numbers are irregularly, erratically, they’re going outta business. And this applies, of course, to the birds that eat them and the bugs that even the amphibians and so on, all down 50, 60, 70%. And it is much worse than people think. But the threat to us, my belief is we are going to end up banning whole ranges of chemicals, in fact, the majority of chemicals in the next several decades.

[00:51:59] Jeremy Grantham:  And if we don’t, we are. And it’s showing up already, in my opinion, in both fertility and, and also in general health – American life expectancy today is 76. In England, it’s 81, but if you go around as the economist pointed out, you go around London, you find that New Crossgate, which is not a place you’d like to be on a dark night, it’s the most desperately poor part of greater London. It has a life expectancy of 76. That’s as low as it gets in Westminster – I was checking myself – is 86, 87, the richest one of the Richard Districts. And so we’re at a level of New Crossgate in the US and Sweden is 84. We’ve managed to open up an eight-year gap in life expectancy, as if we were on the cusp of a developing country. And we’ve gone backwards for the last seven years, which is unique in the developed world. The only one who comes close is the UK, which is flat for that time period. So we have lots of things to worry about and they all seem to be coming somewhat to fruition now in time to overlap with what would be a fairly normal traditional recession caused by the usual. And will these long-term factors now, will they make it longer and worse? I think it’s a possibility, which I’ve tried to write about. I don’t think it’s certain, I think things in this complex can never be certain, but I think it’s quite likely that we will have unexpected negative consequences for the next few years.

[00:53:46] Trey Lockerbie: Speaking of that, I live in Los Angeles, and just yesterday, there was an EF-1 tornado in South Montebello, only 25 minutes from my house, which is just mind-boggling. And so, to your point, I mean, things are really getting extreme now.

[00:54:02] Jeremy Grantham: We had one in Massachusetts 18 months ago. 

[00:54:05] Trey Lockerbie: Unbelievable.

[00:54:06] Jeremy Grantham: Also for the first time. 

[00:54:07] Trey Lockerbie: So you touched on so many points that I would love to cover, but we don’t have the time. The picture of either people getting paid to have babies or maybe incubating them like the matrix, you could paint all kinds of interesting futuristic pictures from these trends. I’d like to see if we can end on a high note here, because I recently came across this Nature article suggesting that superconductivity might be possible at room temperature. This has been a proposed idea for a long time, but perhaps they’re making progress on it, which would really create more efficient batteries and dramatically change clean energy in a very quick way. As I understand it, and this is way above my pay grade, I’m just wondering if you’re following a story like that.

[00:55:01] Trey Lockerbie: My bigger picture is, it is now a golden era for VC because technologies like these are presenting themselves. Meanwhile, a lot of VCs are locking up because of fears around the general markets and high interest rates and money flowing elsewhere that’s less risky. So if you could really motivate VCs to run into the storm here and do the counterintuitive thing, which is to invest in companies whose fundamentals are probably still strong but the prices are now lower, what would you say to them?

[00:55:35] Jeremy Grantham: I think VC is our best shot at digging out of all these problems and that it does attract some of the best people. And a quarter of them are apparently from around the world. We do a really good job of taking their best people too, which is fine in the end. We crack these technological problems, and they will spread around the world.

[00:56:01] Jeremy Grantham: The thing about research is, in the long run, it’s absolutely formidable. They always work eventually, and you always get fusion. And in the end, it’s always longer than you think. So, fusion being, of course, a classic in both cases, but it’s the same for everything you pick. All these wonderful new ideas in the trade rags, and you think, oh, wow, that’s going to make all the difference in the world.

[00:56:30] Jeremy Grantham: And 10 years later, they’re still working on it in the lab. And then 10 years later, it’s VC, and then 10 years later, they’re starting to mass-produce it. And 10 years later, they really have the cost down. The engineering effect is much more impressive. It’s underestimated because from the moment they start producing until 10 years later, they are unbelievably good at driving the cost down. And the first phase, of course, you can’t have the second phase without the first, but the first phase is really a terrible tease because it’s full of brilliant ideas that you will not live to see. It’ll be your children, and most of them will eventually make it.

[00:57:18] Jeremy Grantham: The battery technology effort is amazing. Different kinds of batteries, long-term, short-term, fast, slow, all over the place. It seems like some of the best talent in the world is working on it. And yes, of course, there will also be fortunes made and so forth. And yes, this is a bubble. And the bubble, like 2000, was focused on growth stocks. And at the top of the growth stock bubble, were companies who are kind of research facilities that have no sales and have no earnings and might be three or four years away from having any sales at all. And of course, when confidence goes, they go down the most.

[00:58:03] Jeremy Grantham: My Quantum Scape went from $132 in December 2020, which is when I felt the bubble losing air. On that day, it peaked bigger than the market value of General Motors or Samsung, with years to go before it had any sales. And last December, it hit $5.1. So, the researched companies and early stage of VC are right at the point of maximum vulnerability to a loss of company. That’s the short-term story. It may be a year or so of substantial difficulty, but in the long run, it’s the only place to be. You’re doing something worthwhile, generating new ideas, productivity gains, and encouraging the economy in a world where economic growth has been slowing pretty steadily. You’re doing your best to counter it, and I think it will. In green VC, of course, you have the backing of the  entire world’s governments all getting behind it. Now, Ira, being a huge example, many multi billions, but it’s happening everywhere, and so it’s like an unfair tailwind blowing you along. I’m very happy to have half my money there, notwithstanding the next two difficult years. It’s a hell of a place to be in the long run. I like to say it’s the only case of potentially having your cake and eating it that I have ever come across. It is exactly what we should do for the long-term well-being of the climate, and it’s a candidate for making the most money of any sliver of investment in the entire capitalist system, which, you know, is pretty cool. And I certainly hope I’m right.

[00:59:48] Trey Lockerbie: Well, you’ve been right about a lot of things, especially since we have been chatting over the last couple of years. It’s always an honor to have you on the show, Jeremy. I really appreciate you taking the time out of  your incredibly busy schedule and valuable, valuable time that you spent with us today.

[01:00:10] Trey Lockerbie: So thank you so much again for coming on the show, and I hope we can check in again down the road and see how some of these things are progressing. But for now, thank you so much.

[01:00:25] Jeremy Grantham: And it really is a pleasure, and I see it as my job description to try and get some of these ideas out and about. So thank you.

[01:00:36] Trey Lockerbie: All right, everybody, that’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. And if you’d be so kind, please leave us a review. It really helps the show. If you want to reach out directly, you can find me on Twitter @TreyLockerbie. And don’t forget to check out all of the amazing resources we’ve built for you at theinvestorspodcast.com. You can also simply Google TIP Finance, and it should pop right up. And with that, we’ll see you again next time. 

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