Jeremy Grantham (03:44):
And the news is on the front page. The news is not on the financial page, the market, big market events are on the front page. This is all characteristic of the handful of great bubbles that we’ve had, which are 1929 in America, maybe in 1972, certainly 2000. And in the housing market, certainly 2007, ’08. In Japan, 1989 was the biggest and the best of all the major markets and even bigger and better in their real estate market. So, we’ve checked off all the boxes. Now, the question is how high is high? Very hard to tell always where the peak will be.
Jeremy Grantham (04:27):
Or what you do know is that how high the peak is, has no bearing at all on what the fair value is. So, let us assume that the fair value on the S&P is, let us say, 2400. Whether it stops at 4300 or 5300 doesn’t change that. What it does change is the amount of pain that you get to go back to fair value and below. The case in point would be Japan. Japan had never sold over 25 times earnings in 1987, ’88, 1989 until it went through 25 and went all the way up, we were told at the time, to 65 times.
Jeremy Grantham (05:07):
And the price you paid for that is that they’re still not back to the same price they were in 1989. And their real estate market, which was an even bigger bubble than the stock market. In fact, I believe, the biggest bubble in history bigger than the South Sea bubble and the tulips, the land under the emperor’s palace really was worth the entire State of California. And the price they paid was that their land is still not back to 1989 levels. So 32 years later, they’re still down. And that’s how you get a major drag on the economy because when you mark down housing and land, it’s an even bigger and more dangerous business than the stock market.
Jeremy Grantham (05:48):
And if you do it at the same time as the stock market, then you have an enormous loss of perceived value. And that is a big, big drag on the economy, which the Japanese have had to absorb. And it took them perhaps 20 years to do that. So, you profoundly do not wish for a super high level to your bubble. And you profoundly do not wish for more than one asset class to be bubbling at the same time. And Japan made that terrible mistake and paid a very high price to have real estate and stocks at the same time.
Jeremy Grantham (06:20):
We paid somewhat the same price in 2007 because we had the first really interesting housing bubble in American history, we had never had one before. And it was the kind that was so extreme, it would only occur every 100 years or so. And we worked out that if it went back down to trend, it would cost $7 trillion. And it did go back perfectly, it was a very well-behaved bubble. It went smoothly back at the same speed that it had gone up, three years up, three years down. And then for good measure, as is usually the case, it went below the old trend line value and added another couple of trillion dollars of pain by the housing market going even lower.
Jeremy Grantham (07:03):
And that housing market was so big and profound and so accompanied by financial instruments of the notorious subprime variety that it took the stock market down with it and caused, obviously, a financial crisis. And the stock market threw in another $7 trillion of loss of value. So, you had a double whammy there which would guarantee a tougher recession from the negative income effect of which we had. 2000 is a very interesting contrast because 2000 was a much higher equity bubble than 2008. But the real estate market was cheap, actually, very cheap.
Jeremy Grantham (07:40):
The REITs were selling cheaper than the value of their properties. And the properties themselves were cheaper than the cost of building them. And the yield on the REIT portfolio at the very top of the market was 9.1%. Secondly, bonds were cheap. Bonds were incredibly cheap. And the new inflation-protected bond called the TIP had just been introduced, and it yielded 4.3%. Just imagine that 4.3% guaranteed protected against inflation, guaranteed good money by the government. And the regular bond market was very cheap. So, bonds were cheap. Real estate was very cheap. And only the stock market was expensive.
Jeremy Grantham (08:22):
And it broke beautifully, of course, relatively well behaved. The NASDAQ went down at 2%. The S&P went down 50% from that 2000 tech bubble. But the recession was not that big a deal because housing was not involved and bonds were not involved. This is the only time in history where we have a bubble in the bond market everywhere in the world. We have the lowest rates in 4000 years, according to Jim Graham. And 25% of all government money, you actually pay the governments around the world to take your money. They don’t pay you, you pay them. And there’s no historical precedent.
Jeremy Grantham (09:00):
And that’s typically a slightly bigger market cap, the bond market than the equity market. But then, the equity market, we have probably the highest priced US equity market ever. And if not, the highest or very close rival to 2000. And then, if that wasn’t enough, we have coming up on the rails at incredible speed, the US housing market. It’s up over 20% in 12 months. It’s the biggest move in history. It’s bigger than ’07. And it’s taken the median house price to a higher multiple of family income than even 2007.
Jeremy Grantham (09:38):
And that’s all over the world. The stock market is not that expensive around the world. It’s really clearly a bubble in the US but outside the US that’s merely overpriced. But the housing market in most markets that are interesting is extremely bubbly everywhere. And in most cases, even higher than the Boston’s and San Francisco. So, if you go to Vancouver, or Toronto, or Sydney, or Auckland, or Paris, or London, or Hong Kong, or Singapore, or Shanghai, they’re all higher multiples of family income than we have. So that is a real danger on a global basis.
Jeremy Grantham (10:17):
So, we’re doing all of these together. And if you insist on being comprehensive, then you have the commodities market. The commodities market is kind of the fourth-grade asset class. And the Goldman Sachs Commodity Index of non-energy, just to separate half the market value is energy. But the other half includes all the foods, all the metals, and that is back to the 2011 high. And 2011 was deemed to be one of those cosmic long-term supercycles of commodity prices.
Jeremy Grantham (10:49):
And so, that is a push on the income of everybody in the world. High metals prices, high food prices, actually incredibly unfortunate growing weather this year, just to rub it in, push prices even higher. So, that will be stressing the income of ordinary people into the next year or so.
Trey Lockerbie (11:09):
You’ve kind of highlighted there is what people are calling the everything bubble, which I think makes it quite different from the previous bubbles we’ve had. You correctly predicted the market tops of Japan in the late 1980s, the tech bubble of 2000, the housing bubble of 2008. And now, even the bottom of the market in 2009, when people were just starting to capitulate. So, I guess what I’m curious about, I’m reminded of that Hyman Minsky quote about stability drives to instability. And I think of it almost like you’re playing the game of Jenga and you stack this thing pretty high, and people start pulling out their profits.
Trey Lockerbie (11:48):
I guess, if we’re using that analogy, what is the indicator to you that would suggest that we have actually reached, in fact, the peak?
Jeremy Grantham (11:56):
Let me say that we typically identify a bubble zone, often, it went on quite a lot longer. But it always fell below the point where we had suggested it was entering bubble territory. So, once it broke through the peak, the 1929 peak of 21 times earnings, we started to be bearish in 1997, but only a little bearish. And then, as the peaks rose and rose from 21 times to eventually 35, we became more and more bearish until we were screaming bearish and still the market went up for another year. So, we were pretty early.
Jeremy Grantham (12:34):
In the housing bubble, we did much, much better. We basically walked people through the last year or 18 months pointing out how dangerous the subprime and so on in the housing market, and how much damage it would do. We pretty well got that one right. And of course, we got extremely lucky on reinvesting when terrified, which was posted the day the market hit the low in March of ’09. And here we are, I thought, we entered bubble territory about last June, about a year ago.
Jeremy Grantham (13:04):
And I’ve made it quite clear what I consider a definition of success. And that is only that sooner or later, you will have made money to have sidestepped the bubble phase. So, I am suggesting that the last 20% or 30% of the market will be retraced with interest. And I would expect that the fair value of this market would require the market to approximately half. And I wouldn’t be surprised if it did much less than that. And if it goes up another 20%, it will have to get rid of that as well, as a bonus.
Jeremy Grantham (13:39):
You can very seldom identify the pin that pops it, 1929, no one’s agreed yet what the pin was. And they say about 1929, the “selling” came in from the country, which means that the initial selling pressure was from the Midwest, not from Boston and Philadelphia, and New York. What was going on was probably that the economy, which had been unbelievably strong, was turning down. But because of the lags in the data, the city slickers didn’t know it, but the guys out in Chicago who actually had businesses and farms and capital and so on, they knew that things had turned out and they decided sitting around the club at lunch that they better take a few profits.
Jeremy Grantham (14:23):
And so, selling came in from the country. And the bubbles tend to peak at absolute optimism when the economy looks perfect and you’re extrapolating it forever. And that’s the definition of a bubble. And they have to be facilitated by friendly monetary conditions. And when you’ve had a wonderful economy and friendly monetary conditions, you pretty well always had a bubble. They’re not that common. And here we are, again, we feel the economy looks wonderful. If we extrapolate it forever, it means it’s worth a huge price. Of course, it never does last forever, but if it did it, it would be worth a huge prize.
Jeremy Grantham (15:01):
And that’s the mechanics that is going on. And then you can say, what might rattle the cage? Well, I think, unexpected COVID problems on a global basis and in the US. I rattle the cage. Unexpected inflation that doesn’t go away in a hurry, and then starts to run into longer-term inflationary pressures which we could discuss, that might rattle the cage. And the biggest cage rattler of all is everything else you haven’t thought about that could go wrong. And my guess is that’s probably the cause, in the end, of most of the bubbles deflating.
Jeremy Grantham (15:38):
The mechanics of a bubble is you have maximum borrowing, maximum enthusiasm. And then the following day, you’re still enthusiastic but not quite as enthusiastic as yesterday. A week later, you’re not quite as enthusiastic as last week and last month. And gradually, the enthusiasm level drops off a bit, you have no more money to borrow, you’re fully borrowed, and the buying pressure gradually slows down. And that’s it. And there is a very interesting warning signal that has only happened a few times. And that is, in a bull market, the risky stocks go up a lot more than the blue chips.
Jeremy Grantham (16:20):
In 1928, the junky low-priced index went up over 80% and the S&P went out, let’s say, about 40. That’s what you expect. But in 1929, as we approached the cliff edge, the low-priced index began to go down, even though it had a beta of two. That is to say, you would typically expect it to go up or down twice the market. And here, you had the market and the S&P going up another 40% prior to the crash, but the low-priced index was down for the year. The day before the crash, it was not just down it was quite badly down over 30% for the year, which is remarkable. And nothing like that happens again until 1972 going into the nifty 50 market, which was a huge break, by the way, 62% in real terms, it’s still the biggest break since the Great Depression.
Jeremy Grantham (17:10):
And during 1972, the S&P is up about 17% and the average big board stock is down 18. That’s a 35 point spread, which isn’t bad. And the average stock is a higher risk, high volatile should have been going up more, but it didn’t. And as I said nothing on the upside happened like that between 1929, 1972. Of course, the risky stuff goes down more in a bear market, but in a bull market, it always goes up more. And then there was a six-month window related to the Iraq War, which we’ll call a draw. And that brings us to 2000. In 2000 March, they start to take out the internet stocks, the pet.com and they shoot them and they drop like stones. A month or two later, they’re shooting the junior growth. And then, a month or two later the middle growth. And finally, by mid to late summer, they’re really shooting even the CISCOs which were giant companies.
Jeremy Grantham (18:06):
And they took the whole 30% of the market, which was TMT they called it, tech media telecom. And it was down 50% by September, it had been murdered. But the S&P was unchanged, which meant that the other 70%, the Coca Colas and the rest of the boys, the IBMs were up about 17% on average, to balance the books. So, what had happened is that the confidence termites, I think of them, they had started at the most crazy pet.com and work their way down through the CISCOs which were pretty outrageously 80 times earnings.
Jeremy Grantham (18:44):
And then finally, they arrived at the broad market and the entire market rolled over and fell 50% in two years. So, nothing like that happens again until now. But what’s happening now, and it may be a false alarm, it may be a head fake. But Russell 2000, which as I said, put in this 50% rally in three months ending on or around February the 9th, it’s down since February the 9th. And this month, it’s 9 percentage points behind the S&P 500. So, the S&P 500, the blue-chip index, has been picking up a splendid bull market everything intact. But the Russell 2000 has just lost 9% on a relative basis and is down from February the 9th.
Jeremy Grantham (19:29):
Now last year, the Russell 2000, which is the 2000 stocks after the biggest 1000 taken out, it was huge. It was far and away from the best index, followed by the NASDAQ which has some blue chips in, followed by Standard and Poor’s. This year, the Standard and Poor’s suddenly year to date comfortably in the first place, let’s say, up 10% and NASDAQ up 5%. I’m sorry, I’m getting my numbers wrong. But the Russell is now up about 10% for the year, having being the strongest index, it’s now the weakest. And the NASDAQ is five points higher than the Russell. And the S&P is three or four points higher than the NASDAQ.
Jeremy Grantham (20:13):
A lot of that has happened in the last year. And then when you look at the super crazies, you find that the stock index is down 25%, the number of stocks selling below 10 is way down. The most ambitious pack of all is the one that I bought nine years ago, QuantumScape And that came at 10 and went to 130 at the end of last year, and we weren’t allowed to sell for six months. And today is 24, which is a whole lot less than 130. And QuantumScape had a market cap of 55 billion at 130. It’s a brilliant research lab. But it has no product, really, for three or four years. And yet, it was selling for more than GM market cap or more than Panasonic in terms of batteries.
Jeremy Grantham (21:01):
So, nothing like that ever occurred in 1929. Nothing like that occurred in 2000, the pet.com were worth scores of millions or a couple of hundred million. This is 55 billion we’re talking about, for a company that has no earnings for three or four years, no sales for three or four years. They’re quite remarkable. And all the stock, as I said, have gotten weaker, the main stocks are down maybe 40%, 50% from the spiky tops, AMC, GameStop, and others. And Tesla is down from 900 to 640. It’s a big decline.
Jeremy Grantham (21:40):
So, I would say the termites are doing a pretty good job that they are starting at the crazies and nibbling away not that Teslas and the brilliant companies, but they’re nibbling away at the ones that had the most confidence. And on some grounds could be argued as the most extreme overpricing. Tesla having just gone up eight times in a year on a sales gain of 35% is a pretty good demonstration of super confidence. And so, I would say there’s a decent chance that this process that we saw before the other great bubbles in American history is on its way. They all lasted a few months, nine months in 1929, almost a year in ’72, seven months in 2000.
Jeremy Grantham (22:24):
And here we are maybe five months into the game, six months. So, it wouldn’t be amazing to me as a historian if this thing lasted till the end of the year, and it wouldn’t be amazing if it started to keel over in a month or two. It’s lasted longer than I thought last June or last fall for two reasons. I don’t think anyone expected quite the success of the vaccination. There’d never been one this successful as the RNA ones and the Moderna and the Pfizer. So, that was one reason. And the other reason was, I don’t think anyone expected the sheer scale of the bailouts.
Jeremy Grantham (23:06):
These are the biggest bailouts as a fraction of GDP, not only in the history of our country but in the history of any country. This is a far greater stimulus program, both from the FED and the government that we have ever seen, with money supply spiking at a 25% increase, with the government buying 40 billion a month of mortgages, even when the real estate market is up over 20% in a year to the highest level ever recorded. These are fairly crazy, or reckless, or unusual features. And we didn’t anticipate either and they’re going to tend to send the market higher and longer.
Jeremy Grantham (23:42):
But as I said before, it doesn’t change the fair value. It doesn’t change the eventual outcome.
Trey Lockerbie (23:46):
See, and that’s where I’m so curious about your prediction because if we go and look at something like the Buffett Indicator, which has been suggesting that the market has been significantly overvalued for a very long time, years now. I would have maybe been right there with you in March of 2020 thinking, “Okay, this COVID, this global pandemic, is the perfect pin to this bubble …”
Jeremy Grantham (24:10):
But it wasn’t a bubble in March of 2000.
Trey Lockerbie (24:13):
Jeremy Grantham (24:14):
It was a boring, boring market. I wrote a paper two years before that saying, “Brace yourself for a possible melt-up.” The market was just beginning to show some speculation, it was just beginning to accelerate. And for about six weeks, I looked like I was clairvoyant. It shot up in January and then it lost interest and fizzled and the market came down a bit and the economy was mediocre. And it dribbled up. We had 11 years of standard-issue, ordinary yawn bull market until the spring of last year as the stimulus kicks in and suddenly phase one, you recapture all the losses from the two-month bear market, very sharp bear market infinitely short.
Jeremy Grantham (25:07):
And then very quickly, within two or three, four months, you’re at new highs on many stock market issues. And then, pretty soon in many economic issues, you are, and from then on it flies. And after we get to new highs, that’s when the Russell 2000 went up 50% in three months. And that’s the real indicator when you get a vertical level of takeoff in NASDAQ and the Russell and so on and the S&P chugging along very handsomely to brand new prices that had been totally lacking for 11 years.
Jeremy Grantham (25:40):
I had debated people that it wasn’t about actually and wrote it up, that it never had the excitement level anything like 1929 and 2000. But now, it does, I would say with room to spare that this is the craziest market with the mean stocks and Bitcoin. This is the craziest market anyone including me has lived through.
Trey Lockerbie (26:04):
So, I’m wondering back in 2020, if the words from Jerome Powell were of any significance to you. I’m paraphrasing, but something to the effect of having an unlimited supply of ammunition, meaning new money that the FED could print to essentially reflate this bubble and keep it going more or less indefinitely. Do you think that impacts the 50 plus percent decline we might be forecasting?
Jeremy Grantham (26:29):
No, I think, Powell belongs to the Greenspan, Bernanke, Yellen little cult, they all fit together. They all realized that lower rates and moral hazard pushed up the price of assets. They all realized that assets going up generates a positive income effect, it simply does. You spend a couple of percent of what you unexpectedly gained, you count on gaining a bit but if you gain five bits, then you spend a little bit of the extra the following year.
Jeremy Grantham (27:00):
So, it has a very positive income effect. But the same happens with housing. If housing goes roaring up, you remortgage, you make a trip to Spain, you put your kid through school, you do all those good things. And on the downside, you do completely the reverse. Anyway, so Greenspan and the boys and the girl took considerable satisfaction in the positive effect they had on pushing up asset prices. Lower rates and moral hazard will raise the price of assets, which they did all over the world. And no one was a bigger friend of the stock market than Greenspan. And he did raise to the rescue when they finally lost air.
Jeremy Grantham (27:41):
The S&P went down 50% from a very high level, but it only hit a long-term trend. This was the first bust in history that didn’t go crashing below trend and stayed there for 10 or 15 years. So, he did have an effect. What he wasn’t able to do is he didn’t start the NASDAQ from dropping 82%. And if you’re interested in Amazon, it dropped 92%. It had been the start of 2000. It still drops 92% before making everybody rich, but who I wonder held under the psychological damage of 92% decline, and the S&P went down 50%.
Jeremy Grantham (28:16):
And then, you fast forward to Bernanke. Bernanke completely didn’t see the housing bubble and the risk it posed. He said the US housing market merely reflects the strong US economy. The US housing market has never declined. It never had declined because it had never had a bubble before. Every time there’s been a bubble there, it has always declined. Hyman Minsky’s lips, you create a situation like that it will eventually blow up its own weight, burst of its own weight.
Jeremy Grantham (28:44):
Anyway, he was convinced it wouldn’t collapse. And of course, it did. And the housing market went all the way back to trend and below, which was a dreadful hit. And it created so much chaos. It carried the stock market down with it, again, 50% on the S&P almost exactly to the first decimal point. These are not small declines, and yet they occurred in the face of passionate defenders and promoters of moral hazard and I’ll come to your rescue and we’ll make money cheap as it takes. And that took us through Yellen and then into Powell, the same story.
Jeremy Grantham (29:22):
They all talk a wonderful game about how they’ll be the friend of the asset class, asset class pricing, friend of the stock market. And yet, it didn’t stop two of the greatest wipeouts in American history. The most impressive thing here is not that they do the same thing over and over again as if they have somehow no memory. It’s the faith the financial community has in them, despite the fact that they have been let down badly twice. These were not insignificant setbacks. The tech crash was brutal. Amazon down 92, every growth tech stock was down 70 or so it seemed.
Jeremy Grantham (30:00):
The housing bust was merciless. The stock market decline of those seven was really painful. And yet, it’s as if it never happened. Oh, Powell says this, Powell says that the FED has money, the FED is going to be our friend. Hey, Greenspan was our friend, Bernanke was our friend and we got croaked, guys, what is the matter with you? The Federal Reserve simply does not understand the risks of asset price bubbles and asset price collapses. It is clear from the data they don’t get it. Greenspan could never make up his mind whether the market was overpriced, irrational expectations, or whether, in fact, it was fine.
Jeremy Grantham (30:43):
Yellen couldn’t. Bernanke couldn’t see a housing bubble that was a three-sigma 100-year event, where were his statisticians? The answer is the Federal Reserve statisticians do not do asset bubbles. They are, in that respect, utterly clueless. And we apparently never see that. We are willing to look through the crash of 2000, the housing crash, a really dangerous affair. They didn’t do their duty. They didn’t hit it off. They didn’t raise the limits for mortgages. They didn’t warn anybody. They allowed it to happen. And yes, they were pretty good in the decline. They were pretty good at applying bandages and stimulus and support for the wounded.
Jeremy Grantham (31:27):
But they sure as hell should not have allowed that housing bubble to occur. They don’t get it. They don’t see the risks and they don’t see them now. And so this time, we don’t just have a housing bubble. We have a housing bubble, a stock market bubble, a commodity bubble, and a bubble, an interest rate bubble. This is going to be the biggest write-down. The next time we’re pessimistic, we have more potential to markdown asset prices than we have ever had in history anyway.
Trey Lockerbie (31:57):
So, when you refer to everything being in a bubble, I recently heard someone say that if everything is in a bubble, then it’s the currency that’s in a bubble. And I know you’ve gone on record stating that you’re not so much on the fringe of thinking that the US dollar might be in jeopardy. But when you start to see people like Stan Druckenmiller and a few others who have come out recently gone on record saying that the FED is endangering the US dollars’ global reserve status. Do you start to take notice? Do you start to shift your thinking at all? Or are you not seeing similar outcomes that they might be projecting?
Jeremy Grantham (32:35):
These are very smart people. They’ve spent a larger percentage of their time agonizing about credit bonds and currency than I have. What I can see is that we have never had this kind of money supply. We have never had this kind of debt everywhere, as we have. And it’s easy for me to believe that it may have consequences. So, Summers’ argument that yeah, we might muddle through, but this could be very dangerous in terms of inflation, I think, yeah, well, he got that one right.
Jeremy Grantham (33:08):
He fought desperately hard to have subprime instruments unregulated. He waged war against Brooksley Born who was trying to exercise her right to control subprime instruments. He and Greenspan and Levitt of the SEC kind of called up and abused it. And then, when she wouldn’t back off, they took it to Congress and got the law changed, so that we could not regulate subprime. What a brilliant idea. It nearly brought the entire economy to its knees. And who holds Summers, Levitt, and Greenspan on this account? They’re all kind of forgiven. I call them the Teflon men.
Jeremy Grantham (33:44):
It doesn’t matter what they do, they’re somehow forgiven. But that was, in my book, one of the more dangerous financial management crimes of the modern era. But in any case, you can’t get everything wrong, and I think the idea that Summers is warning us that it could be very dangerous and that inflation could be worse than expected. And that will have, of course, effects on the currency. It affects everything, it affects, eventually, perhaps on credit. And the rate at which money supply has been generated is off the scale. No other country has done this, and the rate at which our debt ratio as a country.
Jeremy Grantham (34:19):
I am not an expert. But I can see that this is all new. I can see that many new extremes are coexisting. It’s like there’ll be monsters, they’ll have potential monsters all over the place, of a kind that we have not dealt with very often. And in such numbers, we have never dealt with it. So, the ability of things to go bump in the night, things to go wrong, it is obvious to an amateur in these areas that the risks have gone through the roof.
Trey Lockerbie (34:49):
That’s kind of my question because I’m reminded of a quote by Keynes, who said, “It’s better to be roughly right than precisely wrong.” So, if we extrapolate this out, as you say, is it time to move to cash meaning being roughly right, even if this market might drag on for months or a year beyond where we are now, rather than be precisely wrong and get caught up in the decline? And are you factoring, like you said, the debasement of that into money supply into the choice of going into cash?
Jeremy Grantham (35:21):
No, I am not. I am leaving currency worries to other people. I have enough to worry about. With every real asset category, badly overpriced, that is quite enough for me to worry about. And history is quite complicated enough anyway without attempting to think about every aspect of the system. So, I will leave that to that. What is slightly unusual about this bubble on a global basis is that, yes, real estate has bubbled everywhere and often worse than in the US. Yes, commodities are everywhere. Yes, bonds are everywhere overpriced and interest rates are negligible everywhere.
Jeremy Grantham (36:03):
But on the stock market side, outside the US, most of the markets are merely overpriced. And that is a very far cry from being a candidate for the most overpriced market in American history. And so, the answer is, if you avoided the US equity market and, in a sense, took refuge in a merely overpriced balance of the world, particularly in emerging markets, you will almost certainly make some money. I would say, you will almost certainly make less than you would like. And you will almost certainly make less than a long-term trend. But you will almost certainly make some money.
Jeremy Grantham (36:39):
And that is more than I can say for the bond market. And that’s more than I can say for the housing market. My guess is you will lose money in those assets and you will lose a ton of money, I suspect, in the US equity market. So, you have one place where you would find moderate refuge. There is another area and that is, for the last 11 years, we have had a massive shift in terms of growth versus low growth or value. And high growth stocks, which had a long history, the first 45 years of my career value barely steadily beat growth. In the last 11 years, growth crushed value, and the ratio is about as extreme as it has ever been.
Jeremy Grantham (37:24):
So my guess is that will be a relative refuge. And the two parts where the two circles overlap, where you could get low growth or value in the non-US markets, particularly emerging, I would suggest you could do even better than I suggested in the aggregate markets overseas. The value component of the aggregate markets overseas, you could probably come close to a normal return, which is a hell of a lot better. But if you can stand the psychological shock of being paid a negative number for cash, I would find some way of keeping 20% or 30% liquidity to take advantage of the eventual markdown of assets of all kinds.
Jeremy Grantham (38:07):
If you can stand more than that, I would carry more. It’s very hard psychologically and people don’t do it.
Trey Lockerbie (38:12):
I want to touch on your experience through the ’70s and ’80s. I heard you mention blue-chip issues in a way that I’d never heard before, you call them one-decision stocks, I think, meaning you find these companies that you just buy and hold forever. And that’s the one decision made, Coca Cola, et cetera.
Jeremy Grantham (38:30):
This is not my language, you understand. I am quoting the language of the era.
Trey Lockerbie (38:35):
Jeremy Grantham (38:36):
They were called one-decision stocks. And the great banks, the New York banks, owned the pension fund business in those days, and the rich family business. And that’s what they owned. They figured all they had to do was own Coca-Cola, IBM, Eastman, Kodak, Xerox, and the drug companies and everything would work out fine.
Trey Lockerbie (38:56):
I’m curious if you’ve seen any stocks as of late that might fit that description, the one decision type of stock. You mentioned QuantumScape earlier going from 130 back to 24, is that now at a value that is appealing to you and something that you think could be a good hold for a long period to come?
Jeremy Grantham (39:14):
It’s really over my pay grade. I’m happy to say I paid two and a half for it eight years ago, as a relatively early-stage venture capital. We did it because it’s such an important idea to have an improved version of a battery for an automobile. And if it works, it will be very important. But as I said, three or four years from now, the scale of the market will be enormous. The competition is enormous. And perhaps, there’ll be one winner, perhaps there’ll be seven winners.
Jeremy Grantham (39:44):
I think somewhere around these prices, it might be a decent hold. But it would not be amazing if one day its true value was 100 or its true value was nil.
Trey Lockerbie (39:56):
It is a great idea especially when we talk about the effects of climate change which you’ve been a big proponent of raising awareness for a long time. You spend most of your time in Green Venture. I’m curious, what about climate change impacts your investment decision? Are you led to innovations when it comes to energy? When it comes to extrapolating CO2 out of the air? Nitrogen effects? I’m just curious, what is your circle of competence when it comes to climate change investing?
Jeremy Grantham (40:25):
Let me say, this is personal. This is for the Grantham Foundation. Our job description is to help decarbonize the world. And we do that through grantmaking. And we do it through investing a very large chunk of our capital in aggressive early-stage, green venture capital, ideas that will if they work, be really important at decarbonizing. And we have built a team of half a dozen people who more or less full-time look at green opportunities. We’ve been doing this for a few years.
Jeremy Grantham (41:02):
And our general battle plan is extremely aggressive. We think venture capital is the best part of global capitalism, far and away, the best part of American capitalism, which I think is otherwise a little fat and happy monopolistic too many stock buybacks, not enough CAPEX. But VC is the last best exceptionalism in America. It’s what we do best. It’s the largest by far, it’s the best by far. We raise money, we take risks better than other people, we forgive people for failure, give them a second chance. The very best and brightest now or want to go into VC or starting their own business, whereas they used to want to write algorithms for Goldman Sachs or be consultants for McKinsey.
Jeremy Grantham (41:47):
And that’s the way they should. It’s much more important that we get new ventures right. And in green venture capital, they could save our bacon. And there are armies of terrific ideas coming out of the great research universities. And the US, again, as the death grip on the great research universities, there’s a few in England. But other than that, it’s the US. So, what a wicked advantage. So, we aim to be 70%, 75% of our entire foundation in relatively early-stage VC, 20 points in the very best of the rest, all non-green activities but the very best ones. And 50% to 55% in the green of which half we invest through professional pools of venture capital, and a half we invest with our own team directly. That’s the battle plan.
Jeremy Grantham (42:38):
And some parts of that are pretty well complete. But in any case, the total we have today is about 75% in venture capital.
Trey Lockerbie (42:48):
You were also a pioneer on the idea of index funds. And given that index funds have grown at an accelerated rate exponentially even over the last 10 to 15 years. I’m just curious, has it changed your opinion? Or do you think that the common man, obviously, not spending time in the markets is best off even with the 50% decline coming just dollar-cost averaging into something like an index fund over time?
Jeremy Grantham (43:12):
Yeah, it’s psychologically very difficult to cope with getting out of a bull market and getting back into a bear market. In both cases, your brain or your body is screaming at you. Moving out of a situation where you keep making money is beyond most people. And then, as it starts to drop, it becomes painful the other way. It’s very difficult buying and holding an index fund is kind of the default simple position for the long term. And one thing that I realized in 1971 was that the people who play the game, the cosmic poker game, me against you picking stocks are always going to sum to the market minus the cost of playing the game.
Jeremy Grantham (43:54):
In the poker analogy, it’s table stakes you pay a buck and a half for sitting in your seat. And it costs about one and a half percent one way or another to play the game management fees, custody charges, friction, brokerage costs, commissions. And the guys at the bar who are watching the poker game, who are the indexes, are going to sum to the market. So the players, however clever in their entirety, are going to sum to market minus one and a half. And the guys at the bar are going to sum to market. So the players are, by definition, guaranteed no hope. In total, they’re going to underperform the indexes.
Jeremy Grantham (44:31):
And that was always, for me, a sufficient reason. And we call it the zero-sum game. Investment management does not produce widgets, it, in fact, chews up some of the widgets and management fees to run the game. And that indexing would therefore always be a very plausible alternative. The competition, by the way, we’re recommending indexing because they said the market was efficient. That is nonsense today, but it was glorious nonsense in 1971. But apparently, they believed it and they got Nobel prizes for believing it.
Jeremy Grantham (45:04):
That’s just the craziest belief that one could ever hope to meet. And given the bubbles and the way they keep rolling through history, since 1971, you think the point might have been well made, but it isn’t. They think it’s all efficient and the market goes up and down, in some way, magically defining in a logical way, stock prices, as if we were not completely psychological creatures driven by fear and greed, which of course we are. So, they said, the market’s efficient therefore indexing. And if the market were efficient indexing would be, of course, the correct answer. And we said nonsense, but it’s a zero-sum game. And if you have a lot of money, you should take the cheap way out. And in the long run, you’ll win. And that’s a completely sufficient reason.
Jeremy Grantham (45:48):
It also happens to be accurate. And so now, 50 years later, the efficient market guys also throw in the zero-sum game argument, I noticed, having their Nobel Prize safely tucked away. But they completely denied that at the time.
Trey Lockerbie (46:04):
You mentioned it’s not for everybody to see a market decline. And we are driven by fear and greed, which is why I’d be remiss if I didn’t ask you this question about, you mentioned the late 1990s, where you had pulled out of the market and a lot of your clients were pulling their money out of your fund. I think your fund decreased about 50% during that time. What was it like, I mean, personally watching that? I mean, that’s got to just really pull at you emotionally, to be so steady in your feet and in your principles and be right. But what was it like living through that?
Jeremy Grantham (46:37):
Well, there are a few interesting tidbits, and that is the clients who fired us moved their money into growth stocks. And therefore, when the market broke, they lost a whole lot more money than we did. And the one question is how many came back? And the answer is none. So, let’s imagine we lost 40% or 50% of our clients. Not one single one came back because we were right and they were wrong. And we saved a ton of money on the round trip that we missed. We missed going up another 25%. We went up, let’s say, we went up to 25 and [inaudible 00:47:11], the aggressive competitor was up 60 and the market was up 50.
Jeremy Grantham (47:17):
So, we were 20, I think, 20%, 22% behind for the duration, which is a killer in a bull market. And then, we saved. We made money in a 50% decline. We made money in 2000, 2001, 2002. And in the first two years, we made fairly decent money. So, we made a ton of on the round trip, but nobody came back. Secondly, when they fired us, they fired us with hostility. Unlike all the firing before us since, where you’re fired for being out of date, old fashioned, inappropriate, or just not fitting their portfolio this week, we were fired as if we meant to cost them money.
Jeremy Grantham (47:57):
They were angry with us. The tone suggested it was a completely deliberate undermining of their wealth. And that was a shock. That was a terrible shock. And it was also a shock to find how many of the elite committees believed in Alan Greenspan’s golden new era that would last forever and would sail off into the setting sun. They had not done that in Japan. In Japan, we lost no business. We were terribly early. We underperformed Japan. And then we got it all back with interest. We lost no business. Because they could see clearly that was the crazy Japanese.
Jeremy Grantham (48:31):
But when it was here, they participated. They believed, or some of them on the committee believed in the golden new era. And that was a bit of a heartbreaker for me. I hadn’t realized that would happen. And they just said, “We had completely lost our way. And we’re missing the point of the new tech.” So, yeah, that was extremely painful and surprising. And then, of course, when everything collapsed and we made money, the people who had not had us thought, “Well, they’re our kind of guys, if I’d been there, I would have hung tough.”
Jeremy Grantham (49:02):
And so, they threw their money at us and we quadrupled in three years. We did a lot more than quadruple, actually, we are octupled in four years. The good old days.
Trey Lockerbie (49:13):
What an incredible story. And I just think this is an important, timely, sobering reminder of learning from history and not expecting things to go on forever. So, before I let you go, Jeremy, I just want to give you an opportunity to tell people about your foundation and anything else you’d like to share, any other resources, and maybe any other words of wisdom for especially investors who are just getting started.
Jeremy Grantham (49:41):
If I was coming into the investment business, I want to go for reasons that must be apparent by now into the venture capital business. And I would hope that some of them would value doing something extremely useful and therefore would go into the green end of the venture capital business.
Jeremy Grantham (49:58):
Our foundation, I believe, is looking at the only free lunch I’ve ever seen in my life. And that is when we invest in 100 important green venture capital deals, some of them fail, some of them will work, but the money will come back with a profit. And then, we will recycle it into another layer of terrific ideas and then recycle it again and again. You can imagine that a dollar invested in that recycling pool will have a more positive effect even than a dollar of grant. And we try and make our grants as focused as we can. But it’s a pretty hard competition to compete with that.
Jeremy Grantham (50:35):
And the philanthropic world does not realize what an advantage they have in this, particularly in the green era, where green venture capital is a good candidate, I think, going forward for the highest potential return of any area of even the venture capital market. Why? Because in the last year or two, we are seeing fairly rapid waking up on a global basis of countries and their policies and their regulations and their money flow to get behind decarbonizing the system, taking out fossil fuels, putting in wind, solar storage, and so on.
Jeremy Grantham (51:12):
And it’s going to cost trillions of dollars, but it’s going to save our bacon. It’s going to save many trillions of dollars. The cost of not doing is outrageously high. And the opportunities from doing it are enormous. And the side benefits, you’re going to be able to walk through Downtown Manhattan and all the vehicles will be electric. And the particulate matter that comes from diesel, in particular, will not be killing you. I mean, it does a terrible job on your brain. It does a terrible job on your general health and your fertility, for heaven’s sake.
Jeremy Grantham (51:44):
And all that will go. Bond Street in London is the worst poisonous street in Europe. And it will all be electric. And our health will be much, much better in 20 years. And that will absolutely happen. It will be an entire side benefit that no one has the brains to put a dollar number on. But it will be a huge saving to the National Health in England and the health system everywhere. So, you can drive the well-being of the world more than anything else by doing early-stage green VC. And you can simultaneously be a candidate for the highest return subset of the marketplace.
Jeremy Grantham (52:25):
And at the same time, drive the cause for saving our bacon, saving the planet, if you will, decarbonizing the global economy and do the same simultaneously. And that’s pretty remarkable.
Trey Lockerbie (52:38):
Jeremy, I want to be mindful of your time. I really appreciate you taking the time out of your day to come on the show and talk to us. And this is incredibly insightful. And I agree that the green VC is an exciting venture. And I hope we get to talk more about it sometime in the future. So, thank you very much for coming in our show.
Jeremy Grantham (52:54):
Yeah, me too, been a pleasure.
Trey Lockerbie (52:56):
All right, everybody, that’s all we had for you this week. I really hope you enjoyed this one. If you’re loving the show, do us a favor and follow us on your favorite podcast app, and maybe even leave us a review. If you’re looking for great value picks, I highly encourage you to Google TIP Finance and find all the resources we have for you at The Investors Podcast calm. And with that, we’ll see you again next time.
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