Jeremy Grantham on How to Tell if a Bubble's About to Burst — Odd Lots

[00:00:00] Speaker 1: you are a connoisseur of historical financial market bubbles which one are which one is most [00:00:07] Speaker 2: similar to the current period that we're in people tend to think a bubble oh it has to be somehow a con job and it's exactly the opposite the great bubbles are the biggest ideas for decades so the only one as big as ai is possibly the railroads of course everybody could see that the railroads were going to change the world you arrived at the railway station in a horse and buggy for heaven's sake and you know you you went seven miles an hour and then you got on a train traveling at 60 miles an hour and went a couple of thousand miles i mean it was utterly revolutionary so what happened everybody could see that the railroads were going to change the world which they did everybody wanted to have a piece of it and they could everybody put their money in it and you had the biggest bust on both sides of the atlantic that you could imagine and everybody lost their money in railroads and out of the ashes the tracks were still there the locomotives were still there the demand was still there and uh it changed the world and then you fast forward to the internet powerful idea clearly by the way accompanied by a lot of silly stuff as well but under underneath it a very powerful idea to have a great bubble you have to have decent economic times the better off the better the bubble you have to have easy money the better and easier etc the better the bubble and you have to have a fabulous idea and you have to have it so obviously be important that everybody can see it now they're very very rare events aren't they this one is as big as anything but the railroads i am not even prepared to say it isn't bigger than the railroads it may be but they're the two super champs besides them i think the internet is yeah a bit of a piker but they're the two colossal ones if ever there was a massive idea that will change is already changing the world [00:02:25] Speaker 1: it's a i does anyone not know that hello and welcome to another episode of the all thoughts podcast i'm [00:02:37] Speaker 3: tracy alloway and i'm joe weisenthal joe i have a headline for you go on oh yeah there's a good day for headlines you probably is june 16th you have a lot of headlines you could that's right you could [00:02:48] Speaker 1: choose from but one in particular yeah i'm sure you saw this already uh spacex extends gain to 17 [00:02:55] Speaker 3: set to overtake microsoft in value i had a feeling i think at some point did they also overtake amazon yeah i think all of those yes i think um in the last week i mean we were traveling the week of the spacex ipo but it just captivated everyone and day after day and there are i there are any number of superlative you know at bloomberg we really like superlatives you know it's like there's like the largest gain since x or the biggest and there's more stats than superlatives right um well i suppose but uh there was also one i saw um i guess yesterday so june 15th was the the world's 500 richest people collectively added 366 billion to their wealth there's the single biggest you know the numbers get bigger over time there are some it's some big times for the market a nice day for them but the [00:03:45] Speaker 1: crazy thing about spacex is okay you have this company that's now worth 2.7 trillion dollars or something on 20 billion dollars of revenue from 2025 and i can't even do you know if we're talking about valuations you can't even do a traditional price earnings ratio because there's no earnings there's just sales and the price to sales ratio is more than 100 something like that you know look like i don't [00:04:11] Speaker 3: even know where to begin i mean you you've seen this is a superlative yeah i mean the the argument that's being made is that um yeah there's a lot of arguments being made but people it's like oh it's actually an ai company because of all the gpus and data centers that they've built they really do have and we've done an episode on this an extraordinarily commanding lead in space and satellites and starlink etc um you know the revenue is what it is i don't know but also i think it's fair to say things feel [00:04:43] Speaker 1: a little bit speculative yeah at the moment right you see a headline like that 17 percent that's you know overtaking a stalwart of the tech industry in the space of it's been less than a week right [00:04:57] Speaker 3: yeah i mean you know look i mean the other thing is look these companies are like and we're going to get these other big ipos later in the year with open ai and anthropic presumably they've built you know i mean spacex has been around for a long time they historically companies came public much earlier etc so obviously you know the it does have 22 000 employees it's a big company but the revenue is what it is and if you're looking at it from a sort of like valuation based metric you would have to say at a very minimum investors are if are you have to be banking on very rapid growth in the very short [00:05:33] Speaker 1: term in the coming years to expect good returns here right so obviously one of the big talking points [00:05:39] Speaker 3: do you know they like i'm looking at the des page for spacex do you know where it's headquartered no actually starbase texas oh so they apparently so they have their own town in texas that they got to name but that is their corporate info on on the des page starbase texas well that's definitely worth [00:05:57] Speaker 1: 2.7 trillion so all right the big talking point in markets is obviously valuations all of this ai frenzy is it a bubble is it not but even if you think that a lot of this is speculative yeah my big question is what do you actually do at this point right because so much of the market has been momentum driven recently ai enthusiasm is pretty much everywhere so we talk a lot about weightings and the in indices benchmark indices of big tech but also as we discussed recently with torsten slock in his great presentation at our live show like the ai factor is basically embedded in pretty much every [00:06:34] Speaker 3: stock at this point in time well you know look i'm the way i look at it for my own investing in my retirement and i very have like sort of very boring normie index-based investing it's like look i may be missing out but these are great returns etc i'm not managing other people's money you know other people like that's a nice luxury you know what i'm saying it's like i have the luxury of being able to say these are fine returns i'm just getting from the s p or whatever roughly and that's fine it's a great year and if like sure i didn't like you know i'm not all in on 2x levered korean memory stocks but i'm still like these are great returns had i been had someone been paying me to manage their money i don't know if they'd be happy to get market returns right now yeah that's right so this [00:07:17] Speaker 1: poses a bunch of interesting questions obviously yeah the big one being are we in a bubble or not and then i guess the next biggest one being well what do you actually do yeah how do you stay sane that's right how do you stay sane in a giant market bubble and we do in fact have the perfect guest someone who has managed to do that over the years more or less i think we're going to be speaking with jeremy grantham he is the co-founder and long-term strategist at gmo as well as the author of the new memoir the making of a perma bear the perils of long-term investing in a short-term world and famously the caller the accurate caller of many previous market bubbles including dot-com which is the parallel that everyone keeps using so jeremy thank you so much for coming on odd lots it's a pleasure thank you for having me so what do you recommend investors to at this point in time because it seems like there's no escape from ai enthusiasm to put it mildly well my simple advice is usually try and avoid the hype [00:08:20] Speaker 2: check the numbers and a hundred times sales pretty well does the job for you it's easy for kind of market historians to be having a good time these are extraordinary times it's seldom been more interesting i'm thrilled to be alive when all the all the major issues that i have spent my life studying and particularly the last 15 years are coming to a head basically at the same time and to find that being met by the highest priced market in history give or take is extraordinary and i think in 50 years market historians will look back and talk in awe of spacex and read as a kind of novel slash joke its prospectus and compare it with the stories they tell about the south sea bubble you know an undertaking of such enormous value that it cannot cannot be at this time revealed i mean they scooped up a lot of money and and ran off with it and they deserved it the naming of your book [00:09:38] Speaker 3: the making of a perma bear what it like when i read that title should i have perma bear in air quotes as in like people perceive you to be a perma bear or do you i voted for quotes and the publisher didn't like it interesting yeah because like because a i don't you know i know you you've warned you know i associate you with like warning about that the markets can get over their skis and understanding market history etc etc on the other hand i look at gmo's holdings and positioning and i see names like you know i do not see funds that are just overwhelmingly in treasuries and gold and save you know uh safe haven assets i see ownership of meta and microsoft this does not look like the the whole portfolio of someone who i would think of as a quote perma bear unquote when i was 70 i figured it was [00:10:36] Speaker 2: time to leave my colleagues in charge of all the day-to-day decisions i have nothing to do with the portfolio today my only job is to study long-term existential threats to the market and society and that includes the making and breaking of the great bubbles which is fine because i have always for 50 years at least considered the making and breaking of the great bubbles to be the only thing that really matters the rest of the time show up for work keep your nose clean you're doing fine but the forming of these spectacular bubbles and they're breaking really separates the men from the boys [00:11:15] Speaker 1: so you touch on this in the book but when we're in the midst of a major bubble and people are seeing crazy returns like 17 on spacex what do you tell clients when you know they're missing out on these huge gains i assume you're encouraging them to be patient to wait for that mean reversion but how do you actually handle the pressure of having a customer a client who is under pressure to at a minimum meet [00:11:45] Speaker 2: their benchmark with great difficulty it's always been difficult dealing with clients in a major bull market and luckily we've had quite a bit of experience because since green span we've gone from one overpriced market to the next starting with the tech bubble and then the housing bubble and then in a sense the end of 22 was a the end of 21 was a spectacular overpriced market and now this so you've had a lot of experience and we we're more careful at handling the clients now than i think we were in the tech bubble where we famously lost half our book of business in two and a quarter years [00:12:30] Speaker 3: actually can you explain what does that look like in practice and i understand that you're not active day-to-day in the security selection but obviously people who work for you are and they're very active and obviously in the client handling what does that actually look like in practice [00:12:46] Speaker 2: of like uh good client management at any firm in our case being as honest as you can be lay the facts on the table make them as clear as you possibly can try and take out 100 of the hype and kind of engage with your client so that they understand exactly how you see the market working why it does this why it does that how it's in general priced and um you know that's a long continuous job and it keeps going in the bull markets and the bear markets and what changes really is the clients level of excitement they they become careful and miserable for a while and they're excited and jumping up and down for a while but our process of trying to deliver the facts as we see them doesn't [00:13:47] Speaker 1: really change much i think a lot of people would probably agree that markets feel a little frothy at the moment but i think there's also a mentality again it goes back to this momentum factor that's dominated in recent years but i think there's a mentality that everyone just assumes they're going to be able to get out before everyone else everyone's going to head for the exits at the same time so you enjoy the gains and then hopefully you're slightly smarter than everyone else and you manage to save yourself before the bubble actually bursts how do you go about thinking about timing of the bursting of bubbles what are the signs that you actually watch out for in terms of when everyone is heading for [00:14:28] Speaker 2: the exits all at once wow it's um i i have a few rules that have worked um more often than not um the one that's most interesting to me has only flashed four times since 1925 and that is that the uh in the early phases of the bubble that is we define a bubble as a rare two sigma event and based on the price only and when it breaks through that um let's assume 1928 you have a huge move and the stocks that lead it you know are going up 60 80 percent for the year and then in 1929 the junkie flyers start to go down it's not that they underperform a rising market the market goes up 35 percent to the peak in 20 in in october they can't even get the sign right the previous year's leaders the spectacular movers start to decline and they spent the whole of 29 going down and by the time the market broke the s p low priced index which regrettably was discontinued years ago uh was down almost 40 percent and uh the low priced index were a bunch of fallen angels with enormous uh volatility very high betas and they had had a spectacular 1928 and they started to decline why is that i i have a i have a theory that this is relates to mr prince's unusually honest answer why is he still in the bull market as long as the music's playing i have to keep done and that of course is the name of that game but he doesn't have to dance with pumitek pumitek was the most advanced spec in 99 which was a hell of a good year to be the most advanced stock and you don't have to go off the cliff in pumitek you you go off the cliff in coca-cola that's the ideal and that's exactly what happened in 1929 people grab in that case actually coca-cola they gravitated to the coca-colas and the radios and and away from the junk and the junk started to decline that's an incredible signal the the greatest prime primal scream from the stock market ever and nothing like that happens again you have underperformance of high flyers but you never have them go down in a decently rising market until drum roll 1972 the top of the nifty 50. the s p goes up 17 the average s p stock goes down 17 so i can remember the numbers forever and then we have the biggest bear market since the great depression that was a truly miserable bear market 73 74 whether you had small cap large cap quality junk everything went down 50 and then when adjusted for inflation closer to 65 an absolute monster and nothing like it happens again until 2000 in the year 2000 you may remember the growth stocks peaked horrifically in february the rest of the s p did not the rest of the s p rose about 15 so you had a a co-equal high in october but the growth stocks were down 40 percent having been as low as 50 by then they rallied a little and back in september uh you had the s p as high as it was in march of 2000 just amazing deviation between the growth stocks who'd been making spectacular running in 98 99 and early 2000 and and the rest of the market that continued up and then you had a very sharp break the end of 2000 a steady break in 2001 and then to rub it in a miserable minus 22 percent in 2002 and nothing like that happens again until 2021 in 2021 you may remember the mean stocks peeled off by the middle of the year kathy wood and her portfolio were going down by the end of the year they were off 35 40 from their peak and yet during that same six months the s p powered ahead it's really quite remarkable when they get the sign wrong and and unfortunately that i had an adventure with quantum scape quantum scape turned out to be a meme stock without my knowing it because i had a huge position personally and the reason i had a huge position is that i was offered an opportunity to invest several years earlier on an all or nothing basis i took this big position or i had nothing so i took a deep breath and it was much too big for our foundation which we have for the protection of the environment my the grantham family and so i had to own it personally so it was the only stock that i owned and uh it was a very big chunk and it came as a spack um at uh four times my investment better better than a kick in the pants ten dollars a share up from two and a half and within three months it was 131 and let me just talk about 131. uh at the end of 2020 that was the very first stock to peak out at over 130 was bigger than general motors and it was a battery research lab yeah they were going to design with any luck a solid state battery and they still may but they still have not got a battery on the market so this wasn't like spacex this had no sales forget no profits and was selling for more than general motors actually i think that is more speculative than spacex which i think is a very very high hole [00:21:02] Speaker 3: yeah i'm glad you brought back 2021 because that was a weird year wild times in a way that really was see i would argue the 2021 was actually much more wild than right now because we don't really you know because of the proliferation of quantum scapes which was one of many stories that you could tell you could go back to the rivian valuation at its peak or numerous other escape is much okay okay all right all right fine but but let's talk about ai for a second because obviously we reach back towards memories of the dot-com bubble or 2021 but i'm looking at a chart on my terminal right now of nvidia revenue so in 2019 nvidia had revenue of 11.7 billion and in 2025 it had revenue of 130 billion so the revenue has gone up therefore i think by over 10x um in six years you know we talk about and everyone said oh market the very high valuations can't we say that the investor in nvidia in 2019 was getting the mother of all deep value investing given what we now know in retrospect about what its [00:22:18] Speaker 2: earnings were about to do well obviously if you're clairvoyant that was sure sure a deep value opportunity um nvidia obviously a brilliant company and ai by the way is a spectacular important development but nvidia the biggest piece of luck i think i can think of in the last 30 years you have all your money in in chips made for playing games and suddenly it turns out that that is absolutely the right the right design for ai yeah and you have such a running start that it may take you tell me five years ten years it doesn't seem like the ultimate mode it seems like the ultimate head start in in a game where a head start is worth a ton of dough it is worth the tentuple in your sales but it's only a head start other people google gearing up to be competitors in the next decade of course there will be plenty of competition maybe even technologies that end run the current type of chip these things happen history is [00:23:31] Speaker 3: full of them well ken let me just push on that again so i i take your point about nvidia having um this incredible mode from maybe arguably stumbled into the technology backwards because they were obviously in video games before but like i'm looking at say even a microsoft 2020 annual revenue of 143 billion 2025 annual revenue of 280 billion so we see the biggest companies in the world doubling real business in the span of five years which does not feel to me anything like what we were seeing and i have fond memories of 1999 myself that's when i got personally interested in markets these are gigantic businesses still putting up huge growth numbers that lap wall street forecast year after year yeah [00:24:20] Speaker 2: and for the record um when microsoft first appeared in a tradable portfolio yeah um for gmo it was in our value stream we had a value stream and a momentum stream and we only bought the most attractive 10 percent and we did that each month for 12 months so we had 12 little portfolios each one the best 10 percent for each month of the year and microsoft entered the cheapest value decile and stayed there until july of 99 and that's because our value model looked at long-term future earnings and dividends projected as best we could and we did that through projecting return on equity and we did that by looking at how return on equity regressed to the mean and which factors affected the rate certain factors slowed it down market domination price setting that you could prove slow it down way way down and microsoft was the perfect uh example of this it had very very low volatility it was clearly overwhelmingly the price setter and consequently our model said it was worth nine times book not seven times book but it was selling it so you if you have a good value model you can you can buy these things you can see them on occasions coming along and yes it's done spectacularly well and has uh had then particularly a much better moat to me than nvidia has today but if you will allow me a minute here please if you look at the mag 7 you look backwards in history and you can say with a pretty clear conscience each one dominates their seven different niches they have near monopolies on a global basis even tesla you know has a jump start the biggest and the best for for a long time in evs and you have amazon beginning to dominate retail google research etc etc seven decent monopolies dominating the world justice department etc perfectly sound asleep no one is interested in pulling a teddy roosevelt they're not going to jump in and slash and burn and divide uh exxon into seven different pieces they're they're letting these things grow and and and fix and set their pricing and make tons and tons of money and then you look forward starting from today does it look anything like that doesn't it look like seven companies deciding they're all in the same market ai right that moving the most powerfully with the greatest investment is dominant are they not seen here beating their chest and saying my 200 billion in investment in a single year is bigger than your 127 yeah boo they know how much gets paid off to the first mover who grabs the market they all want to be the first there can only be one as they say in the movie and there's seven of them fighting it out it could be a very messy blood curdling game i suggested that they have it outside uh the white house uh and still um what a comparison just imagine 10 years from now looking back and saying you couldn't see the difference between seven easy monopolies and and a dog fight of seven vicious rich companies huge cash flow huge understanding of the virtues of being dominant all deciding at the same time to fight out in one market and you could say yes there was the cloud what about that and the cloud was a nice well-behaved oligopoly three of them gently deciding to compete in genteel ways exactly the right thing to do if you find yourself in that position and clearly not the approach that is being adopted this time we have seen huge investment you look back their idea heavy capital light you look forward let's hope their idea heavy but they are capital heavy this time it's like a watershed in in all almost everything that matters between the past and the future and nobody seems to be talking [00:29:33] Speaker 1: about it in that way and i don't get it the dot-com bubble has come up a number of times in this conversation do you actually have a preferred historical analogy for the situation that we're facing now because we've been through technological revolutions associated with speculative manias before ranging from i guess what i would say are pretty real ones like the railroad bubble and yeah and the internet yeah to kind of crazier ones like we're all going to go deep sea diving yeah totally and get rich that way you are a connoisseur of historical financial market bubbles which one are which one is most similar [00:30:14] Speaker 2: to the current period that we're in ah so people tend to think a bubble oh it has to be somehow a con job and it's exactly the opposite the great bubbles are the biggest ideas for decades so the only one as big as ai is possibly the railroads of course everybody could see that the railroads were going to change the world you arrived at the railway station in a horse and buggy for heaven's sake and you know you you went seven miles an hour and then you got on a train traveling at 60 miles an hour and went a couple of thousand miles i mean it was utterly revolutionary so what happened everybody could see that the railroads were going to change the world which they did everybody wanted to have a piece of it and they could everybody put their money in it and you had the biggest bust on both sides of the atlantic that you could imagine and everybody lost their money in railroads and out of the ashes the tracks were still there the locomotives were still there the demand was still there and uh it changed the world and then you fast forward to the internet powerful idea clearly by the way accompanied by a lot of silly stuff as well but under underneath it a very powerful idea so you had amazon go up six or seven times in uh 99 and when the market broke it went down famously infamously 92 percent check it 92 percent and then it rose from the ashes just like the railroads and inherited the retail market more or less so you have to be to have a great bubble you have to have decent economic times the better off the better the bubble you have to have easy money the better and easier etc the better the bubble and you have to have a fabulous idea and you have to have it so obviously be important that everybody can see it now they're very very rare events aren't they this one is as big as anything but the railroads i am not even prepared to say it isn't bigger than the railroads it may be but they're the two super champs besides them i think the internet is yeah a bit of a piker but they're the two colossal ones if ever there was a massive idea that will change is already changing the world it's ai does anyone not know that i think everybody knows it does anyone want to put their money in it i think spacex etc gives us a pretty good idea ninety percent of the value if you read the perspective perspectives is based on ai even though that particular ai seems to be having its bottom kicked by two or three others as we sit but wouldn't let facts get in the way of a really good story and um this is an absolute classic it checks everything off one after another which haven't been checked off many times in history so this is it if you think this is not a bubble you are going to be in for a bitter disappointment how do you channel in [00:33:48] Speaker 3: your book uh you talk about how competitive you are and growing up and wanting to play all different types of games how do you channel competitiveness and in a productive manner career wise so that it doesn't hinder you or it doesn't make you chase performance or does it make you worry about one year's performance versus the uh one another competitor is like how do you how do you make the competitiveness [00:34:14] Speaker 2: instinct be a good thing i think try and bring it to bear on a few areas that that matter to you starting with obviously the most important playing a decent game of doubles and tennis and uh every point has to be played as if your life depends on it and you pick partners and opposition who who do the same and you have a wonderfully good time and then you look around for other things and for me it was ideas um and and i could have made a lot more money if i focused on profit maximizing but for me the the idea was the dominant idea and and sorry principle and and the idea of being competitive was everything hinges on trying to outthink the enemy the easiest way for me it always seemed was to be longer and wider and more comprehensive and and stand further back than the other guy and what you quickly realize when you do that is that no one else is even trying so this is not a fair fight everybody is focused on the near term and if you want to profit maximize that's not a bad idea and uh very few people are are attempting to be in the market and simultaneously asking questions that are several years out and even to some extent a decade or two out and um so it's been very easy for me to be both competitive and and and cheerful and uh and often [00:35:58] Speaker 1: wrong since we're talking about career development now i suppose is it important when you're a perma bear or more accurately when you're perceived to be a perma bear to distinguish yourself in some way from other bears who are out there because again at this particular moment in time there are a number of high profile commentators who would say that ai is a bubble so how do you actually stand out from i guess the [00:36:27] Speaker 2: that's not that's not the bubble calling crowd yeah i have no idea my i have only made two unmitigated uh bullish calls uh the market has a really hard time telling the difference between hey this is overpriced this is going to make you less money over the next 20 years than it would do if it was half price they're just kind of mathematical uh realities and because you say that they oh you you said the market was going to collapse you have been bearish forever now when i want to be really bearish and and recommend you get out of the market i i say so and i've only done that twice in in on july the 15th 90 2008 july the 15th 2008 i wrote a quarterly letter which basically which actually said abandon ship stove keeper the french equivalent and actually quoted the nursery rhyme don't be brave run away live to fight another day and do not take any risk you don't have to take we all have restrictions on how much we can get out of the risk-taking business but do not take anything you don't have to okay that was pretty clear and the last thing that we had been bullish about was emerging markets and i said i've changed changed our mind we think this is the end of the line sell any emerging that you can and uh we did the biggest trade that we had ever done getting rid of the last of our emerging um i must say shortly before we uh published the letter what year which year was that 2008 right oh the emergency oh okay yes and may i say that following that in four months the emerging market halved i think it was the biggest sharpest decline in the history of any major index from july the 15th to november the 15th and actually slightly before that the uh the whole index halved and uh and the other bearish one was uh was at the end of 2021 where the quarterly letter was called let the wild rumpus begin right that meant now get your tail out avoid the market i'm happy to say s p went down like a rocket ship minus 25 growth stocks down 35 mag 7 down 40 and the bond market had the worst year in the history of the bond market and then as i also like to say my nice bear market was rudely interrupted by chat gpt and and the economy that was doing its usual thing of of gracefully moving into a mild recession because animal spirits were going down was also changed by massive and increasing capex spending on ai which dragged kicking and screaming the animal spirits of the rest of the economy they didn't change easily by the way yeah the s p the rest of it went down for another 10 months but they kept going so powerfully in the market and so powerfully in the capex business that they changed the game that's only happened once in history and i don't know how to predict things like that anymore than covet and new new things are a pain and there aren't happily many of them but they're the two most interesting ones in my career covet was novel how do you treat novelty if you're a historian you don't you have to work it out on other principles and this ai interruption of what was a perfect perfectly ordinary and i thought predictable uh bear market because it it it flagged my great discrepancy between the market leaders going down as the blue chips continued up how do you do that i don't know yeah this is really striking [00:40:38] Speaker 3: you know we we recently um we had torsten slock at one of our events talking about um you know this sort of imperviousness of the ai trade to what traditionally we'd call macro so what you describe you're like okay here comes the expected as you said probably would have been a shallow recession and now we see this investment this capital expenditure that's completely they could it does not seem like the companies care at all about the fact that the fed hasn't cut rates as expected etc these classically macro indicators that would be a recession business cycle etc had just seemed to be blown out of the water yeah blown out of the water by the ai trade yeah and and i must say that [00:41:20] Speaker 2: overwhelming interest in interest rate and interest rate predictions has left me totally cold for the last 50 years i i leave that to other people i think it's in general wildly exaggerated i've lived in a world where for 50 years the increasing debt to gdp ratio of the us economy the japanese economy and every other economy has been predicting imminent collapse and the ratio has gotten higher and higher and then it's predicted double collapse and it still keeps rising the only function of of interest rates is that it makes debt easier to acquire and the function of easy acquired debt is that it helps the economy one little problem if you go back to alan greenspan you find that before he gets there there is a very very slow increase in debt to gdp ratio just because the financial business is becoming more complicated and then after him it rises at 45 degrees and it goes from a small fraction of gdp if you throw in all debt uh it it triples and quadruples and and it does it over you know 30 years you have biggest economy in the world 30 years to test what happens quadrupling of the debt to gdp and the growth rate goes down so how can debt be a real mover of growth rate when you've had that wonderful macro test seen from looking back over 40 years huge increase in debt decrease in gdp growth rate very strange so i leave all that stuff way alone if you will let me back up um to i was saying two clear get out of the market calls plenty of the markets overpriced the market has been overpriced since 2000 i admit it it's been overpriced and we have said so the whole time because looking back at the 20th century the 21st century has been overpriced they used to sell at 15 times earnings we have been selling at 23 times earnings that is not a small fraction of an increase it has been a different world the 21st century but based on history it's been overpriced and and of course it still is but i have made two bull calls in my life the only time for the first 10 years we got quoted was in some something called the wall street letter long deceased i think it was a attached to the wall street journal and it was a weekly kind of gossip thing about the industry and they're hidden in the tail end actually of of that letter is my first opportunity to quote and it's uh july 82 and the pe of the s p is seven times and i say i think we're close to an unprecedented rally in both the stock and the bond market and i've always been thrilled to give people copies of this this newsletter and then the market shoots up and we become more careful for a long long time and then finally the market comes down in 09 and by a miracle that only occurs once every two lifetimes we published a letter one pager uh only two of those were done in my career of 30 years letter writing and uh it's called reinvesting when terrified and i think is is the best thing i wrote mainly because it was short and it just said don't you won't call the bottom of the market you know don't bother with that don't even try it just concentrate on the fact that the market's gone is cheaper than it's been for 22 years it's even on our seven-year forecast you're dealing with 12 percent a year compounded returns in the s p equivalent to a higher numbers in emerging and foreign equity get together a plan take it to your committee any plan is better than no plan you have got to start recycling your money back into the market and the good news is as far as i'm concerned it only counts if you wrote it yeah saying it is too peripheral it gets washed away in into the ether but i wrote it and we sent it to the wall street journal who didn't get back and and day by day four days passed until my advisor on propaganda and i decided to hell with this let's post it ourselves and because of that delay we posted it the day the market hit it slow 666 on the s p 500 less than one tenth of where it is today my god this has been a bull market oh thank you for reminding two podcasters that it [00:46:55] Speaker 1: only counts if you wrote it no it's good but to be fair we do write some stuff so there is that uh [00:47:00] Speaker 2: can i just i spent some talking i i sympathize with you uh can i just go back to you were talking about [00:47:08] Speaker 1: how investors seem to have to some extent become more comfortable with higher price to earnings ratios now versus say for much of the last century when it comes to value investing we all know that value has been losing recently to momentum does it feel at all to you that something has structurally broken in the sense that investors are much more focused on price nowadays they're much more focused on short-term gains rather than longer returns and at the same time you've had a lot of retail money flow into the market courtesy of you know new platforms robin hood and whenever i think about robin hood i think about clicking buttons and remember they used to have the animation yeah when you would like celebrate if you place to trade like that's a lot of new money coming into the market that potentially thinks differently to the way investors for much of the 1900s actually thought i think in every bubble [00:48:12] Speaker 2: it gets very much like this um and you said uh much more focused on price not in the sense that they're looking for bargains much more focused on momentum right that's what i mean yes price rises rapidly and and and they like it and the value is irrelevant this is you know this is what happened in the south sea bubble and it's what happened in tulips and it's what happened in the railroads and it's what happens in in in the nifty 50 and and the tech bubble it's what always happens this is not remarkable by the way this isn't even spectacularly overpriced compared to japan japan is the mother and father of all bubbles um in 1989 it sold for 65 times earnings and if that doesn't make a value manager wake up in the middle of the night screaming once in a while nothing will because uh you know we we went up finally to 35 times earnings in the tech bubble never having been over 21. that's pretty spectacular jump but japan had never sold over 25 times earnings and went up to 65 and i'm happy to say we survived that quite well through uh through good luck and the good luck was that international investing had only just come in and we were selling people their first international portfolios that they had ever had including harvard and yale and um that is quite remarkable by the way how slow the u.s was scotland and so on had been doing this uh foreign investing for a long long time but not it was not fashionable in the u.s and um because of that no one had was comparing international with an international index it was only two or three years or two or three months that they had had an international portfolio they were comparing it with the s p because all their competitors were still in the s p and and and the novelty there was betting international against the s p and uh it was winning the international was so far ahead that we could underperform because of japan and we underperformed by 10 points a year for three years and we lost no business at all and we had a decent market share and then of course japan broke the lesson from japan is pretty clear the biggest bubble in the history of the stock market of an important stock market second only to the land bubble in japan of of coincident more or less coincident timing and um what was the price you paid for having it go from 25 to 30 to 40 to 50 to 60 65 and the solomon brothers team went around at 60 to 65 explaining that the bond rate in japan was so low it should be a hundred times i'm not kidding you i'm not kidding you and um what is the price you paid a lost 20 years really not 10 years 35 years have to go by before you get back to a high and i don't think even that is adjusted for the modest inflation that they had i mean you want to have a bigger bubble and a better bubble go ahead just be advised that the correlation with a [00:51:47] Speaker 3: longer and worse decline is pretty well won you know i we could talk for another hour just on international all these things but i have one last question you know you're known for having a lot of um personal sort of like other interests besides investing particularly related to the environment climate change you talk about you wrote a letter i believe last year about uh plastics and other forms of like dangers to the environment do you have any optimism at all that ai in particular will be of service to humanity in tackling some of these concerns that you have about sort of [00:52:25] Speaker 2: ecology and so forth god i wish i knew it the spectacular thing about ai is the degree of difference of opinion you know often you find that the rank and file have one view and the hot shots who know the most have a different view but this is not like that this is you have nobel prize winners who disagree violently you have real experts who've studied it for 30 years who disagree violently you have the rank and file with the as much experience as they could have who disagree violently there is simply no agreement on the future of ai it will either make us all incredibly rich we'll sit on the beach and be served by robots or the robots will go one step further and get rid of us inadvertently or deliberately um this is not bad this is the ultimate complexity that one has ever heard and you cannot possibly know what is going to happen you can only plan for a wide range of outcomes but we know for a fact that it chews up enormous amounts of electricity we know for a fact that that is associated with an awful lot of carbon dioxide production and real pressure on the environment so we start knowing that it will be tough and by the way you make robots every 20 every 20 minutes these humanoid robots have to go off take a coffee break and plug themselves in yeah they they will run through energy like we have no idea how we can hardly support the energy demands of of our current ai confined to your laptops the energy demand of having machines running around uh will dwarf that beyond recognition we will have to have multiples of the global energy production that we have now we are simply living beyond our means you know the real experts who studied for 30 years say we need 1.7 planets to maintain the current level of income uh in a sustainable way and um if we want to live like americans we need five planets and uh ai in the best of all possible worlds might help address this but um it's hard to imagine ai becoming self-aware and being better at everything than we are it's hard to think of an example as jeffrey hinton would say where a smarter civilization a smarter species has been dominated by a comparatively stupid species we we somehow implicitly rely on their benevolence we are not spending that much time and money trying to design a benevolent ai we are spending money trying to design a more powerful competitive devil take the hindmost uh type of ai it it's inherited our our style you know humans have been the survival of the fittest grab what you can why you can don't worry too much about three or four years from now i find that exactly the same in corporate america and and capitalism by the way we don't act as if we value our grandchildren we play soccer with them at the weekend as i like to say and we help pay the school fees but then we go back to work for a chemical company or fossil fuel company and act as if we mean to kill them all it's a strange nature except it's the same as every other species on the planet grab what you can live for today and uh and here we are doing the same it's something we all recognize is a bigger danger than anything we've ever met before living with a with a another intelligence yeah that is going to be inevitably much more than we are and uh and we are left you know worrying about pees when when when the survival of our species is at stake when our strangely our climate is going to hell not as we used to think in 20 30 40 years but now our baby production is going to hell not as we used to think in 50 years or 100 years but now you know china is producing fertility rate of one a baby production that every 30 years has that in 90 years is an eighth and career is is a third of its baby production each 30 years a ninth in 60 years a 27th i.e they're out of business in a single lifetime unless it changes and it has been changing but it's been changing steadily for the worst 65 of all countries are below replacement and quite a few like china are way way down towards one and nobody cares we are not programmed to worry about long-term slow burning problems and they're all coming to bear together and they're compounded by our ignorance or lack of concern about the risks of ai this was going to be a very [00:58:19] Speaker 3: exciting time exciting terrifying also if we need five planets i think you just made the ball case for [00:58:26] Speaker 1: spacex i was just gonna make the same joke oh my god yeah i shouldn't have let you i shouldn't have let [00:58:32] Speaker 2: you go first there's another way to resolve that though and that is to have a billion people and not eight or ten or twelve and the interesting thing is if you asked a society to please have fewer children when they wanted more you wouldn't have a prayer unless you used force but we are going to have a dramatic sustained drop in our population by sheer luck we are the first generation in history who are deciding to have for perfectly good reasons a hundred good reasons we've decided to have fewer children and if we keep doing this we go out of business it's quite simple if you don't have 2.1 healthy well-educated children you're on your way out and almost nobody does in the developed world and even in sub-saharan africa baby production is falling like a stone it's just falling from a very high level falling from seven babies per mother to four they have lost more babies over the last 50 years than europe has it's just that they've lost them from a much higher level all right we're gonna have to leave it there [00:59:44] Speaker 1: but jeremy grantham thank you so much for coming on odd lots oh thank you for allowing me at least two minutes to talk about serious stuff joe i love talking about historical bubbles yeah me too and i guess i should like shout out some of our really old episodes at this point on very esoteric bubbles like the florida land the catfish bubble i did think the point about the change in the mag 7 stocks very yeah this sort of watershed moment this idea of a cage fight yeah on the white house lawn and uh i guess a change in corporate strategy where everyone is really tackling the same area of business [01:00:22] Speaker 3: yeah that was interesting no it's super interesting like you know 10 years ago you could draw a very clear line between what google's business was and say meta's business right you can't do that the same degree when both of them you know meta they're not right at the edge but they're trying to they want to be in the game as like a model maker they're also spending and or both spending enormous amounts of money on capital expenditures it's over like they really are like no longer the sort of dominance of their verticals but i have to say like his conversation there at the end and he's like well will the robots be our butlers on the beach or will they accidentally kill us or will they purposely kill us or will humanity extinct ourselves because we're stopped having having babies like yes it sort of does make you like why are we wasting time talking about p.e ratios like when these are like the big questions that we're like right up against yeah like why are we talking about p.e ratios ever how do i prep my portfolio for robot extinction very important always like the is kevin warsh gonna cut at his first interest rate like that will not very likely be a particularly important question or moment you know 10 years from now like that's probably not what's anything will hinge on that in the grand scheme of things that's true [01:01:39] Speaker 1: but again this sort of goes back to uh the big tech argument but if you couch everything in existential terms then you can justify anything right which is what we're seeing right now in big tech i realize i just uh naturally went from talking about the extinction of humanity back to big tech valuation so [01:01:58] Speaker 3: yeah i apologize for that you know it's interesting you know we did that episode about uh the history of rope uh recently and you know in that book he and he made the point on the podcast that um you know we went for about a million years maybe not i don't know if it's humans but maybe right before humans well there was literally one invention and that was the hand axe and then you think about like in the last few years alone between gpt and glp ones and evs etc and then jeremy was making that point like history was a little bit boring you know the 1950s like oh coke opened the new factory and that was news and now like and what that means is literally and um you know other people have said this like time is speeding up like there's just more events per day happening i'm tired joe i'm tired i'm tired but that it's good for the news business it's not so good for our producers all right on that note [01:02:52] Speaker 1: shall we leave it there let's leave it there all right this has been another episode of the all thoughts podcast i'm tracy alloway you can follow me at tracy alloway and i'm joe weisenthal you can [01:03:00] Speaker 3: follow me at the stalwart follow our producers our tireless producers carmen rodriguez at carmen armand dasho bennett at dashbot kale brooks at kale brooks and kevin lozano at kevin lloyd lozano and for [01:03:12] Speaker 1: more all thoughts content you can check out our daily newsletter you'll find that at bloomberg.com [01:03:16] Speaker 3: forward slash all thoughts and you can chat about all these topics 24 7 in our discord discord dot gg [01:03:23] Speaker 1: slash oddlots and if you enjoyed this conversation then please leave a comment or like the video or or better yet subscribe thanks for watching