Deflation is a terrible thing. Inflation you could tolerate to
trade anything as a trend. You think about Bitcoin. I don't Think it's a currency. I think it's a commodity today wherein
that everything Bob. I'm Erik Schatzker and welcome to an on call edition of
Bloomberg's Front Row. Jeremy Grantham has been investing for a Half century and calling bubbles for almost as long. He's a
living legend in financial markets. A year ago Jeremy predicted The pandemic rally would end with a historic crash. Here's what
he told me. When you have reached this level of obvious super enthusiasm the
bubble has always without exception broken in the next few Months not a few years.
Things didn't play out that way. In fact the S&P 500 gained Almost 27 percent. So I had to check in with Jeremy again. Had
he changed his mind. Not one bit. Jeremy says U.S. stocks are in A super bubble only the fourth of the past century.
Super bubbles can really wipe you out like 1929. That's where we are now.
As you might imagine I had a few urgent questions for the Co-founder of Boston's GM. What should investors do now. How
worried is he about inflation and Fed policy. Cushion the blow. Is he still a crypto skeptic. Here's my conversation with Jeremy
Grantham. Jeremy a year ago you predicted an epic collapse in stock prices
and you told me it would rival the 1929 crash and the dot com Bust of 2000 2001. Were you wrong.
No I don't think so. I noticed reviewing it last night that there was one little
element of contradiction. At one stage I said you can't call These events to within a few months. And at another point I said
history says that when you reach this level of craziness the Market tends to break within a few months rather than a few
years. And I think with hindsight. The markets started to get distinctly weaker about 10 months
after we talked. So that's a few months plus a little bit all the same. Twenty
twenty one was a great year for stocks. If I'm not mistaken the Seventh best in a half century. And this has been.
Exactly how the great bubbles have broken the blue chips. The S&P 500 have kept strong right up to the last second and wave
after wave of the stocks that had made the real running peel off And drop.
In 1929 the flakes. We're down for the year before the market Broke they were down 30 percent the year before they'd been up
85. They had crushed the market. The really classic example of This is the Russell 2000 which is stop number 1001 to 3000
multi-billion dollar companies. They're a serious enterprise. In The last year
they are down. They have not made any money at all. The S&P has Made 23 percent. The Russell 2000 is meant to go up about one
point two times the market in a bull market. Like you're saying There was it should have been up about 30 percent. It wasn't
even up recently. Since this is a huge divergence of a kind that has never
happened other than the super bubbles of 1929 And 2000 2000 you may remember the growth stocks peeled off and
were down 50 percent. The S&P was flat which meant the remaining 70 percent had risen 20 percent. This is an enormous divergence
and it happens on the upside for the blue chips. So this is Absolute. It's almost eerily classic. It's a pattern. It's a
pattern. It's a very rare pattern. And we have been checking off This list all year. When they sat down a year ago we had seen
the accelerating phase that you need in a bubble. That had taken place last year with the
Nasdaq up over 100 from the low but also up 58 percent from December of 2019. So even granted that Covid decline it was a
hell of a year it was a year of acceleration. And the Nasdaq has
Started to weaken relative to the blue chips. The Russell has
started to weaken much much more so even than NASDAQ At the risk of putting words in your mouth. You are as certain
as you were then if not more. I would say clearly more.
I. I did freely admit not in our conversation but elsewhere that I
wasn't quite as certain about this bubble. A year ago as I had Been about the tech bubble of 2000 or as I had been in Japan or
as I had been in the housing bubble of 2007 I used to think that in terms of near certainties. This time I
felt highly likely but perhaps not nearly certain. Today I feel It.
It is just about nearly certain. The hallmark of a bubble.
Is what you have termed. Crazy behavior.
What would you point to today right now as further evidence of Crazy behavior. I think the crazy behavior.
The peak of crazy behavior is behind. I really do.
I think We're now in the buy the dip mode which the super bubbles
specialize in. You don't have two years of buying frenzy dying Overnight typically. So even in 1929 you had some magnificent
rallies. And by the dip is the watch word of practically every brokerage
house out there and it always is. You never. Almost never have a major brokerage house say the game's over.
Guys duck. It doesn't happen. The commercial imperative is Overwhelming to stay bullish. That's how you make money.
If you're right. And stocks are in a multi sigma deviation from the statistical
trend. Tell me what happens. The S&P 500 peaked at almost eight Hundred points.
What is the bottom. The trend line being slightly generous is twenty five hundred.
And most of the great bubbles the super bubbles go below trend And stay there for quite a while.
In the Greenspan era that tendency stopped in 2000. Yes the Nasdaq came down 82 percent which was fairly brutal. Amazon came
down 92 but the Federal Reserve raced to the rescue so loudly And strongly that they stopped the decline in the S&P a trend
line. It only declined 50 percent. 50 percent is a hell of a big Decline but it was only enough to get it back then to trend this
time trend is at most twenty five hundred. And I would expect Even if the Federal Reserve tries to do the same it will be hard
to prevent the market from declining to that level. We're talking about a decline of certainly from the peak of
almost form over 70 percent and of course a decline very quickly 50 percent in 1929 a decline 50 percent in three years in 2000.
And the housing market which was another great American super Bubble went all the way back to trend in three years.
Jeremy it's one thing to predict a collapse in stock prices. It's another altogether.
To tell investors they should sell. Should they. As I said a Year ago I think I think they'll do pretty well by selling. I'm
sympathetic to how difficult it is to get out entirely out of Equities. And I would point out as I did last year that there
are less overpriced parts of the equity market around the world. In fact everywhere is less overpriced in the US. The US is the
peak of this bubble as it was in 2000. And what it meant then is what it will mean today and that is
the U.S. will decline a whole lot more than the rest. It's also True that the value end of the spectrum as opposed to the growth
that is about as cheap as it gets. So if you can combine those By buying value stocks outside the US I would say particularly
emerging markets. But there's quite a few countries Japan the
U.K. where the markets are if they're overpriced they're only
moderately overpriced. The US is not moderately overpriced. It Is shockingly overpriced. You and I have talked about the perils
of shorting single name stocks. Dangerous business. But given Where things are and your level of certainty would you short an
index. Would you short tech stocks. Would you short the S&P 500. Personally
as opposed to GMO in the foundation we have for the protection Of the environment. We are indeed short a decent amount of
Russell 2000. So we haven't been hurt in the last year which is Amazing. We're also sure to about half as much again as in
NASDAQ which did hurt us but not sensational. And the point There is a lot of our money is in venture capital. That's very
growth. We need some hedging and. If we weren't exposed to a large amount of growth stocks I
suspect we would skip. The hedging we would skip going short.
In any case I would never shot an individual name. I would only Shot a broad index and the indices I would shot if I was up for
that would be the Russell 2000 because they have a high density Of flaky companies that aren't making any money. And and the
NASDAQ which also has a high and high percentage of companies Not making any earnings at all. What makes the NASDAQ more
complicated is that it has these remarkable fang stocks in it And.
That that makes life complicated. What if I'm a long term Investor. Say running a pension fund or managing my own for a 1
CAC which I should add I don't. But what if I'm one of those people and I look at history and
history tells me that over time independent or including Crashes.
Stocks deliver a handsome return and if I just stay in the Market I'll get that return whether it's 7 percent or 8 percent
or 9 percent or 10 percent over time. You know if you could set your dial for 50 years and.
Throw the key away that might make some sense. Let me remind you That in 1929 you didn't get back in real terms until about 1954.
That's a long wait. In 2000 you didn't get back for 13 years.
By modern standards that's a pretty long wait. And in Japan which is really the granddaddy of both bubbles land
and stocks they are not back to their 1989 peak. Today. That is a very very long wait.
So if you think you can stand it for 10 or 20 or even 30 years. Be my guest. But history says a lot of you will not stand it. A
lot of you will become more conservative deep into this kind of Correction. And what about.
The real sour grapes critics the ones who say you're just a Broken clock. That's only right twice a day. We have a
relatively humble Measure of success and that is at some future date.
If you got out when I said get out you will be glad. It doesn't Mean you won't suffer. In the meantime but at some future date
you will be glad that worked in Japan. We were very early. But if you'd gotten out when we got out and you'd suffered as
the Japanese market went up you would still have made and saved A lot of money on the round trip. The same in 2000. We were
basically recommending that you ease up on on U.S. equities by Mid 98. And that was a hell of a rally. And that was brutally
painful. But it was still a level where you made tons of money. By 2002 the market was much lower than that. Why doesn't getting
out mean. For GMO included mean liquidating going to cash.
I think commercially it's too extreme to be brutally honest. And secondly if you can execute.
The strategy that I described there is a really respectable Chance that you will make money.
You say that the bubble you described back in January of 2021
Has further inflated into a super bubble.
And I'm curious to know I think others would be too. What's the difference between a standard bubble and a Super
Bowl. A standard bubble we defined over 20 years perhaps 25 Years ago as a two sigma statistical event. It's just a measure
of how much of an outlier you are. So you have a historical deviation from trend. Yes you have. You
have a price series of the S&P. You can calculate a trend. Statistics one to one is not difficult and you can work out how
far away from trend you are in a two sigma is the kind of Deviation that should occur every forty four years. And because
we're a little wilder and less efficient than we should be it Occurs every thirty five years. It's not that we meaning human
beings we base species IBEX as a species every thirty five Years. It was a little closer than I expected back then but
every thirty five years feels about right. One a career twice a Lifetime that feels like a pretty decent definition of a bubble
and a three sigma should occur every hundred years. Now we. As I like to say we do crazy pretty well as a species so they
occur much more two or three times more often than they should. They they are out of kilter much more than than two sigma. So
two sigma you can have some fairly standard bubbles. They they They give you a certain amount of pain 30 40 50 percent pain.
Super bubbles can really wipe you out late 1929 And.
That's where we are now. We ended a few months ago into three Sigma territory super bubble territory and the other great risk
is. Last year we also entered bubbles in real estate. So this is A very dangerous year that we've just had. If the super bubble
bursts as you predicted will what happens. What happens to the Economy.
What does history tell us. Some bubbles are very specialized to US growth stocks like 2000.
And they and they hurt. There is a wealth effect. People lose Money. They pull back on their spending but they don't hurt
anywhere near as much as when you combine that with a housing Bubble. So in 2008 where we had the only housing bubble in
American history that burst and the stock market came down 50 Percent in sympathy then you're talking serious damage to the
economy through the income effect. Because this time we have as A multiple of family income US housing suddenly is more
overpriced than it was ever in the housing bubble of 2006 to 2008. And they got bad this last year. Since we last spoke the
biggest increase 20 percent that the US housing market index has Ever had has taken it to a new high. And they are in the US
still much cheaper than Canada Australia New Zealand. London Paris et cetera. So that is a global event that could
cause enormous pain. So we have a housing problem. We have a Stock market bubble like 2000.
We have overpriced commodities. Oil is eighty eight. And we have of course the lowest real rates in the history of
man. If bonds are overpriced.
And stocks are overpriced. Does that make the traditional 60 40 Balanced portfolio useless absolutely useless.
For years investors have taken comfort in the notion of an Implicit put anytime the market stumbled. The Fed would
effectively bail it out with a rate cut or more recently by Injecting liquidity.
The Greenspan put became the Bernanke put which became the Yellen put. And finally the power output.
Does inflation and the handcuffs that it puts on monetary policy Eliminate that implied option.
It complicates it and yes it limits it. It probably does not Remove it because of inflation. Yeah. And because of low rates
and now you don't have the tools that Greenspan had. But Nike was more limited. He needed a lot of help from from
Treasury.
From government spending. And what about now. Now you have a
much higher ratio of debt to GDP. You have much more debt on the Balance sheet of the Federal Reserve and you have much lower
rates. They will try. They will have some effect. There is some Element of the put left. It is just heavily compromised as you
suggest. How worried are you about inflation. I haven't written about inflation for 20 years.
When I did quarterly letters I never featured inflation. I didn't think it was on the radar screen. It is now on the
radar screen once again. It's not that inflation will go roaring back to 1972 1982.
Instead it will always be part of the discussion from now on. In My opinion instead of forgetting about it it will be spiking and
irritating and falling back and then spiking again. It will be Part of the scenery in the way it used to be in the second half
of the 20th century. There's a lot about this economy. I think that will be dragged back into the late 20th century.
We've had a very very abnormal honeymoon Goldilocks period for 20 years which I think is ending. Let me put it this way. We're
in the early stages of running out of raw materials of costs. We Live on a finite planet. There's only a certain amount of cheap
oil. Cheap nickel cheap copper. And we're beginning to hit some Of those boundaries. And we're going to have bottlenecks here
there and everywhere. The food price index of the UN is about as High as it gets. Growing food is not getting easier. Climate
change is coming with heavy floods. Serious droughts and higher temperatures. None of these make
farming easier. So we're going to live in a world of bottlenecks And shortages and price spikes. And we have to get used to it
and learn to manage our way around. So commodity prices that People perceive to be high right now may yet go quite a bit
higher. I think so. And it may well turn out that owning Commodities or oscillate to commodities will be something of an
escape valve. Commodities have a long history of doing quite Well when inflation picks up for obvious reasons. And inflation
is quite likely to pick up. Looking out into the future it is Pretty clear that we are running out of labor. Fertility rates
have dropped like a stone. China is reeling from the shock of finding that it has ten point
eight million babies last year. It's only the other. The other Year seven or eight years ago it had 20.
And this means absolute certainty that the cohorts of 20 year Olds coming into the workforce will will be smaller. Going
forward everywhere everywhere in the developed world we're below Replacement fertility. You know the universe of professional
investors as well. Is there anyone out there whom you expect to Navigate these waters. Well. I think there's quite a few.
Hedge funds that have a style of making a one hundred small bets A trading.
Gas prices against diesel prices and Brent oil against Texas Oil. They do a thousand arcane little relationships. They're all
independent of the market. If they do it well they'll make a few Percent maybe even quite a few percent. And there will be some
enormous dynamic moves in resources. The Federal Reserve is Confident that it can contain inflation with a series of
incremental rate hikes. What do you think it'll take. I think The Fed absolutely does not get.
The pain that's involved with a bubble breaking you can see that In the history of the last. 50 yes. Greenspan encouraged.
The tech bubble. He bragged about the productivity gains from the Internet that
would last forever. Actually productivity has declined slowly But surely since then.
When it broke it caused a lot of pain. But Nike learnt nothing. He encouraged the housing bubble. He denied its existence even
though it was a three sigma one in 100 year event that had never Occurred in American history before. And what have we learned.
We just went straight back into the game overstimulating pushing
The rates down down and down. They have gone for 50 years. So
they started at 16 percent on the long bond. And now the real Return you would get is minus two. You've been a longtime critic
of Alan Greenspan. That's true. You're a critic of Ben Bernanke. And I suppose by extension Janet Yellen to. Do you have any
confidence in the current chairman Jay Powell. No. No he hasn't expressed any reservations about the Greenspan
Bernanke Yellen. Powell policy of pushing rates down. They act as if a low rate
is a panacea and comes with no downside. That is clearly Nonsense. It's created I think the biggest evil in our society
and that is inequality. If you drive up the price of assets Systematically and it's bound to happen if you drive the rates
down to negative territory. Who do you make money for. You make money for the people with
assets who owns the assets. The top 1 percent has 35 percent of All the assets. The top 10 percent have practically all the
assets. What are the what's the asset ownership of the bottom Half.
A rounding error. Practically none. So you mark up the assets And that that's your contribution contribution to society. What
you're doing is pushing down on labor pushing down on the bottom Half with no offset from increasing their assets since they have
not. And you're making the top 1 percent ineffably rich. And the Data bears that out. Right down to the last two years when the
top point one percent has doubled its wealth during Covid. And the bottom 50 percent. I can assure you has not doubled its
wealth. The dominance of a handful of firms has increased Steadily in most subsets. And so profit margins have gone up and
the power of corporations has gone up. And they've been able to Use more of their power in influencing government. And they
have. There is a lot of regulatory capture where people from Business tend to run the agencies that regulate the industries.
So it's been a wonderful time to make money. The corporate System and the share of GDP that goes to corporate profits has
steadily risen and the share going to labor has steadily fallen. This makes it a dreadful cousin with with the asset class
inflation that we've had. They both have two things in common. They make the rich better off and they make the working class
worse off. And that I think is the great poison at the moment in the
American system. If we do not address rising inequality we will Be in real trouble. We are the least equal society measurably in
the developed world. We have the least fluid economic mobility For heaven's sake. You know when I arrived in America.
In the 60s it was a joke. How rigid the UK was. The UK is now Less rigid than the US. The number of people moving from the
bottom quarter to the top quarter in a lifetime. Is half of what it is say in the Sweden's of the world. In the
US we are the least mobile. I mean this is so un-American. It is So far from what people believe to be the case. But check it
with the least mobile with the least equal society. And it it's A poisonous influence. And we have facilitated it. We have moved
to the taxes on capital. Capital gains tax dividend tax interest Tax. We've moved them down. And by definition the amount that
has to come from income has gone up. Here's what some of those Rich people are doing.
Institutions family offices. And most recently retail investors Have been plowing money.
Into private equity private credit growth equity. And more and More venture capital. And they believe they're going to get
superior returns with lower volatility. Is there safety in Private markets.
I like to draw a very clear line between venture capital and Everything else.
Private equity is just another form of money management. Your shuffling the existing pieces of paper around. If you make
money someone else loses. And to do it well is exciting and
Useful for your clients. From a society's point of view you
don't add a lot of value. Venture capital is completely Different. Venture capital facilitates and expands new ideas.
Innovation change all the things that we will need to deal with Climate change to deal with inequality to deal with future to
deal with progress. You need as many innovations as you can get And venture capital does. And America does venture capital very
well indeed for many many years. The venture capital industry Was dominated by a handful of powerful Silicon Valley based
firms that Kleiner Perkins is the Sequoia is the benchmarks the Andreessen Horowitz is. Increasingly though it's a playground
for hedge funds. Tiger Global being the most prominent example. Is that a
good thing. A healthy development. It's like many things. It's Good and it's bad.
The bottom line in climate change in particular is that the sums Involved are colossal trillions of dollars have to move.
And. Yes I think there's something to be said for Simon pure
specialists in venture capital who do terrific research and et Cetera. But in the end we need money. So we welcome. I welcome
the hedge funds. I welcome the new people who make investments Very quickly. I'm very light research. And of course there's a
bubble element to all that. And some of it will be priced Much more highly in the last few months than it will be sometime
in the next couple of years as the bubble fully breaks. But in The end look back at the Amazons. Look back at the Internet
bubble. There was a lot of money wasted but my God did push it did push
along the technologies of the Internet and it was the US who Emerged with the Amazons and the et cetera. The a wealth of that
of that era. Jeremy I'm curious to know if In the 12 months since we last spoke you've changed your view on
crypto currencies. I have to spend a lot of time in the last year on crypto
currencies. They may not be good for buying groceries. They may Not be a store of value. They may be highly correlated with the
speculative stocks. They may have come down 40 50 percent. Like The spikes but they do something. Way over my head to
understand. Do you buy the argument that there is an important Difference between Bitcoin on the one hand and at least a couple
of other crypto currencies on the other. And I'll name them a Theorem that's a block chain. Ether is the coin and Solana and
the difference and I'll do my best to articulate it is that Those other block chains are actually building blocks for new
businesses that will prove to be revolutionary because they will Eliminate things or help to eliminate things that I suspect you
don't like. Transactional friction in the banking system and Rent taking that remains embedded in legacy financial
institutions. So the question is is there a technology block Chain that will turn out to be very useful whether done by
corporations and governments and everybody else. I am sure the Answer is yes. There is a useful technology et cetera et cetera.
Does this justify trillions of dollars of perceived wealth. No it doesn't. It might amount to trillions of dollars of wealth
eventually if they can find a usefulness for it when it's Integrated into the economy.
It will perhaps facilitate facilitate productivity. Like many Ideas do.
Very few ideas of that kind floated around and were capitalized At trillions of dollars even though they had an enormous impact
on the economy. BLOCK chain should be like one of those. So maybe not quite as much of a crypto skeptic. You could say
the Internet by the way the Internet has created enormous value But it didn't float around Internet units.
Which were capitalized and became worth trillions of dollars. And I admire them for not doing that. They deliberately went out
of their way to make the Internet and a facilitator and not in a
Way of amassing money
in itself. You like green as a theme. Are there any other themes or trends that you're willing to bet
on. I tell you what I think about the future and that is the green
will turn out to be just a subset of a bigger more comprehensive Issue and that is loosely speaking living within our means.
We have simply shot way beyond the long term capacity of the Planet to deal with us. And one of the problems is waste. And
this is not just climate change and greenhouse gases but of Course plastics. It's also poisons. We generate so many toxic
chemicals that there is strong indication that. The planet is really not conducive to life. We are killing off
our insect life. We're killing off all manner of animal life. The world can do just fine without her Miss RTX. But it can. It
can't deal without insects because of a cascade effect. All the Little critters that insects all the birds that eat insects all
the amphibians etc. and they begin to go out of business and Then the things that need them and the plants that needed them
to. To be fertilized.
One thing after another goes out of business and so nature is Beginning to fail.
And in the end if we don't fix that we begin to fail as well. And we see that in the toxicity numbers. Human fertility is
going to hell. We have one third of the sperm count that we have at the end of
World War 2. This is not impressive. Mostly we were over engineered so we get
away with that. But in the last 20 years we've gone from young Couples needing help. A rounding error to maybe 15 percent of
every young couple in the US now needs help. And that say more Or less a global problem. So green investing isn't just the way
they make money it's an existential necessity. It's an existential necessity. And it's part.
Of a bigger problem living beyond our means we use up our Resources. We put too much pressure on the natural environment.
We poison the natural environment and. In that sense it's a lot bigger issue than climate change
writ small. Thank you again. Very difficult. Yes it's a pleasure. Pleasure's
mine.
