GMO's Jeremy Grantham | Investing Legend Interview

In extreme lows like 1974, 1982, and March 2009, the market reaches what Grantham calls 'terminal paralysis' where fear prevents even aggressive action, yet these are exactly the times—only 5% of market cycles—when investors must force themselves to buy stocks despite panic.

“The market got down to seven PE and what I call terminal paralysis, sets in where you're so frightened you can hardly move. You can hardly get to work, forget to buy stocks and that's of course, as Warren Buffet would've said, that's exactly the time you have to do it and it's only 5% of the time, they are much quicker than the crazy bull markets.”

The Indian subcontinent has the best share of world arable land with practically the entire sub-continent being farmable under normal conditions, but temperatures exceeding 35°C (95°F) with humidity render outdoor survival impossible for more than a few hours as human internal organs cease to function; India recently experienced 45°C for three weeks (fortunately dry), and similar temperatures with monsoon humidity would be deadly.

“The problem is once you get over 35 degrees centigrade, which is about 95 Fahrenheit and you get humidity with it and you can't stay out more than a few hours and they recently had 45 degrees centigrade for three weeks, as you probably read, the hottest they have ever had. Fortunately it was dry as could be. Humans can deal with that because we sweat... but if it arrived in the monsoon season then people die”

The termites (speculative deterioration) entered the market much earlier than February 2022—peaking in new issues in January 2021, new issue outperformance in February 2021, ARK ETF in February 2021, and meme stocks (AMC, GameStop) a month or two later, with 40% of the NASDAQ already down 50% or more before December 2021.

“In January '21, the number of new issues peaked. In February, the out performance of the new issues peaked out and in February also ARC peaked... then a month or two later, the meme stocks with little on no earnings like AMC and GameStop, they peaked out... 40% of the NASDAQ before December 21, we're down 50% or more”

Low interest rates are globally associated with negative psychological effects on equity valuations—PE multiples compress when inflation rises and profit margins face pressure in the short term, though long-term holders benefit from inflation as real asset protection; this creates a painful adjustment period.

“The bad news is that psychologically inflation is associated with a negative, with a drop in PE from a psychological point and pressure on proper margins in the short-term and then it's adjusts, but it's very painful adjusting”

The US faces higher financial crunch risk from the current debt-to-GDP ratio (approximately 130%) in a high-inflation environment compared to the 1970s-80s stagflation when debt-to-GDP was in the 30s, making monetary policy tightening more dangerous to financial stability.

“Yeah, we run much greater chance of a financial crunch this time than we did in the seventies, a riskier world as if we needed that”

Companies engaged in decarbonization (electric vehicles, battery technologies, renewable energy) are heavily exposed to critical metal shortages (lithium, cobalt, nickel) and must rapidly develop substitutes, improve extraction efficiency, discover new reserves, or face severe constraints in scaling production 10-20 times current levels.

“Everything to do with decarbonizing the global economy is they're exposed to the incredible shortages of the necessary metals and it really is up to us to redesign our way around these bottlenecks before they get too bad... we're going to have to scale up 10 and 20 times the current fleet”

Potash (potassium) is a finite, non-renewable element essential to all agriculture with no substitute; 70% of the world's 150-year supply of phosphate reserves are in Morocco, and potash is largely concentrated in Belarus and Russia, creating geopolitical vulnerability and causing African food shortages when supply is disrupted by war.

“Phosphate is 70% in Morocco, 70% of all the world's hundred and 50 years of reserves are in Morocco... potash is very largely in Belarus and Russia... Half of the African countries are short of potash this year because of the war and the price has gone through the roof and they can't afford it”

The most easily correctable climate impact is methane leakage from fracking, pipelines, and landfills through regulation; methane is 100 times worse than CO2 in the short-term greenhouse effect, and pipeline systems (especially in Boston) are medieval and leak above 3% threshold, making natural gas worse than coal when leakage is included.

“I think that most easily correctable is methane leakage... methane as it leaks is in the short-term a hundred times worse than carbon dioxide... If they leak more than 3%, which almost certainly they do, then natural gas is worse than coal because methane as it leaks is in the short-term a hundred times worse than carbon dioxide”

Unlike the 2000 dot-com bubble where there was very little inflation, today's higher inflation (8-9%) moves the nominal fair value of the S&P upwards, which should be accounted for when estimating the real decline and fair value targets.

“There was very little inflation around in 2000, but this time with inflation running at eight or nine, it does move the nominal value of the S&P upwards and one shouldn't lose sight of that.”

All productivity gains since 1975 have flowed to the top 10%, with a disproportionate share to the top 1% and even more concentration in the top 0.1%; this means average workers see no benefit from economic growth and lack motivation to participate in labor markets.

“It's because we have had decent aggregate productivity, but all of those gains have flowed to the top 10%, a lot of it to the top 1%, et cetera and a lot of that to the top point mark. In a way, I think it's the 0.1%.”

The supply of younger people to care for aging populations is dropping steadily from now onwards for the rest of listeners' lifetimes, and the elderly are very resource intensive, requiring extensive medical and personal care that will be impossible to sustain.

“The supply of people to look after us old fogies is dropping steadily from now on for the rest of your life about, for sure... we're going to accumulate old people who are very resource intensive. They need a lot of medical care, they need a lot of people care and we're not going to have all that many people there.”

Investors prefer stable modest growth (2,2,2,2,2%) over volatile higher-growth patterns (6,-2,6 averaging 3%) even if expected values are equal, demonstrating that PE valuations are driven by comfort/psychology rather than earnings.

“They'd rather have 2, 2, 2, 2, 2% than six minus two. Even if that averaged three, they'd prefer the stable two.”

Heavy flooding is the most predictable consequence of climate warming because every 0.1°C temperature increase guarantees increased atmospheric water vapor, which increases heavy downpours (though not necessarily total rainfall); heavy downpours damage farming through soil erosion and are already occurring with increasing severity.

“Heavy flooding was always going to be the most predictable. Every time the temperature notches up a 10th of a degree centigrade, the air takes more water vapor... The only thing that guarantees, ironically is not more rain, but it guarantees heavier downpours and heavy downfalls do damage to farming. They erode the soil”

Quantumscape at its peak in December 2020 had a market capitalization of $55 billion, larger than General Motors and Samsung, despite being a research lab with four years until any sales or profits, making it a bigger speculation than anything found in 1929 or 2000 when adjusted for inflation.

“Quantumscape... came at 10 like all specs, went shooting up to 132. At 132, it had a market cap of 55 billion bigger than General Motors and bigger than Samsung... it still had four years to go before it had any sales or any profits and it sold for more than General Motors”

Birth rates have declined below replacement level in every developed country except Israel and China, creating absolute certainty that 20-year cohorts entering the workforce will be progressively smaller for at least the next 20 years, with China's decline being particularly dramatic (fertility rate dropped from sufficient replacement to approximately 1.4 almost overnight).

“The birth rate has crunched in every developed country except Israel and China... Every one of them has a population growth rate lower than replacement level... We know with absolute certainty, since they're alive already that the 20 year olds arriving in the market will be fewer and fewer for the next to 20 years”

The primary interpretation of commodity data is that not only was China's 30-year rapid growth a driver, but the world's best, cheapest, and most plentiful resources have been depleted and extraction has shifted to lower-quality second-tier reserves requiring significantly more energy and processing.

“the correct interpretation of the commodity data is that it wasn't only the China shock, the rapid growth rate for 30 years in China, but it was also showing signs that the best and cheapest, most plentiful resources had simply been mined or pumped and that we are running down into the second tier”

From 1900-2002 (102 years), real commodity prices fell dramatically from 100 to 30 (a 70% decline), providing enormous economic benefit; however from 2002 to present, real commodity prices have risen from 30 to 90 (a tripling), representing a major structural shift that has received insufficient analytical attention.

“In a hundred years it went from… Starting at a hundred, it went down to 30, a brilliant help for getting rich and then from 2002 until today, it's gone from 30 to 90, so over 122 years commodities are just about flat adjusted for inflation. Only 20 years ago, they were down at 30 cents on the dollar. This is a huge shift, hasn't been nearly enough fuss made about it”

Eating less red meat would have a huge climate effect as the second-priority solution after methane regulation, but implementation is extremely difficult because humans resist behavioral change even when it's for public good; the gap between human capability to solve problems and actual human behavior is the core constraint.

“Number two, of course if you eat more grains and less red meat, that has a huge effect... The trouble with that is expecting humans to change their ways. If humans were prepared to change their ways, we wouldn't be worried about climate change... Our big problem is the gap between what humans are capable of doing and what humans actually do”

Geothermal energy appears incredibly promising because the fracking industry has conducted tens of thousands of well experiments, developing advanced lateral drilling and rock-fracturing techniques that can be directly applied to geothermal extraction, and the heat from the planet's center is essentially infinite.

“Geothermal looks incredibly promising because the fracking industry has gone through the most amazing set of experiments, tens of thousands of wells, pushing, prodding, experimenting, shocking the rock using extra special mixtures of liquids to pump down and lateral drilling... if you could take all of that, which we can and apply it to geothermal... it would be almost surprising if we couldn't, at least in some parts of the world have a really economically viable source of energy”

China is achieving near-total control of critical green energy industries: 500,000-600,000 electric buses versus US 1,500; over 50% of global electric vehicle production; thousands of miles of ultra-high-voltage DC transmission lines; manufacturing of solar panels, solar panel materials, lithium refining, and cobalt refining.

“They have five to 600,000 electric buses and we have 1500. They make over half the electric cars... They have thousands of miles of high tech, ultra high voltage DC lines. They also control the manufacturer of solar panels, the manufacturer of the materials that go into solar panels, the refining of lithium, the refining of cobalt”

Housing saw the biggest year-over-year price advance in 2021 (20%) in recorded history and reached a higher multiple of family income than the peak of the 2006 housing bubble, creating significant downside risk as mortgage rates increased from 2.5% to 5.7-5.8%.

“Housing was chugging along okay, but last year it had the biggest advance, 20% in 2021... it went up to a higher multiple of family income, house priced divided by family income. Higher multiple than the peak of the housing bubble of 2006... the bottom of the mortgage was two and a half and it went up to 5.7, 5.8”

A simultaneous bubble across equities (especially growth stocks), housing, bonds, and commodities is exceptionally dangerous; Japan's experience from 1989 shows that recovery takes 33+ years, and the US housing bubble of 2008-2009 created severe equity-housing correlation that amplified downside pressure.

“You have bonds, housing, stocks and commodities. The only people who've tried that was Japan in '89, they're still not back to the price of the equity market. They're still not back to the price of the land and the housing market from 89, that's 33 years and counting”

Removing 2 trillion tons of carbon dioxide from the atmosphere over the next couple of hundred years is the absolute minimum required to bring atmospheric CO2 back to sustainable levels (300 ppm); the Grantham Foundation focuses venture capital entirely on biological and engineered carbon dioxide extraction because it represents the scale of the decarbonization challenge.

“2 trillion tons or more, that is the absolute minimum. 2 trillion tons absolutely has to be taken out of the atmosphere over the next couple of hundred years... The Grantham Foundation, that's all we do with our private investments, our venture capital. We have a team of half a dozen and all we do is focus on carbon dioxide extraction”

The US power transmission grid is medieval, fragmented into separate regional grids with poor interconnection (Texas had its own grid during the 2021 freeze and could not receive electricity from other regions), and insufficiently maintained; China has developed sophisticated ultra-high-voltage DC transmission while the US lags.

“Everything that matters when high tech transmission lines… My God, we have really medieval… We have three or four separate transmission lines. We couldn't send electricity into Texas, they had their own grid when they had that terrible freeze up and everyone was in danger of dying of cold. We couldn't send them any of our electricity because there's no grid and what grid there is, is antique and ill-kept up”

The US maintains structural advantages in green technology due to possession of world-leading research universities (15 of the top 20 globally versus 3 for Britain), which are critical for bench capital and pure scientific research that underpins green tech; the US also has a strong culture of spinning out research into capitalist enterprises.

“We're the biggest, the best we have the great research universities. Last time I saw a list of 20, we had 15 and the Brits had three that's practically a death grip... the willingness of Americans to spin out and become capitalist research engineers is profound”

The shift toward lower birth rates in wealthy countries is historically surprising when framed positively; it's not surprising when considering the true costs: children are expensive, require constant time and energy, consume education budgets, and limit life freedom, particularly for women who don't want to manage household and children.

“You could flip that around and say it was a major surprise that people chose to have big families. They're expensive, they take all your time and energy, they take all your money, fewer holidays to Borneo. I mean, the cost of education has gone through the roof... If you have three or four children, you need a million dollars of after tax money to get them through colleges et cetera”

CEO-to-worker compensation ratios have increased from 40:1 in 1965 to 300-400:1 today (exact ratio depends on calculation method), while Japan maintains approximately 40:1 ratios through social contract norms without formal rules, demonstrating the role of culture in limiting inequality.

“1965, it was 40 to one... In Japan, it was about 40 to one. Today, it's still about 40 to one in Japan. They have no rules. It's just the social contract... They thought it was unseemly to increase it much more from 40 to one. We've increased it 300 to one”

Ray Dalio expects internal conflict to arise in the years ahead as part of a broader shift toward a new world order, and this is already visible in bank runs in China, riots in Sri Lanka, protests in Italy, Albania, and Germany due to lack of food and high inflation.

“Ray obviously believes that we're entering into this new world order and he expects a lot of internal conflict to start arising in the years ahead but it's coming, I think maybe sooner than expected. As of today, we're seeing bank runs in China, we're seeing riots and protests in Sri Lanka. We're seeing Italy protest, Albania even Germany because of lack of food and high inflation.”

The 1970s stagflation was caused by multiple oil price shocks that triple-to-quintuple the price of oil over a short period, coming after 50 years of stable low prices, which painfully reduced growth and created inflation simultaneously.

“The seventies had problems with the oil crises. You can call it one giant crisis or you can call it two or three, but in any case a triple, quadruple, quintuple the price of oil. In a hurry... they shot up and stayed up for a long time and inflicted enormous pain on the system. They lowered the growth rate.”

Methane recovery from dumps can be economically profitable (positive return on investment) even if not the highest return that year, making methane reduction regulations the highest-priority climate action after fracking and pipeline regulation.

“Dumps also produce a lot of methane and you can use it, you can recover it. In most of that, recovery will make you money. It may not be the highest return on your agenda that year, but it's a positive return. You save it and you sell it. That should be pretty high up the list”

US wage growth for average workers adjusted for inflation has increased only 10-15% over 45 years while France increased 150%, Britain 60%, and Japan over 100%, demonstrating that US has failed to share productivity gains with workers while other developed countries succeeded.

“If you look at the increase for an hour worked, it's up 10 or 15% adjusted for inflation in 45 years. In France, it's up 150%... Even the lonely Brits are up 60%. The Japanese are up over a hundred”

The world has eroded 90% of its soil safety margin in major growing areas; historically there was a foot or so of extra soil buffer, now only an inch or two remains, and soil is being lost at approximately 1% per year, leaving only 40-70 years of viable agriculture under current practices depending on location.

“We have eroded 90% of our safety margin. We have sufficient soil in the great growing areas, but we only have an inch or two extra where we used to have a foot or so extra, so our safety margin has been used up and we are losing it at about 1% a year. Depending on where you are, we only have 40 to 70 years of good agriculture left”

Higher interest rates are globally beneficial because they reduce speculative leverage, prevent overextension of home purchases, and allow savers to earn meaningful returns; the current low-rate environment prevents young people from entering the housing and equity markets as they cannot afford purchases after rate increases.

“The world is much better off with moderately high interest rates. You get money on your savings, people don't speculate as much, they don't leverage as much, the risk in the system declines and you can afford to buy a house at lower prices... At the moment at the peak in December, if you're young, you can't get into the game. You can't buy your first house, you can't buy an equity portfolio”

The Fed's demerit is that it kept interest rates too low for too long, dangerously increasing inequality by allowing leverage and financial engineering to benefit the top decile; inequality is the greatest poison in the system and has damaged economic strength and contributed to declining growth rates.

“D merit accrues from the fact that it kept on pushing down interest rates far too long and dangerously increasing inequality which is, I like to say the greatest poison in the system these days. The degree of inequality we have in the US now it does damage the strength of the economy”

Climate scientists have historically been overly conservative in their public statements about climate change due to political pressure and desire to protect scientific dignity; the IPCC's latest report represents a major shift in tone, explicitly stating 'we are losing' and describing a 'closing window,' finally matching scientists' true beliefs about catastrophic risk.

“Nine years ago, I got a commentary in Nature... The commentary was aimed at the scientist being so wimpy and it said, 'Be brave, be arrested if necessary, be honest you guys, you're being much too conservative.'... The tone has completely changed. The UN's Report, the IPCC the last one, a few months ago it contains an opening salbo that says, 'We are losing. We are working in a closing window'”

Cultural differences in civic engagement and social trust explain different responses to shared sacrifice: Japan reduced electricity consumption 25% on request and maintained that reduction 12 months later, while Americans reduce only 6% initially and return to baseline within a year, reflecting stronger Japanese social contract based on Confucian/Buddhist respect for authority and neighbors.

“The Japanese are brilliant at it. If you tell the Japanese to use a little less electricity because there's been a crisis, electricity will drop 25% the next day... If you ask Americans, it would be down 6% the next day and in a month it would be down 4%. In a year you wouldn't be able to see it. This has to do with the social contract... the Japanese... tend to be naturally and more respectful of authority... It is just part of their culture”

Voluntary population decline in wealthy societies is historically unprecedented and provides a necessary (though not sufficient) condition for avoiding catastrophe; the planet cannot support 10 billion people for 100 years under any circumstances and would need 2.5-3 planets, but could potentially support a couple of billion more gracefully.

“we are likely to have over the next couple of hundred years, a declining population and we have some chance that, that will be a great help. It isn't a sufficient condition, but it is a necessary condition. The planet, under any circumstances could not support for the 10 billion that one reads about all the time for a hundred years, it can't be done. We would need two and a half to three planets”

Making enemies of China is strategically risky without ensuring energy and supply chain independence; the US has not adequately ensured it can operate without Chinese lithium refining, cobalt refining, solar panel manufacturing, and other critical green technology inputs.

“If you make an enemy of China, you should be well-advised to make sure that you can get by without their goodies. I'm not sure that we have done that”

Labor force participation in the US has declined significantly from 2000 and is now lower than European countries despite the US being typically high-participation; this represents a true measure of unemployment (the fraction of population working), suggesting the US has higher true unemployment than Europe.

“In 2000, we had about as high a participation rate as anyone on the planet and since then ours has come down, the Italians and so on, have gone up. We have one of the lower participation rates, which is really the definition of unemployment. How many people do you have? What fraction are working? The rest are in a sense unemployed... We do not equal the EU... we have more people not working than Europe does”

Milton Friedman's doctrine of maximizing short-term profits is effectively 'sociopathic capitalism'; if a human adopted a policy of maximizing only short-term personal benefit, we would label them a sociopath; this is the model that dominates modern corporations.

“Milton Friedman is basically advocated to sociopathic capitalism, your only responsibility is to maximize profits, which is interpreted as maximizing short-term profit... It's just not a good business policy to maximize short-term profits... If a human being adopted that policy, 'I am only interested what's in it for me,' we call him a sociopath, that's it. We have sociopathic capitalism for the time being”

US equity valuations show 'double jeopardy'—abnormally high profit margins combined with abnormally high PEs, representing a dangerous combination because both can mean-revert simultaneously, with profit margins being especially vulnerable to recession.

“We have very abnormally high profit margins, rather disappointing growth and abnormally high PEs. This is known as double jeopardy because we know what explains Pes”

The first four months of 2022 marked the fastest decline in the S&P 500 since 1939, demonstrating extraordinary market momentum to the downside.

“the first half of this year is about as fast as stock markets ever declined. I remember seeing that the first four months was the fastest decline in the S&P since 1939, when I was one year old and they were preparing for World War I”