What this covers
March 2023
0:00 Intro 2:31 Great Bubbles 10:15 Presidential Cycle 14:50 Future Scenarios 19:05 Int'l Housing Bubble 22:30 SVB Failure "Expected" 24:40 The Everything Bubble 26:14 Long term is now 26:40 Factor 1 - Climate change 27:26 Factor 2 - No more cheap resources 32:30 Factor 3 - Population shocks 38:08 Climate change investing 39:40 Shortages 41:52 Green VC 42:30 US economy in sad state 45:00 Wage inequality 46:55 Investing in a recession 52:07 Currencies 53:00 Gold and the "economic reckoning" 54:40 Drivers of PE 56:08 Inflation and PE 59:20 SP500 targets 1:00:45 "Screaming" data 1:01:50 Debt and Bubbles 1:07:00 The worst is yet ahead 1:09:40 Have a battle plan 1:10:40 Rosenberg on timing 1:11:40 Closing
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Grantham argues that the 2021 bubble was a superbubble comparable to 1929, 1972, and 2000 that must unwind painfully through a 'meat grinder' period, compounded by three long-term structural headwinds (climate change, resource scarcity, and population decline) that are now biting simultaneously, making a severe recession and extended bear market inevitable despite the presidential cycle providing temporary support.
- All superbubbles follow an identical pattern: extreme speculation, rapid unraveling of growth leaders, rallies, then painful fundamentals adjustment—2021 showed classic superbubble markers (high beta collapse, meme stocks, extreme valuations)
- Long-term factors (climate damage reducing GDP, resource costs rising 3x due to diminishing returns, demographic bust in developed world and China) are now manifesting simultaneously for the first time
- P/E multiples should compress to ~17 from current 27 based on deteriorating inflation, profit margins, and stability inputs, implying S&P 3000 base case or 2000-2500 if long-term factors bite harder
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Resource scarcity represents a paradigm shift from a 100-year trend of declining real commodity costs (1.5% annually down 70% by 2002) to rising costs driven by diminishing returns (miners drilling deeper, mining lower quality ore) outpacing technology improvements; the index of 35 equal-weighted commodities went from 100 in 2002 to 33 by 2011 and back to 91 by December 2022, tripling over the past decade
“so then it it promptly it promptly broke for a few years as China slowed and the weather improved in the grain growing areas uh but but then it regrouped again for a hundred years it had been trending down persistently it had dropped over a percent a year it was a 70 decline in the cost of the average resource...but in 2002 something happens and a large chunk of it is China who tries to grow the first time in history a giant economy increasing its demand in six seven eight percent a year...my colleague and I believed that there was a very high probability that the game had changed that there had been a paradigm shift in resources...for a hundred years the technology had been growing at something like three percent a year and the and the diminishing return effect of drilling a deeper wells and and Mining lower quality or were was adding a couple of percent so it was minus two plus three and Technology was winning and we thought there was some reason by 2011 to suggest the opposite and that is if anything the diminishing returns was adding a minus three and the technology if anything had backed off and and was more like plus one or two and so suddenly the cost was Rising and our index went from 100 to 33. not bad in 2002. and today or last December anyway was a little over 90 91. it had basically tripled um this is a different world that we've been living in on on in in the case of resources”
Following superbubble breaks, a January bounce-back rally is typical and predictable, occurring when tax loss selling ends, Christmas bonuses arrive, and investors hunt for bargains; this pattern appeared in 2001 and 2022 and should be expected every 10-15 years
“and incidentally to get ahead of myself then of course they rallied in in the January bounce back of after tax lost selling when you've gone down to 5.1 you've got a lot of tax loss selling to do then you have the money you have your Christmas bonuses and you look around for your Bargains and in those years every 10 or 15 years you get a a you should expect a terrific January bounce quantumscape went up 120 percent and Kathy Woods probably went up 40 some of the meme stocks went up 50 to 100. it's what happens it's what happened by the way in in 20 uh in in 2001 following the Great Tech route of 2000 it was a heck of a January rally including on on the second trading day it went up 14 the nasdaq's still it's the biggest one-day rally it finished up 12 for January”
The average American worker has received no wage increments since 1975 (adjusted for inflation, perhaps up 10% at most), while French workers are up 150%, British up 60%, and yet US GDP growth over 50 years is comparable; all extra money has flowed upward to the rich, making the situation counterproductive long-term
“the average worker in the US has not received any increments since 1975 maybe up to 10 maybe nothing adjusted for inflation and the Dopey French whose bottoms we have been kicking for this 50-year period uh are up 150 percent and um which is pretty remarkable...the Dopey Brits are up 60 and the Americans are up zero and yet the GDP has been a little bit less in the US uh over the 50 years a little bit more over the last 15 and and not that far behind anyway in the 50 years so what has happened well it is undeniably the case that all of that extra money has flowed upwards to the rich and the average worker has had no benefit and 50 years is a long time to have no increment in an hourly work in an hour's work”
Every superbubble is followed by a recession with no exceptions; if handled well (housing and bonds both cheap as in 2000), you still get mild recession with NASDAQ down 82%, S&P down 50%, and 'terrible wipe out of the specs,' but if multiple asset classes bubble simultaneously or policy is poor, the damage is far worse
“the big picture is we have a little handful of these super bubbles every one of them is followed by a recession right that's pretty simple if you get anything really wrong like 1929 it's followed by depression if you mess around with the financial system you have the terrible happenings of the great financial crash but if you do everything more or less right if the housing market is just fine actually cheap in 2000 the bond market is very cheap in 2000. you're really trying to make life simple you still have a mild recession and you still have the NASDAQ go down 82 percent you still have the s p go down 50 even though Greenspan is roaring in to help it to cushion the pain to make life friendly lots of moral hazard lowering the rates and still it goes down 50. so the big picture is you always get a recession you always get a terrible wipe out of the specs and and you get a pretty hefty decline in the s p and if you do anything gratuitously worse than that like having a bubble in more than one asset class or messing up your economic policies or your financial policies you will do worse”
Babies born this year globally will be about the same as 2000 despite massive increases in African births, because developed countries and China have experienced a decline in births for the first time in hundreds of thousands of years; this population bust is absolutely certain for the next 20 years as cohorts already born will enter the workforce
“there is a population burst in the developed World Plus China the like of which you can't imagine that the baby's born this year will be about the same as 2000. despite a massive increase in the baby's born in Africa because there's been a steady decrease in babies born everywhere else for thousands of years hundreds of thousands of years the general population of babies has been increasing very slowly at first very rapidly since the Industrial Revolution and now for the first time it's going back and it is absolutely guaranteed the next 20 years we will have fewer young workers 20 year olds presenting themselves to the marketplace because we know that one of the rare things in economics that is certain because they're already born and the baby cohorts have been getting less for 20 years”
Great bubbles are fundamentally different from ordinary bull markets and exhibit two-and-a-half to three-sigma statistical properties, including 1929, 1972 (honorary member), 2000 tech bubble, 2006 housing bubble, 2021, and Japan 1989 as the 'mother and father of all bubbles'
“the most important principle to me is that the great bubbles are quite different from ordinary bull markets and if you if you average in the others you get a lot of dilution and you missed the point the great bubbles most of them two and a half Sigma or three sigma events are 1929 1972 is kind of an honorary member on on the cusp 2000 the Great Tech bubble a beautiful one the most symmetrical of all is the housing bubble of uh oh six three years up three years down perfect and um and this one uh let's call it 2021 and and of course the mother and father of all bubbles uh Japan 1989 in both the real estate land market and and the stock market”
Superbubbles are preceded by long periods of perceived nearly perfect economic growth, profit margins, and investor confidence where leverage increases significantly, people begin cheating and creating Ponzi schemes, and people buy stocks because they're going up rather than based on fundamentals
“they all get there after a long period of economic growth economic conditions that are perceived at the time is nearly perfect profit margins nearly perfect investor confidence more than perfect absolutely in full screaming blossom where people are buying stocks because they're going up and and forgetting about fundamentals where leverage has has gone up a lot and where people have started to cheat and weasel more than normal because they can Ponzi schemes have taken root here and there”
South Korea leads global fertility decline at 0.8, halving its population more than half per generation; Japan is at 1.3, China at 1.3 with additional crisis of sex ratio imbalance from two-child policy creating shortage of fertile women; China faces a shift in population profile with no precedent in speed or scale
“fertility rates need to be 2.1 in South Korea leading the pack was 0.8 last year which halves your population more than half your population every single generation of babies are quite remarkable Japan is about 1.3 China was about 1.3 last year now China has a special problem the two-child policy uh created a wafer thin segment between 20 year olds and 40 year olds which is the guys who have babies and it also produced a 15 tilt to men um so you have a chronic shortage a fertile women times a miserable fertility rate of 1.3 the rest of the world has to deal with the 1.3 or the 1.7 in the US and the UK but they don't have to deal with the fact there aren't any fertile women China has both so China is going to have to deal with the speed of a shift in their population profile the like of which no one has ever imagined ever in in the space of 20 30 years they're going to run out of workers they're going to have such stress supporting their old people before they're really rich that you have to worry if you're a Chinese Mandarin”
Rising resource costs are inflationary and hurt the growth rate because if input costs for raw materials rise, they come straight off the top of the growth rate despite being counted in GDP, which measures costs not real output
“if you input more for your necessary raw materials than you used to that's coming straight off the top of your growth rate and you mismeasure it because GDP is a is a list of the costs so if you spend more drilling for offshore Brazilian oil your GDP goes up you get the same oil that you got from a 50 Cent Barrel in the Saudi field”
Superbubbles are obvious and cannot be missed if you apply first-semester statistics; in 1929 (undefined, but extreme), 1972 (17x spread between indices), 2000 (35x PE vs 21x prior high), and 2021 (peak rivaling 2000) all were statistically unmissable, yet people say 'nobody saw it coming'—this claim is false and contradicts data
“the best guess is that a bubble will behave like a bubble and the more remarkable meta level question is how come people can get away with saying nobody saw it coming each time nobody saw it coming when the data is screaming that you can't possibly miss it you first semester course of Statistics you could not miss 1929. you could not miss 1972. you absolutely categorically could not miss 2000 when it went to 35 times earnings the previous high PE had been 21. it went to 35 For Heaven's Sake in Japan it went to 65. no you cannot miss these bubbles and you could not miss the one in 2021 it went it went to a a peak that rivaled 2000.”
The globalization boom of the last 20 years, driven by China opening a pool of 500 million workers combined with Eastern Europe and the collapse of the Soviet Union, provided a great opportunity to outsource to cheap labor, but this is now ending as we face deglobalization which is inflationary and inefficient
“20 years ago we had china opening up the greatest pool of useful labor in history and you throw in Eastern Europe but you're talking 500 million extra ego workers combined flooding into the cities plugging into a pretty decent system or starting to work in the case the case of East Germany of Eastern Europe and and suddenly you had combined with globalization a great opportunity but to Outsource to the cheapest pool of Labor anywhere and capitalize on your brand and that's what happened and and now that is over we're deglobalizing which is inflationary and inefficient”
In 1929, the S&P was up 20 percent while the low-priced (speculative) index was down 35-40 percent the day before the crash; this Divergence pattern appeared again in 1972 (S&P up 17 percent, average Big Board stock down 17 percent), in 2000 (growth stocks down, S&P down but balance of market up in low double digits), and in 2021 (growth managers saw wholesale retreat in second half while S&P was up 20 percent)
“the s p is up 20 the s p uh it was up a lot more than 20 in 1929 but but the low priced index the speculative guys were down 35 to 40 percent the day before the crash in 1929 and you had nothing like that Divergence the low priced index had been up 85 in 1928 nothing like that Divergence where the high beta stocks are going down forget underperforming until you get to 1972 1972 the s p is up a bit 17 the average Big Board stock is down 17 percent that symmetry means I can remember it forever and you get nothing like it again until 2000 where as most of you can remember what happens from March of 2000 is the the pet.coms go practically broke in in a few months and the growth stocks start to peel off from the junior growth stocks month by month working their way up to the ciscos by the end of the year after a decent rally at the end the NASDAQ is down 40 percent the balance of the non-growth market is is not down at all the s p is down but it's entirely the growth stocks the balance of the market is probably up in the low double digits and and uh and then again no such Divergence until drum roll 2021 in 2021 until there was a bull market you couldn't tell any growth manager that there was a bull market in 2021 Kathy Woods's portfolio was in whole scale Retreat for the second half of the Year down big for the year”
Pressure builds behind the dam like a huge pressure during bubble unwinding, and while you can't predict which specific asset class or institution will fail, you can be confident something will fail and it will be surprising because you will be surprised exactly where it occurs
“I have written fairly and and I was in a podcast two days before the crash and I was making the same point that the stresses build up like a huge pressure behind a dam and you can't really work out which brick is going to go in the dam um first you you can be pretty confident that sooner or later the great Bubbles as they break will find a pressure point and you can also be pretty confident that you will probably be surprised exactly where it occurs”
The only way to resolve superbubbles is to break the bubble of perfection—convincing people that things will not be perfect forever—which nearly always leads to fairly rapid unraveling of the most speculative stocks while big blue chips continue up, creating a distinctive divergence pattern
“from those points from those dizzying points in 1929 and March of two thousand and late 2020 early 2021 you you could argue there's only one way things can be resolved eventually the easiest thing is to break the bubble of of perfection convince people that things are not going to be perfect forever which they believe at the at the top and that way you nearly always get a fairly rapid unraveling of the most speculative stocks uniquely you get this Divergence where the beginning of the bubble the speculative leaders go down sometimes a lot while the Big Blue Chips continue up”
American capitalism is in a sad state, suffering from monopoly features and regulatory capture, with profit margins at 20-year highs due to underinvestment in capex; firms lobby to create artificial scarcity of products, use share buybacks instead of capex to boost profits, reducing jobs and wage growth while slowing productivity
“I think American capitalism is in a very sad state is suffering from Monopoly features fat and happy it's captured too many regulatory organizations institutions including the US government basically um so the U.S economy is Run for the benefit of large corporations by and large and and this is reflected in the highest profit margins in this 20-year window that we have ever seen it's also reflected in a a new form of capitalism which is you want to if you want to make money it's pretty simple you create a mile shortage of your product and you do this by getting on the telephone and lobbying your your your uh competitors and and you end up in jail so a much better way is is to do it by having the culture do it for you and the modern culture is you blame the stockholders the stockholders don't want capex so nobody does capex and capex has dwindled down to a world record low fraction of GDP over the last 20 years when this new culture has taken hold”
Housing declines move at half to one-third the speed of stock market declines; the last housing bubble peaked in 2006 and troughed in 2012 (6 years), while stocks took 1.5-3 years, meaning housing's slow unwind will extend the economic downturn significantly
“but it doesn't it doesn't work overnight it has a slow effect on on building new houses which is not that big a component of GDP but it if you throw in furniture sales and improvements and so on it's quite a bit that goes down steadily a housing declines typically go at half or a third of the speed of the stock market stock market is always kind of on speed in comparison and you can't count the last housing bubble peaked in 2006 and troughed in in 2012. it took six years and the stock market that time took a year and a half but sometimes it takes up to three years at a bear Market in stocks but housing can be much slower so it it slows the economic effect way down it filters through very slowly”
The 2000-2002 bear market saw -40% NASDAQ year 1, -20% year 2, -30% year 3 for -82% total; people thought it was over after the first 40% decline, but the pain continued across multiple years; the current cycle may follow a similar multi-year pattern rather than a single sharp decline
“let me just repeat the NASDAQ NASDAQ went down 40 in 2000 would be it's all over that was quick that wasn't too bad I I survived it barely but I survived it the point is 2001. uh I'm sorry yeah 2001 was down twenty percent even before 9 11 it was still in it was still in a in the fangs of a bear absolutely and and and 2002 was down 30. so you had minus 40 minus 20 minus 30. um that's how you get to minus 82. it was pretty painful but everyone thought it was over after the first 40 decline”
Silicon Valley Bank's failure reflects a classic vulnerability: a harmless-looking bank providing useful service to venture capital community, but when you look closer after the event, you can see the vulnerability to venture capital concentration and a vulnerable business model to rising rates
“this harmless looking Bank in Silicon Valley uh providing a very useful service of course if you get closer to it uh as always happens after the event that you can see it's vulnerability to uh venture capital and so on”
Henry Ford understood that if you don't pay workers an honest wage they won't buy your products, a principle that seems forgotten in modern capitalism where wage stagnation is proceeding despite the fact that it's counterproductive to long-term growth and consumption
“I like to quote Henry Ford you know if I don't pay my work as a an honest wage uh how they're going to buy my cars and that's a pretty good idea and we seem to have forgotten it”
The only variable found to predict voting behavior in elections is the state of the labor market in the 6-month run-up to the election—anything that happened before that is deemed irrelevant, even if preceded by two years of brilliant labor market performance
“we've studied what moves the vote and there's only one thing we could find and it's probably because we were Dopey but we tried very hard the only thing we could find was the state of the labor market in the six-month run-up the election anything that happened before that was deemed irrelevant you you could have a brilliant labor market for two years and and then if it was bad in the six month run up to the election it would cost you both”
The Federal Reserve has never gotten anything right, merely creating an environment conducive to a chain-linked series of superbubbles that break with consequential painful effects; the Fed pushes up asset prices and helps short-term economy but doesn't consider that bubbles always break and hurt the economy when least needed, and they keep quiet during downturns
“my argument of course I hope it's well known by now that the FED has never gotten anything right it's been Paul volcker they have merely created an environment conducive to a chain-linked series of super bubbles that break with outrageously consequential effects painful effects and they don't seem to mind that and they brag about the fact that they have been pushing up the price of of assets and helping the economy which it does without considering the fact that they always break and hurt the economy when you least need it and they keep very quiet during that phase”
The demographic paradox: developed countries face a population bust that threatens economic reality and labor supply, while Africa faces a booming population with the worst soil, worst governments, longest distances, and climate change problems, creating threats to food security and stable society; this is inflationary for developed countries and destabilizing for Africa
“there are two paradoxical problems and very big problems to do with population one is in the developed World Plus China we have a population bust that will threaten the the reality if you will of the economy and at the same time we have a booming population in Africa that will threaten their their ability to feed and maintain a stable Society they have the worst soil the worst governments the longest distances and and and climate change problems um it is not a pretty Outlook for them anyway that that's inflationary”
QuantumScape, a battery company acquired as a SPAC that went from $10 in late 2020 to $130 (reaching a $52 billion valuation for a research effort without a product for ~4 years) before collapsing to $5.10, exemplifies the apex of the meme stock phenomenon and the 2021 bubble's extremity
“my own favorite quantumscape my favorite only because I bought it seven years earlier as a starter and it came at 10 in late 2020. like Annie's back I hate spax but it was despite me came as a spat went from 10 to 130 52 billion dollars for a research effort that wasn't going to have a product by its own admission for about four years or so and selling for more than General Motors or Samsung the battery comes I mean that was in a way the apex of the meme stocks I was too close to it to see it as a meme stock and and it peaked in December 2020 the first one because it was the most crazy and then the meme starts joined in March April started to go down in 2021...my own quantumscape bottomed late last year at 5.1 down from 130.”
The presidential election cycle drives equity market performance through stimulus timed to improve labor markets in the 6-month run-up to elections; the seven-month window from October 1 of the second year through end of April of the election year has returned as much since 1932 as the remaining 41 months combined—a 7x monthly average return versus normal months
“the presidential cycle is just amazing it's one of those few things that you can understand completely you know exactly what's going on what's going on is you want to stimulate the economy to have a beneficial effect running up to the election and so we've studied what moves the vote and there's only one thing we could find and it's probably because we were Dopey but we tried very hard the only thing we could find was the state of the labor market in the six-month run-up the election...so it turns out that that zone is October the 1st of of the second year which this time round was last year until the end of April this year in that sweet spot in that seven month window since 1932 since FDR that seven month has equaled the remaining 41 months of the presidential cycle I am not kidding you check it which means per month that that seven month window is seven times average”
The Justice Department has done a 'Rip Van Winkle' and gone to sleep for the duration, not opposing any consolidation or monopoly features in the system, which is why profit margins are so large and corporate power is so concentrated
“the justice department has done a Rip Van Winkle and has gone sound asleep for the duration and hasn't opposed any of the consolidation and the Monopoly features that have been ticking nicely through the system so that's why the profit margins are large Trumpeter”
Peter Drucker worried in the 1950s that capitalism would become so powerful it would run the government, and that society would push back against this, potentially leading to socialism, but there are other bad outcomes from pushing back against concentrated corporate power
“Peter Drucker by the way back in the 1950s he worried the big problem with capitalism was that it was too successful and that he imagined the day when it would become so powerful that it would basically run the government and what it worried him then was that it would be a pushback from society and and it would become what he worried about it was it would become socialist”
The 2021 bubble is an 'everything bubble' covering equities (at levels close to 2000 on Shiller P/E), housing (record multiples of family income), and bonds (lowest rates ever), making it worse than 2000 (which spared housing and bonds) and comparable to Japan 1989 which also bubbled multiple asset classes simultaneously
“the trouble with this bubble is is the troubles are actually manifold one of which is as many people have said it's an everything bubble so we have bubbled the important and dangerous housing market not not as crazy crazily as we did in in the housing bubble but uh in sheer price we boosted it up to records we bubbled the the bond market to levels that have never been seen in the history of man uh with the lowest rates ever recorded of course Fine Arts and every other asset through the roof and equities particularly in the U.S at adult close to the highest points ever reached in the most Dependable forms of a long-term evaluation um where you smooth the earnings Chiller style or one could say hussman Style the most reliable ones are out or close to the level of of 2000. so we've done all the bubbles together Japan says not to do that if you can possibly help it it's bad enough just doing the equity Market in two thousand and this time we have done a dead ringer for the equity Market Plus for gravy that we've done the housing market and the bond market Bonds were wonderfully cheap in 2000”
Climate change knocked half a point off global GDP growth last year due to floods and fires, affects grain productivity and fertility, and is an inflationary force that reduces growth; combined with resource scarcity and population decline, long-term factors are now biting simultaneously for the first time
“Climate change caused so much damage last year I think it knocked half a point after global GDP for the first time and that was floods everywhere and fires uh here here and there but but record and that was a lot of pain and food food pressure climate change gets in the way of planting reaping and even the fertility the productivity of of the grains and others so it's a inflationary Force uh to be to be dealt with”
Portfolio managers hate inflation and inflation volatility over 2%, love profit margins, and care far less about growth itself (which has no correlation with P/E); the market is a coincident indicator of comfort/discomfort, not a forecaster; this model explained P/E movements with 0.9 correlation coefficient since 1925 until mid-2021 when it broke
“we asked a question not how do you predict it but what actually explains the short-term movements in PE just PE not the market and what we found was it was pretty easy that portfolio managers hate inflation and and inflation volatility uh over two percent and they love profit margins and way way down in in third place is stability of growth growth itself has no correlation uh with PE...so you want stability of GDP and distant third place but if you take that model since 1925 you have a correlation coefficient of 0.9 in other words everything you know about the market is wrong it is not the market collectively is not forecasting the future the market is a coincident indicator of comfort what does a portfolio manager feel comfortable with”
Green investing has structural tailwinds unrelated to the business cycle: government stimulus, regulatory mandates, and enormous capital requirements for replacing transmission, transportation fleets, and energy infrastructure create guaranteed demand for green technology regardless of economic cycles, making it a rare 'secular growth story' amid cyclical recession.
“there is an enormous wind behind a climate change investing the U.S government the governments of the world the regulations of the world are all shifting behind climate change is there any chance that the top line revenue of the green economy will not out Distance by a lot the top line revenue of the ungreen world”
The housing market supply response to rising mortgage rates is counterintuitive and supportive of prices in the near term: homeowners with low (2.8-3 percent) mortgages refuse to sell and move to higher (5-6 percent) rates, so supply drops artificially, keeping prices elevated even as demand weakens, delaying but not preventing the eventual correction.
“people don't want to sell because they can't afford to pay a new mortgage so they don't they're very reluctant quite reasonably to give up their three and a quarter mortgage and replace it at twice the cost so the housing Supply counter-intuitively drops off and can create artificially reasonably high prices for a while”
Housing prices are currently elevated relative to family income; in December 2022, the US was selling at multiples similar to the 2006 peak but well below international markets (Canada, Australia, UK, China with multiples of 7-10x family income or higher), indicating global housing bubble
“stock market is mainly a US event like it was in 2000 housing market is yes it's in the U.S we actually were selling in December at a higher multiple of family income which is the best long-term measure we were selling slightly higher than the peak of the quote housing bubble of of 2006. but we were still in December way below Canada Australia the UK China they they are having real humdingers they are not going from three and a half times family income to seven times they have gone to double digit multiples of family income in most of the districts of London and and Toronto and Vancouver and Sydney and so on and and they are floating rays so the cost flows immediately through and uh has a crippling effect”
GMO has identified specific opportunities to invest in solving resource scarcities: two investments in extracting lithium more plentifully or cheaply, and larger bets on replacing lithium with sodium-ion (1000x more sodium than lithium) or lithium-air (3x density improvements), along with early-stage agricultural research to improve wheat and rice productivity by 10-15%
“how to invest the portfolios to look ahead and see this is what we try and do in the Grantham Foundation uh where we have 75 BC of which two-thirds is green we're saying where are the real bottlenecks we have two investments in in extracting lithium more plentifully or cheaper but then the real play is replace lithium with sodium or lithium air where you have maybe three times the density or in the case of sodium ion you have a thousand times more sodium than you have lithium these are the kind of things one has to invest in uh think of ways of improving agricultural output we have an investment in in a very early stage research that might improve uh 10 or 15 the productivity of Wheat and rice”
The first account GMO managed 45 years ago used both the January effect and presidential cycle, worked for 45 years then, has worked for 45 years since, and likely works precisely because it is so simple-minded that no one else will touch it or charge fees for it
“the first account we had at GMO 45 years ago um used both the January January effect and the presidential cycle it had worked for 45 years then and it's worked for the 45 years since then and the main reason is probably that it's so simple-minded no one will touch it including GMO basically however I'm retired from managing portfolios for 15 years so I'm allowed to wander into these uh zones that other people won't talk about”
The presidential cycle creates a 'timeout' from the normal bubble unwind that has never happened before in prior great bubbles—in 1929, 1972, and 2000, the bubble breaks aligned to miss the presidential cycle sweet spot, but in 2021 the presidential cycle effect slaps directly in the middle of the bubble unwinding for the first time
“sometimes if left to its own it will take a long time and what we have this time is the intrusion of the presidential cycle to create a timeout that has never happened by the way if you go back and you look at the other bubbles you will see that it neatly sidesteps uh in 1929 uh this little window where it has a nice rally and it neatly side steps in 72 uh the the this phase occurs in in 1975 where you have a huge bounce back and uh it sidesteps again in 2000 2000 2001 2002 miss it um this is the first of the great bubbles that has a presidential cycle effect slap in the middle”
There is currently ~$600 billion of unrealized losses in the banking system, but writ large there are trillions in unrealized losses across asset classes, likely to reach double-digit trillions, with multiple asset classes all contributing to stress points and credit system pressure
“when you keep up a pressure we have more debt now than we have ever had we probably have more debt than we realize it is well argued by some people and uh consequently when you put the interest rates up you have well in the banking system 600 billion dollars of unrealized losses but in the system writ large you you have a lot of pain already quite a few trillion dollars and and quite a few trillion more likely to come and everything has consequences when you write down perceived value by many trillions of dollars and it will be more than ten by the end for sure uh collectively and you've got multiple asset classes contributing”
The American VC industry contains more altruism and genuine desire to solve problems than typical capitalism; many VC investors care about helping the world and see some of the risks that Grantham identified, representing a more enlightened subset of capitalism
“it's thoroughly exciting the amount of creativity uh and and enthusiasm that goes on in the green BC world this is the one part of capitalism where these guys literally are a little altruistic I mean I hope they don't get drummed out of the capitalism club for being that way but they really actually do care about doing something useful about about helping the world and they do see some of the risks that I have been talking about”
The third phase of bubbles—waiting for earnings and fundamentals (unemployment, GDP growth) to deteriorate—is 'always the difficult phase' and follows unpredictable lags, but this phase is now arriving after the initial burst (late 2021) and the magnificent rally (2022), with no relief until the presidential cycle expires at end of April 2023.
“the difficult phase is always phase three which is the fundamentals waiting for basically earnings and fundamentals like unemployment and the GDP growth to turn down and they do it with leads and lags which would make your hair fall out it's always different Etc”
American VC (venture capital) industry is far ahead of the rest of the world and is the most important subset of capitalism; it appears to be in good shape despite expecting bashing around the head over the next couple of years, which will set up a wonderful entry point for investors
“I should add one sentence let me repeat the fact that the American BC industry is far and ahead of the rest of the world it's the most important subset of capitalism and it seems to be in wonderfully good shape and yes it's going to take a couple of years perhaps of bashing around the head that will set up a wonderful entry point I do recommend it to everybody”
Inflation rose unexpectedly in mid-2021 and should have caused P/E compression per the Grantham-Beninker model, but instead the market went up (with speculative stocks crashing), creating the unique 18-month error from July 2021 through January 2023 when the model broke
“inflation picks up unexpectedly why it would be unexpected with all that money around and so on and so forth and and and and lockdowns and so on who knows but in any case it picks up and starts to rise pretty dramatically and and theoretically unexpected and therefore shocking people and the market goes up Market does not go up for blue for speculative stocks which are crashing but it does go up for the s p why this is unique so what happens on our model the model has never made a mistake until 2000. in 2000 it calls for the highest PE in history which it gets but it goes 40 percent higher than the model explains 18 months later it's backed down to the model but that that's one 18 month super error although we got directionally we were perfect and then it tracks beautifully again until July of 2021 inflation goes up the market goes up our explanatory P drops like a stone the market goes up then of course January the first they say whoops maybe inflation does matter after all”
Grantham expects a recession to start in second, third, or fourth quarter 2023 (one is underway), and banking stress complicates the economic outlook further, making strategies with inverse correlation to economic stress valuable
“I think that uh Brian Moynihan is a hundred percent right uh that this recession starts I have second or third quarter he has third or fourth quarter we're splitting hairs uh and what's happening now with the banks uh is not good in any respect getting saved or not saved uh this is going to complicate the outlook for the economy uh that much further but the good news for your unit holders is that you have them in strategies that either are inversely correlated to what I see happening uh or not correlated at all”
GMO's resource fund and climate-change bond fund both have strong 5-year records slightly ahead of the S&P, and resources offer superior diversification at 10-year horizons with negative correlation to other portfolio components (correlation drops to 0.25 at 5 years, near-zero at 10 years), making them valuable hedges especially during inflationary periods
“one component for the long term that is very interesting that I missed which GMO has a very good fund and that's a resource fund we have a very good five-year record in that one too and both of them and the climate are slightly ahead of the s p which has been the guy to beat over five years and uh our resource fund just attempts to look at the problems anticipate them and and get ahead but resources have some very interesting features first of all they at 10-year Horizons I know that's a long Horizon but they are negatively correlated with the balance of your portfolio when resources are going up the rest there's pressure on you the rest of your portfolio and vice versa now no other group diversifies like resources not even close even you know you pick utilities that the correlation never gets kind of below 75 percent but this one after five years it's down to 25 and at 10 years it's actually very tiny negative correlation brilliant and when inflation occurs not always but almost always it benefits for obvious reasons”
Emerging markets and developed world (excluding US) equities are not particularly expensive, offering great opportunity to buy without guilt compared to US equities which are expensive; for US equity positions, investors should play the long game by buying resources and climate change exposure rather than short-term US equities
“avoid the U.S because of this rather strange almost inexplicable bias the U.S is so much more expensive this time around in 2000 everybody was expensive this time around it's the U.S it's expensive and the rest of the world it's not particularly expensive so you have a great opportunity really to go into the emerging market and the developed world and and buy some equities and not feel too guilty and GMO in its asset allocation is doing precisely that but don't own short term U.S equities if you want to have U.S equities because you have to then For Heaven's Sake play the long game and do resources and and climate change”
The last time the market hit its low in 2009, Grantham published a rare paper called 'Reinvesting When Terrified' recommending investors establish a buy plan at historic valuations with double-digit imputed returns on the 7-year forecast and begin re-entering the market despite fear, which represented an opportunity like the current situation will provide
“I have to I have to brag here a little bit that on the day the market hit hit the low in 2009 I posted one of only two papers I've ever written outside of a quarterly cycle now I've quit that I I do uh special papers but in those days only quarterly letters and I posted one called reinvesting when terrified and it was only one page for once and it said you are not going to call the bottom well but get together a bible plan this is the cheapest prices for 20 years we have double digit imputed Returns on gmo's forecast for the next seven years go to your committee get the battle plan together and start getting your money back in the market”
Grantham Foundation invests across two-thirds green/climate/resource investments and one-third short positions (credit default swaps, short Russell, short NASDAQ), balancing long-term structural opportunities with tactical near-term hedges
“yeah you're right Grantham Foundation uh performance is absolutely vital to us because it governs how much we can pay out as grants as well as everything else and with 75 in BC you better believe our 25 is credit default swaps and short Russell short NASDAQ and so on”
Grantham was fearful of the January 2023 rally in speculative stocks because it matched the historical January bounce pattern in superbubble cycles, and he called for a 'time out' from his bearish stance through April 2023 due to the presidential cycle, after which the 'meat grinder' phase resumes with declining fundamentals
“in a nutshell I I was fearful of a rally as a bear I was fearful of a rally in the specs which which we got and that was part of the reason I said after a timeout back to the meat grinder reason number one was a January rally which is classic typical should have been expected and reason number two was the presidential cycle neither of these things I talked about by fee charging Enterprises they're too simple-minded and and it doesn't feel like you should charge a fee for it and therefore no one will talk about it and that's probably why it works...and then of course all bats are off and and I believe back to the meat grinder”
Grantham is long the Yen and long gold as part of a package of positions; the Yen at 150 is 'pretty weird' given that it traded for years at 110 and should have been 6% cheaper but became 30% more expensive, warranting a long position; gold is less comfortable due to its intangible nature but Grantham owns more than typically (where he owns none) for the long economic reckoning ahead
“I only do currency bets quite long term everyone else does it short term if you if you play the really cheap ones like the Yen over the long term the long-term value it's not bad in the currency Market it does tend to work and the Yen at 150 is pretty weird it traded for years at 110 to the dollar and then it goes to 150 because it had two percent inflation versus R8 well what do you make of that you know it should have been six percent cheaper and it became 30 more expensive um so we are long again as part of our package uh along some gold uh which is a strange creature at the best of time uh to add to our short positions um the long the long gold would would be correlated I mean that would be that dovetails with your long resources I was going to ask if the gold was part and parcel of that it yes it is and I'm more comfortable with resources because they're real and you use them um I've never been that comfortable with gold but we own more now typically we are none but we own a modest position but what what what sparked your what sparked that the movement the move in the gold from zero to something what did you see I I saw a long dreary economic Reckoning”
The current P/E ratio is 27, but the P/E prediction model indicates it should be 17 and falling due to rolling inflation and margin compression, creating a valuation gap of 37 percent that suggests the S&P 500 should fall to approximately 3,000 in a base-case scenario, or as low as 2,000 if structural long-term factors 'bite pretty hard,' with 666 (2009 low) representing successful risk management but 2,500 being a reasonable midpoint.
“the model says much worse than one six months of inflation is a rolling inflation and so the model is deteriorating so it's now down to 17 p e and falling and and the market is way behind it is not 17p it is 27.”
Grantham received zero performance ranking from Cambridge database for the year ending June 2023 by virtue of VC holdings not being marked to market, yet the zero ranking means 'number one' and 'best performance'—he acknowledges this as 'legitimate cheating' and notes it's 'good to be number one even if it takes a little bit of legitimate cheating'
“the Grantham foundation in the year ending June which is the kind of Academic Year for uh for endowments and Foundations we were on Cambridge database we we got the infamous zero which means we were it we were the number one we had the best performance in the 12-month period and all you have to do to get that is don't Mark to Market nothing to do with us it's just that uh our VC portfolios had not marked um and it's it's good to be number one though even even if it takes a little bit of legitimate cheating together”
Deep value stocks are not that bad as a positioning during recessions and have high risk but also trade at extreme discounts, making them worth considering despite the risk-return tradeoff being challenging, whereas medium value is not interesting because it has performed too well too quickly.
“deep value by the way is not that bad either so if you wanted to add a third one medium value is is not interesting at all it it did too well too quickly a deep value uh of course deep value is in the way of a major meltdown also so you have you have a risk return there they are out of out of line cheap way in the 10 trade-off against the rest of the market”