The Current Bear Market w/ Jeremy Grantham (TIP466)
Trey Lockerbie (00:01:30): Welcome to The Investor’s Podcast. I’m your host, Trey Lockerbie and today I’m so excited because we have a very special guest for you and that’s Mr. Jeremy Grantham. Jeremy, welcome back to the show.
Jeremy Grantham (00:01:41): Hi, it’s a pleasure to be back. Trey Lockerbie (00:01:44): Well, it’s been almost exactly a year since you and I spoke. Back then you were bringing this bell that we were nearing a market top and the signs you saw at the time were this rapid price appreciation, wild behavior and speculation, the meme stocks, et cetera. You gave this wonderful metaphor that stuck with me about the stock market having these termites that eat away at these high flying tech stocks first and that appears to be exactly what we saw happen. Trey Lockerbie (00:02:13): As soon as the Fed came out with their plans to tighten, you saw the tech sector just get crushed immediately and it’s down about 27 or so percent now at the time of this recording.
This all seemed to kick off right at the top of the year, so now we’re halfway through the year and the S&P is down around 20% today. What has surprised you the most about the price action that we’ve been seeing since the top of the year? Jeremy Grantham (00:02:36): Well, I would argue that the termites got into action quite a bit earlier than that. You expect them to go for the juiciest speculative things first and the king of the specs in my opinion, was my own ill-fated Quantumscape.
That peaked out in December 2020. Jeremy Grantham (00:02:56): It was the leader of the gang, 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. Quantumscape, a very good research lab working on a solid state lithium ion battery, half the weight in volume, rapid charge, no fire. Jeremy Grantham (00:03:19): It would be very nice if it worked out, but back then it still had four years to go before it had any sales or any profits and it sold for more than General Motors.
You have to admit that is a candidate for the biggest spec of the cycle, bigger than anything I can find in 1929 or 2000, got to remember in 2000 that the pet.coms were scores of millions or in a few cases, a few hundred millions. Jeremy Grantham (00:03:46): This was 55 billion adjusted for inflation, adjusted for anything.
That was a monstrous demonstration of the ability of the market to think deep, deep into the future and have positive thoughts. Anyway that peaked out in December 2020. 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. ARC, an exchange traded fund of about 30 growth stocks that are very early stage growth.
Most of them had no earnings, so that was exactly where the termites would be expected to go to work and then a month or two later, the meme stocks with little on no earnings like AMC and GameStop, they peaked out and the whole Russell 2000, although it technically peaked in November, by early February ’21 it was about the same, it plateaued for over 10 months, almost 11 months of ’21 before going down. Jeremy Grantham (00:04:53): They had been rolling over and 40% of the NASDAQ before December 21, we’re down 50% or more, so anyone who was into deep speculation knew very well that the bubble had started to lose air long before the end of ’21. That’s one point I’d like to make. Jeremy Grantham (00:05:14): Secondly, 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, so that’s a pretty good excuse to go down and this was the fastest decline.
Jeremy Grantham (00:05:34): This is the about as fast as markets go down and they always have good rallies. There’s nothing as quick and spectacular as a bear market rally. They had one in late 1929 to early 1930, an absolute doozy of 45% and of course, with historical hindsight they signified very little, but at the time they frightened the pants off bears and they give hope that all is over, all is forgotten and it’s back to the races. I suspect we may very well have a pretty decent bear market rally as we sit.
I wouldn’t be surprised if this went on for at least another month. Trey Lockerbie (00:06:10): Interesting. Just on that last point there, I know you’re a big fan of reversion to the mean, is there a certain floor that we might bounce from or that you’re expecting things to capitulate at? Jeremy Grantham (00:06:23): In terms of the entire bear market, it would be unusual for it to bottom out anywhere near this high. I would expect that by the low that the S&P would’ve declined by 50% from the peak in real terms, so you do have to adjust the stock market for inflation and also the trend.
Jeremy Grantham (00:06:44): The trend in the market is a little over 4% a year and as time passes, you should put that into the fair value. A year from now, when the bear market might end, the trend line value would be almost 3000 on the S&P. Of course, there’s no rule that says you stop at fair value. Jeremy Grantham (00:07:03): Typically, in previous big bubbles breaking, they go down below that.
They went down below, of course in the housing bust of ’09 and they went down… In every great bear market break they went below trend except Alan Greenspan, a specialty in 2000. In 2000, the S&P was heroically overpriced, it came down 50% but at 50% decline, it was only fair value. It only hit the trend and then bounced as the Fed brace to re-stimulate and as they went down in 82, that’s a lot of pain and it’s possible they would do that again but you do have to adjust for inflation. 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. Trey Lockerbie (00:07:49): I’d like to stay on this idea of fair value for just a second. I’ve heard you say that today’s market action looks superficially like the dotcom bubble of 2000, but one really interesting thing about that market was that the Internet Stocks were sometimes hardly even creating revenue, let alone profit.
It wasn’t terribly difficult to see that these companies had a high cash burn and they were running towards a cliff. The main companies that survived are all now wildly profitable and some of the best business models the world has ever seen. Trey Lockerbie (00:08:18): Given the recent decline in the NASDAQ, and the main liners that are making up 20% of the S&P 500, do you think any of them are nearing a fair value now? Jeremy Grantham (00:08:29): I don’t include the classic FANGs as being in the super speculator category. I think you could throw Tesla in at its peak, that was super speculative, great company but a bit of a silly price there, but the others like Amazon and so on, I would [inaudible 00:08:48] great companies, but I wouldn’t have included them as super specs and yes, they’re down quite a lot. It’s hard in a bull market to get your brain around what happens in a bear market. Let me go back to Amazon, Amazon in the 2000 burst, didn’t just come down as its sales continued to grow, of course in those days it didn’t have earnings because it was running on borrowed resources.
It didn’t have to, it was still growing like a weed. It came down 92%. 92% with strongly rising sales, a brilliant, successful new idea that went on to own the world and be worth a fortune.
Jeremy Grantham (00:09:27): How is it possible it came down 92%? Think about that sometimes as you go to bed, and I like to say 80% of the time, the market is pretty sensible and doing a possibly good job of estimating value for all the companies. A little under 15% of the time, it gets carried away with optimism and by the end of that time has nothing to do with actual earnings. It’s all in the head, projecting out hundreds of years into the future, assuming that perfect conditions will stay perfect forever. Every bubble takes place with near perfect conditions and huge profit margins and the market runs with that and assumes it will stay there forever and of course, conditions mean revert, profit margins mean revert and good times become bad times. That is a problem and the remaining 5%, the market gets carried away on the downside and starts to be completely irrational, as it was beginning to be in March 2009. It was getting pretty silly pessimistic.
Jeremy Grantham (00:10:27): I wrote a piece, Reinvesting When Terrified that by sheer luck came out the day the market hit its low and it said, “Get a policy, get a plan, present it to your committee or yourself and start to throw your money back into the market. You feel paralyzed, everyone always does and now’s the time to wake up, the market is cheap.” Jeremy Grantham (00:10:46): Of course, that happened in 1974 and ’82, which were classic lows and 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. Trey Lockerbie (00:11:11): Now, I know you’re a huge skeptic of the Fed. Have the Feds rate increases and tightening efforts on the market or the market’s response surprised you in any way? Jeremy Grantham (00:11:22): No, I expect the Fed to be behind the curve, to be deep into optimism and it doesn’t really have a clue about market bubbles and the damage they do when they break.
They’ve been eager now since early Greenspan to encourage bull markets because they help the economy, they really do and they always forget that the bear markets to go along with them hurt the economy at just the wrong time. Jeremy Grantham (00:11:46): If I’d been asked a bet, would the Fed get inflation wrong when inflation came along? At any time I would’ve said, of course they’ll miss it, they’ll be late, their responses will be pretty ill-judged. The Fed’s record is terrible. What is impressive is how much room they have been cut by the market.
I mean the market is incredibly forgiving to the Fed. The Fed happened for 25 years to benefit from that amazing era as 500 million Chinese erased into the big cities and were plugged from marginal farming into highly profitable industrial system. Jeremy Grantham (00:12:22): Then they joined the World Trade Association and made everybody’s stuffed dogs and everybody’s iPhones for that matter. During that phase 500 million extra Chinese, 200 million Eastern Europeans plugging away from communism into capitalism. That was a golden era, Goldilocks if ever there was one and the Fed got to take credit for that. Jeremy Grantham (00:12:46): Prime Minister of England once, Mr. Wilson
got reelected because England unexpectedly won the World cup in soccer and he got credit for it. I mean the president gets in the end credit for everything, good weather, he takes the shock for inflation. These things are all way bigger than the president of the United States, but the president and the Fed gets to enjoy the environment, so this Fed had a wonderful environment, they did nothing right, but they were seen to be presiding over low inflation and decent growth. The growth rate actually has slowed way down since Greenspan. Jeremy Grantham (00:13:22): It was averaging three and a half before Greenspan and averaging two and a half afterwards and today more like one and a half. It’s done nothing in terms of increasing the growth rate, but superficially it felt like a golden age because asset prices went up.
Asset prices went up because inflation came down and rates were allowed to come down and in the end, rates were forced down and low rates make leverage cheap, make private equity deals wonderfully easy and profitable and they push up the price of real estate and they push up the price of stocks and that’s the way it was and the Fed gets the credit for that and it’s due none. Jeremy Grantham (00:14:02): 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 and that is probably part of the reason why the growth rate has slowed and continues to slow.
Trey Lockerbie (00:14:27): Now that inflation has arrived, there’s a lot of concern that we’re entering into a 1970s or eighties scenario stagflation. As a historian, could you give our audience an idea of what was happening during that period and how it resembles today? Jeremy Grantham (00:14:42): Well, every period is unique. 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, we’d come off 50 years of fairly stable, low prices and they shot up and stayed up for a long time and inflicted enormous pain on the system. They lowered the growth rate. Why wouldn’t it? If you have to pay three, four times for your energy and it also, of course pushes up the price, so there’s nothing like an oil price increase to increase stagflation and it did. This time, if you adjust for the passage of time, the price of oil is not as high, but it’s still multiplied recently by three times and so that is imposing pain on consumption and is imposing inflationary pressure. Jeremy Grantham (00:15:36): Because of the invasion of Ukraine, we have had some extra spikes in the price of food, fertilizer and natural gas particularly in Europe.
Interestingly, they are now almost all of them lower in price than the day before the invasion and this is a lovely example of how the stock market works. The start market is saying, “Whoops, there’s so much damage from commodity prices et cetera, et cetera, that we’re going to have a recession.” The recession isn’t bad news because the recession is going to get the Fed back in our camp of lowering interest rates again and helping stock prices and we’re looking out into the future and therefore that’s the good news, so the fear of a recession becomes wishful thinking about future interest rates and so the market gets a repressed for a while.
It’s quite remarkable, but it’s fairly typical. Jeremy Grantham (00:16:30): That’s what we’re having now and that’s why we might have a bit of a rally for a few weeks, I think. Yes, what we should cover is how dangerous it is to get involved in a bubble that has more than one asset class, equities, growth stocks mainly. This time we’ve also moved into housing.
Housing was chugging along okay, but last year it had the biggest advance, 20% in 2021 [inaudible 00:16:56] it had ever had in history and 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, it just means there’s a lot of value there that can be lost and it is dependent on interest rates. As you know when you’re paying a mortgage that the bottom of the mortgage was two and a half and it went up to 5.7, 5.8. Jeremy Grantham (00:17:19): This is a brutal increase in mortgage and means a lot of people will not move houses who otherwise would’ve done, which means a lot of people will not take a new job because they’re not prepared to double their mortgage payments.
Everyone expanded to pay as much mortgage as they could afford, which meant that they put merciless pressure upwards on housing prices as the mortgage rates came down, so that’s a problem and then you have problems with a bubbly commodities market inflicting pain on consumption. As if that wasn’t enough, we have the lowest interest rates in 6,000 years as Jim Graham would say or Edward Chancellor’s written a brilliant new book, The Price Of Time. Of course, with the lowest rates in 6,000 years, you have the highest bond prices and that’s obviously been taken to the cleaners this year, too. Jeremy Grantham (00:18:04): 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. We did some of that in the housing bubble where the stock market came down in sympathy and that was brutal. They give you much greater pressure on recessionary forces and we are playing with fire this time, which was not anywhere near as obvious a year ago before that huge move upwards in housing.
Trey Lockerbie (00:18:40): The interesting thing about the housing part to me is that with high inflation and to your point about expecting it to have inflation for the years to come, is that it seems like you’d want to own hard assets, so the demand should be there to keep propping up for the foreseeable future. Jeremy Grantham (00:18:55): Yes, in the long run, of course housing and stocks are very good protectors of steady inflation. 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.
Of course, it’s associated with a much higher mortgage, but once it’s adjusted, then of course you’re in much better shape. Jeremy Grantham (00:19:23): 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 and you can afford to buy stocks and build a portfolio.
Jeremy Grantham (00:19:40): 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 yields are half of what they used to be. Trey Lockerbie (00:19:52): If I could squeeze one glass question on that because you mentioned the comparison to the 1970s and how we might have high inflation for years to come and the Fed might just raise rates into that, but we had a very different debt picture back then. I think the debt to GDP was in the thirties rather than the hundred and thirties like it is today.
Does that… Is that a- Jeremy Grantham (00:20:08): 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. Trey Lockerbie (00:20:17): We’ve just had this supply side recession due to these COVID interruptions and you mentioned the war in Ukraine and there’s even labor shortages now. Now, that things are bouncing a little bit or coming back but at higher prices, meaning things that inflation has hit the most, do you foresee a demand side recession approaching? Is that the other shoe that’s about to drop? Jeremy Grantham (00:20:38): I think in the longer term, forget the next few quarters who knows what happens really, but in the longer term, we are really running the risk that this is back to the seventies. We have problems with the availability of plentiful cheap resources and we have problems with plentiful cheap labor. The birth rate has crunched in every developed country except Israel and China.
Jeremy Grantham (00:21:04): That’s a very, very important segment of the global economy to say the least. Every one of them has a population growth rate lower than replacement level so in the end, after accumulating lots of older people as a higher percentage, we start to actually have the population drop. Secondly, we’re 10 and 20 years in depending on the country into having smaller baby cohorts, so 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. Jeremy Grantham (00:21:40): We have not experienced this before. This has happened incredibly fast. China has gone from plenty of babies to a baby crunch almost overnight and a fertility rate that needs to be 2.1 is probably running about 1.4.
Even in the US, the UK we’re running about 1.7. We’ve never seen levels like this, so we’re going to have a hard time getting enough labor. 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.
Jeremy Grantham (00:22:14): 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. At the same time, I believe 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. Jeremy Grantham (00:22:45): If you look at the copper ore for example, King Copper is really important to the industrial system. Over 80, 90 years, the amount of copper in a ton of oil has dropped to a third of what it was, so you’re using an awful lot more energy and the energy also, which used to run for a hundred years at $20 a barrel in today’s currency, now runs at a hundred, so you’re spending five times the cost of energy to mine one third the quality of copper oil. Jeremy Grantham (00:23:14): You better believe technology can’t keep up with that.
It did for a long time, it did very, very well but starting about 2002, the real price of the typical commodity has gone up a lot, it’s basically tripled. Jeremy Grantham (00:23:27): 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, but it’s the direction that is interesting to me.
The direction is steadily up. Jeremy Grantham (00:23:56): Now, there’s a lot of volatility and commodities everybody knows. You produce an extra ton and the price collapses and your short a ton and the price triples, but if you look at the trend, the trend has been pretty reversed since 2002. My guess is it will continue to rise and that will pose real stagflationary pressure for a couple of decades and that’s why I fear this is re-entering the seventies and eighties. Jeremy Grantham (00:24:20): If you prefer it, re-entering the 20th century, once again. Inflation will always be part of the discussion.
Sometimes it will be low, sometimes it will be higher, but it will always be on the agenda. The same with stagflation, there will be pressure on growth that we have not had. We’ve had a glorious honeymoon period for 20 years where rates always came down and where Chinese workers were always available and inflation was a thing of the past and it is no longer a thing of the past. Unless we’re lucky and have some sensible behavior from governments around the world, this inflation will go in little waves and will become moderately embedded at best and really embedded at worst. Trey Lockerbie (00:25:03): Just to talk about the underlying factors with what you’re saying there.
The rise in oil and gas prices, obviously the biggest contributor to this inflation rate that we’re seeing and even with food prices, that’s the number one contributor. The oil and gas, the energy going into the food and transporting the food. We just saw our administration tap into their strategic petroleum reserve, the SPR it’s now at levels not seen in 20 years, so going to your point about these resources, if we’re entering the second tier, I think you put it, do you think the US has enough ammunition here to keep the price of oil, somewhat stable? Are we going to just keep dwindling in the supply because there’s been lack of infrastructure being built and we just don’t have the same growth expected in that sector in particular? Jeremy Grantham (00:25:47): What the US government does in oil to make things a little easier for this wartime squeeze is inconsequential for the longer term. It could be quite important in the intermediate term if it tried politically and economically to stimulate fracking. Fracking is the least bad way to have an increase in fossil fuels because fracking comes on and in the first year you get half the oil, by the end of the second year, it’s basically a done deal.
Jeremy Grantham (00:26:17): You don’t have stranded assets. The trouble about developing traditional oil fields is they hang around forever around your neck, encouraging you to pump when you shouldn’t. There is no such danger in fracking.
They come on, they deliver the oil when you need it and then they’re out of business. From a climate point of view they’re just terrible, but from all things considered point of view, they’re the least bad of the fossil fuels for this occasion. I would bring them on for political reasons and to help out with Ukraine and Europe. I’d bring them on in the near term and have them run off and naturally get out of the way. Trey Lockerbie (00:26:56): All right. Sticking on the idea of these resources and the lack of supply, I know you’d never shorten individual stock, but given that there is this growing or lack of supply in the battery materials, you mentioned the lithium and copper, a lot of these metals.
Are electric vehicles or car companies producing electric vehicles, maybe such as Tesla or others are they even in a more precarious position than some other companies? Jeremy Grantham (00:27:21): 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. That means you absolutely have to replace cobalt and secondly, nickel as much as you can to run a whole fleet of EVs that will have to scale up 10 and 20 times the current fleet and we’re doing it. Very quickly these lithium ion phosphate batteries will take over. Jeremy Grantham (00:27:56): Can we be ingenious enough to improve the extraction process of lithium to discover more lithium reserves and better yet to find batteries that don’t use lithium? Certainly the large scale batteries for the grid, you have to get rid of lithium, the scale is too big and lithium is simply not in enough supply. They’re working on that.
There are dozens of research groups working on large scale battery storage, but even for EVs it would be brilliant to have a replacement for lithium. Jeremy Grantham (00:28:29): Whether that is possible, I don’t know. Is it going to pose a price problem? Almost certainly yes, from time to time. As every mining industry goes in [inaudible 00:28:40] so you go from excess to shortage, excess to shortage. It is terrifying to be short or long. Jeremy Grantham (00:28:47): Value managers have always hated commodities for that reason, it feels completely out of their control and it largely is.
They’re about as unpredictable as anything on the planet and if you go short, you die a thousand deaths and if you go long, it’s pretty much as bad. I certainly don’t recommend people to go short metals. If you can go long and throw the key away, I think that will do just fine.
It does take nerves of steel and you better have a good look at your nerves before you do it. Trey Lockerbie (00:29:16): It seems like there’s never a free lunch. Even with these companies that are doing great for climate change, whether they’re producing electric vehicles or what have you, there’s always a other side of the coin and maybe it’s the lithium mining aspect and the implications there. Then you have these ESG policies coming up.
It’s been hot topic as of late, but it’s getting a very bad rap, I would say also. As an environmentalist, how effective do you think the ESG policies are as currently written? Jeremy Grantham (00:29:43): They’re better than nothing. They’re better than a kick in the pants. It’s an early stage. It’s a little amorphous, a little airy-fairy at this stage. I admire the people trying to sort it out.
There’s a lot of green washing involved, of course like most first stages. Jeremy Grantham (00:29:58): In the end, I think it’s a helpful effort to encourage people to report their carbon footprints and so on is to encourage them to do something about it. It isn’t brilliant, it could be done better of course, but yes it is certainly better than nothing. I like to say to an audience, if I’m asked to speak on the topic, let me be honest, I’m an [inaudible 00:30:22] SMG good behavior is great.
What can you say bad about good behavior? E is a question [inaudible 00:30:29] so I would hate SMG to get in the way of the environment, because if we don’t get that right, we will spiral out of control. Jeremy Grantham (00:30:37): You could say, we are showing early signs of doing exactly that. The damage to the environment is happening far faster and more powerfully actually than anyone predicted 20 years ago. I was talking to these guys 20 years ago and the scientists were pretty understated, I can tell you. Nine years ago, I got a commentary in Nature, which is a miracle in itself because it’s the most important scientific journal.
Jeremy Grantham (00:31:01): 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.” Being conservative in climate change is entirely risky. If conservatism on the part of the scientist caused politicians to under react that could be catastrophic.
You can’t criticize them today. The tone has completely changed. Jeremy Grantham (00:31:24): 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 to basically protect a viable society of viable habitat.” It’s really enough to make your hair curl, the implications of their opening statement.
Jeremy Grantham (00:31:47): The numbers hadn’t changed that much, but the language had changed enormously as they begin to pluck up the courage to say it like it is that they were intimidated by politics and they were intimidated by not wanting to seem to exaggerate and not wanting to get involved in publicity, protect the dignity of science. Well, this is more important than the dignity of science, it’s absolutely important that they say what they honestly believe and most of them do today, but all you have to do is pick up a newspaper, really to get religion and you see the rate at which heavy flooding in particular… 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. Jeremy Grantham (00:32:29): 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. It’s only the very heavy downfalls that erode the soil and we are skating on thin ice and no one talks about that.
Jeremy Grantham (00:32:46): 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, if you do it this way. We have to change the way we do agriculture. Heavy tilling allows the soil to blow away, wash away and carry incidentally two thirds of the fertilizer with it. Jeremy Grantham (00:33:22): If you want to really worry about resources, fertilizer is obviously a finite resource.
We mine it, we ship it, we truck it, we scatter it on the farms and it washes away and it can’t be replaced. It’s an element, there’s no substitute without potassium and phosphate. You cannot grow any living thing and we have to learn to allow the underlying bedrock underneath the farm land supplies enough if you do it right. Obviously nature managed to grow a pretty lush planet before humans, without any artificial fertilizer. It can be done, but you can’t do it with big ag.
Big ag is enormously destructive of the resources and we’re just eating our way through it. People say, “Oh, don’t worry, we have 150 years. Hey dudes, we have 150 years.”
The trouble is potash is very largely in Belarus and Russia. Jeremy Grantham (00:34:18): If that makes you happy, it doesn’t make me happy. 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 and in many cases go short of food and are, as we sit already and by next year it will be hell on wheels. Jeremy Grantham (00:34:36): This is not good.
Phosphate is 70% in Morocco, 70% of all the world’s hundred and 50 years of reserves are in Morocco. I tell you one thing, if there’s a civil war or something like that or take over in Morocco, you will have the Chinese and the Americans and the EU wanting to interfere immediately because without them, we simply don’t have enough to get through more than a few decades. Trey Lockerbie (00:35:03): You’re talking about agriculture there. It’s reminding me of just the food supply question in general because our audience listening to you, everyone I think has the intention to do better and to make the planet better over time. You hear these theories along the way, about how much, what you eat is a contributing factor to climate change. I’m curious, is that one of the bigger contributions is that something people can take home and change in their behavior most immediately or what are some of the biggest contributors actually affecting climate change that we should focus on? Jeremy Grantham (00:35:33): I think that most easily correctable is methane leakage.
That’s just a question of regulation. An awful lot of it comes from fracking and the series of pipes that go all the way from North Dakota to Boston and up to your gas stove. They’re leaking all the way and the pipes in Boston are medieval practically, so they all leak.
Jeremy Grantham (00:35:54): 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. That’s probably the thing we could do the most about regulations for fracking, regulations for pipeline leakage and regulations for dumps. Jeremy Grantham (00:36:18): 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, that’s number one. Jeremy Grantham (00:36:36): Number two, of course if you eat more grains and less red meat, that has a huge effect. That would be a good second candidate.
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. We’ve had the technology to live perfectly decent lives without having generated all the trouble that we have.
Our big problem is the gap between what humans are capable of doing and what humans actually do. Jeremy Grantham (00:37:08): To ask them to all transfer away from meat is a big ask. If you could do it, it would be in second place. In real life, it may be fifth or sixth place.
You probably have more chance improving shipping and regulating them than you do getting people to eat a lot less red meat. Humans do not like being told that kind of thing, even if it’s for the public good. Jeremy Grantham (00:37:30): There are people who respond to the public good. 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.
We know that because it happened and a year later it will still be down 25%. Jeremy Grantham (00:37:43): 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.
How much do you trust your neighbors? How much are you willing to sacrifice for your neighbors and because of Confucius or because of Buddhism in Asian countries, they tend to be naturally and more respectful of authority of old fogies and of their neighbors. It is just part of their culture. They have done so much better, but COVID, it isn’t even funny.
Jeremy Grantham (00:38:15): In Japan, they had no regulations. We’re talking about the burden was carried by individuals and they have had… Get this, one 20th of the death rate of the US with the oldest population in the world, amazing. Trey Lockerbie (00:38:29): There are companies that are creating new kinds of red meat or the Beyond Meats of the world and even Tyson Foods. We’ve talked about other ways that we could fight climate change.
I’m curious, I know you’re mostly focused on venture these days, but I’m wondering which public companies or venture companies that might become public down the road. What do those companies look like? Who are going to be the ones that are most contributing to actually fight climate change? Whether it be ones that are focused on fusion or solar or geothermal or food. I mean, what do you think would be the most promising technology you’ve seen to date? Jeremy Grantham (00:39:04): I don’t want to get into wishful thinking, but basically as a society, we show all of the signs the failing societies in history have shown and the top of the list is Hubris, “Oh, you’ve been saying bad things for a hundred years and it didn’t work out.” You think the Romans didn’t say that? 400 years and so on and some of the civilizations down in central America where around for a thousand years and they built water storage, they built aqueducts and they had wonderful armies, but eventually they fall foul of a lot of failings and we check them all off. Jeremy Grantham (00:39:40): We look like a failing civilization book, but I’m hoping we have a little escape clause We have a couple of things going for us that have never worked before. One of them is population, that has never been a gleam in the eye of [Mouthes and the boys 00:39:54] even as we got wealthier that we would choose to have fewer children.
Jeremy Grantham (00:40:01): This is remarkable and then adding on top of our choice is the fact that the world is getting so toxic, that even when you decide to have children it’s now getting to be much harder. One way or the other 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. Jeremy Grantham (00:40:35): We would need two and a half to three planets to cope with that. We can perhaps deal with a couple of billion and we might get there quite graceful.
The other one of course, is technology and the rebuttal to the technology argument is that every wave of technology takes more energy back and it takes more complexity, which is a killer because complexity itself is a failing characteristic. Jeremy Grantham (00:40:57): It takes too much effort, too much manpower, too much energy itself and if that wasn’t enough, it increases your [inaudible 00:41:06] your overconfidence, every wave of scientific progress and so it can be quite deadly, but this time we have some open ended technologies. Jeremy Grantham (00:41:15): I call them, Get Out Of Jail Free cards and because they’re almost infinite fusion, geothermal and brilliantly cheap, effective storage any one of those three and we may get out of jail because that’s enough green cheap energy to in the long run take care of poverty if we chose to, for sure and take care of climate change. The thing about climate change is when we finish, we started 150 years ago with 280 paths per million carbon dioxide in the atmosphere.
It’s only a little bit, but it’s a very powerful commodity. If we had no parts, we would be frozen at minus 20 to 25 degrees centigrade, a frozen ball with just bacteria around if we were lucky. Jeremy Grantham (00:42:00): It’s a very, very potent greenhouse gas. We started with 280 parts, a million we’re up to 420.
That’s a bigger jump than the difference between the ice age, two miles of ice on Manhattan and the pleasant enough world that we have now. That’s a bigger jump, the ice age gap was just a 120 points and we have just gone up by 160 and we’re going to go up to about 525 and we need to go back to 300, so we’re going to have to get rid of 225 parts million of carbon dioxide as well as the methane. Jeremy Grantham (00:42:31): If you want to think about the carbon dioxide, that is 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 and 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, biologically and every other method that we can get at, but that needs a huge amount of energy. However you do it, you’re going to need a lot of energy. Jeremy Grantham (00:43:07): One of our Get Out Of Jail Free cards would be very handy indeed.
What are the probabilities? I think there’s probably 50/50 that fusion in the next few decades will come out with a viable engineering system, engineering and physics. The thing that I have doubt about is the cost. They’re going to be fairly costly plans, but 50/50 will have the technology and maybe it will be cheap and maybe it will not be cheap enough. 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. Jeremy Grantham (00:43:57): It’s really been a revolution of engineering talent and if you could take all of that, which we can and apply it to geothermal and then start the same process with 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. The heat from the center of the planet here is more or less infinite, so that would do it.
Jeremy Grantham (00:44:22): The third one would be a brilliant breakthrough in storage. We’ve come down to 10 cents on the dollar in the last 15 years. If we could come down, once again over the next 20 or 30 years to 10 cents on the dollar or even 20 would probably do it. We wouldn’t need a fusion or geothermal any one of those three will give us a chance of success. The problem is how much of the planet spirals out of control because of food problems, energy problems, creating fail states of the kind that we begin to see in Africa. Jeremy Grantham (00:44:55): If the temperature alone continues to rise, the whole Indian subcontinent, that becomes very questionable as to whether you could do regular farming.
It has a wonderful share of the world’s arable land. If you see one of these maps, which is green for arable, you’ll see that India is one of the few places where practically the entire sub subcontinent is green. 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.
Jeremy Grantham (00:45:34): Fortunately it was dry as could be. Humans can deal with that because we sweat and it reduces our temperature but if it arrived in the monsoon season then people die. They can only be out in the open for three or four hours until their internal organ cease to function. Now, this is not good and furthermore, it is really quite likely that those temperatures will afflict the Indian subcontinent within… If they’re lucky, 60, 70, 80 years. If they’re unlucky 30 or 40, so they better start preparing and that’s a pretty tricky job when you talk about farming because their idea of farming is not an air condition track as it is in Minnesota. Trey Lockerbie (00:46:12): Yeah.
Elon Musk shares a lot of these opinions you just mentioned around fusion and the scalability or the question around it and how economically viable that is. Also, the fusion thing is interesting because we do have another infinite source of heat and that’s the sun and it requires no maintenance. Trey Lockerbie (00:46:30): Solar would be the most obvious thing. According to Elon Musk, you only need a hundred miles by a hundred miles in some corner of Texas of solar to power the entire US, but to your point about storage, that’s the biggest bottleneck.
I mean, that’s why oil is so great. It’s so easily transferable. Jeremy Grantham (00:46:46): Incidentally, I have to interject here. It sounds as if he actually stole that one from me. Trey Lockerbie (00:46:52): He very well could have. Jeremy Grantham (00:46:53): A hundred miles by a hundred miles.
I used Utah because I drove around looking for a state park that was about that size and couldn’t find it. If you think of 10,000 square miles and you think of a square mile outside Boston or maybe four of them, you think, “Oh my God, that’s epic.” 10,000 of them seems impossible, but when you think of a hundred miles by a hundred miles in Utah, this seems eminently doable. Jeremy Grantham (00:47:17): If the Chinese put themselves to it, which they will probably, they will do a hundred miles by a hundred miles and they are scaling up. Oh boy, is China taking control of these important industries? We are allowing them to get a really big jump start.
They have five to 600,000 electric buses and we have 1500. They make over half the electric cars. Jeremy Grantham (00:47:42): When was the last great technology where the US lacked the change? We’re buying five or 6% this year of electric vehicles.
They’re buying 20, Europe’s approaching 20, Norway’s 70. Why are we so far behind on something that’s important? We usually lead the chart. It’s inexplicable.
Jeremy Grantham (00:48:01): Anyway, 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.
Jeremy Grantham (00:48:26): China has 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. 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. Trey Lockerbie (00:48:51): I love what you said earlier about if you were in charge, you would make some effort to boost the gas in the interim because it’s interesting how we politicize these things.
It becomes binary where we have to be pro- green or not pro-green. When I mentioned the hundred miles by a hundred miles to your quote there, it gives people hope, it makes it more achievable or people can start to wrap their heads around it, it makes it not such a steep mountain to climb. Trey Lockerbie (00:49:17): I’m also bullish on the fusion side of things, the nuclear side of things and the EU parliament actually just labeled or they’re pushing to label gas and nuclear investments as “green”. Do you think this is a lead domino in some way to help get the US to get similar regulations involved? Is this a sign of better things to come on that side of the argument? Jeremy Grantham (00:49:37): Well, some of this is war time related, so you have to make exceptions. They’re really in a squeeze and to coal gas, green is desperate and inaccurate. When in real life, it’s often worse than coal, but they’re in a crisis, so you’ve got to, in a sense cut them some slack for a little while.
I’m hoping that this wall will… Yes, it will be a step backwards for coal and so on, but it will be a giant step forward because the message about the Ukraine is never ever be this dependent on Russia again, which means never be dependent on natural gas again, which means get your nuclear and above all wind and solar going at war speed and they will, so this will have moved the agenda considerably forward on a 20 year horizon and considerably backwards on a two-year horizon, but that’s life. Jeremy Grantham (00:50:30): You have to make those compromises, but to think positive thoughts since you started on that. I’m putting my thumb up here, we have the Get Out Of Jail free cards, nuclear and you could include fusion, if we got religion and did it right and so on. We have the three great infinite sources of energy.
That’s very optimistic. Secondly, seen through my eyes in the green VC world, there is an enormous number of brilliant companies working on a thousand different improvements to the green tech world. I’ve got to say, they’re highly motivated. They’re not just capitalists.
I am almost shocked that they’re either Oscar winning performers, all of them or they genuinely care about helping the green business, as do a lot of young people these days. They really put more of a premium suddenly on doing something useful. Jeremy Grantham (00:51:26): It’s very agreeable working with these people and they’re the best that money can buy, a lot of them are imported, if you will from foreign countries. It’s surprising how many successful DC enterprises are run by immigrants and second generation immigrants too.
It’s a pleasure working with them, it’s a pleasure dealing with really bright people who are working for the cause. Jeremy Grantham (00:51:48): They are much more cooperative than normal. Of course, they’re competitive as well and they all want to make a fortune, which is great the best part of capitalism but they are more cooperative than any other branch of capitalism that you will find.
We, being in the philanthropy business, of course see that very clearly. Jeremy Grantham (00:52:08): Anyway, there’s an enormous amount of terrific work going on and America is so good at… 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 and they are so important for green tech, so important for bench capital in general, but much more for green tech than most because that’s all based on pure science. Jeremy Grantham (00:52:33): Some of the social apps are just based on a smart idea, but almost everything in green tech gets its start in pure scientific research and the willingness of Americans to spin out and become capitalist research engineers is profound and its just spreading. It used to be almost unheard of in England and now an imperial college and elsewhere, there’s a real buzz going on.
I am told in Europe, I haven’t seen it for myself, the rest of Europe, I should say. Trey Lockerbie (00:53:04): Thankfully the US seems to be leading the charge on that front, but I know that you estimate the US on… We’re just talking rates of return. We should have a much more underwhelming performance for years to come in the markets versus say, emerging markets.
Trey Lockerbie (00:53:17): You had this great interview recently with Ray Dalio. 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.
Given this macro picture in these current events, how are you currently thinking about the risks in emerging markets? Jeremy Grantham (00:53:53): Yeah. No, the risks of destabilizing the whole global system have risen and continue to rise. It is quite scary, but the risks are in the development world too, as you were implying it, but the speed with which Sri Lanka went from ho ho, boring, boring, jogging along okay to complete chaos. I mean that is shocking, isn’t it? The whole system, it took less than two years to go from… To an outsider anyway, looking pretty stable to looking out of control. It doesn’t take much. When you mess with food, the Tahrir Square days of the Arab Spring, they chanted, “Bread, freedom, dignity.
Bread, freedom, dignity” but bread was first. That was just based on a temporary 150% increase in the price of wheat. Well, we just had another one that was 150% increase in the price of wheat. Jeremy Grantham (00:54:45): There’s likely to be pretty powerful repercussions around the whole of Africa and Middle East and who knows where.
The thing about these pressure points is its often unexpected, like Sri Lanka. Things you didn’t have on your radar screen, suddenly blow up. These are tricky times for emerging and they are tricky times for developed. Jeremy Grantham (00:55:05): Bad things can happen anywhere in the US. You’d have to say our democracy looks to be in the worst shape for 18,000 years or more through my eyes with attempts to overthrow democracy, as far as one can tell. Some very suddenly right wing countries, Hungary so on.
Jeremy Grantham (00:55:26): It’s dangerous times without a war and ironically the war may improve some things, but it certainly increases the aggregate risk of some terrible mistake being made. Whether that’s materially worse and emerging or not, I don’t know. In the end resources will become more important. As I like to say, it doesn’t take much for the four loaves of bread for a haircut to become four haircuts for a loaf for bread. In the end, a loaf of bread is more important than a haircut, and they have a lot of the world’s resources out there in the emerging world and maybe that will turn out to be a trump card. Trey Lockerbie (00:56:03): One quote I’ve heard throughout there about the environment is that the issue is essentially we are compounding on an infinite planet and a lot of these issues we’re seeing out in the world today, I can just hear the Bitcoin Maximalist in our audience pounding the table that we are trying to compound with an infinite currency and if we talk about things like methane being the biggest contributor to climate change, there’s already some promising tech out there about Bitcoin consuming the excess methane that’s off shooting on some plants and repurposing it into green energy just to simply mind more Bitcoin.
Trey Lockerbie (00:56:37): I’ve actually heard you mention Bitcoin a little bit more as of late in some interviews. Gary Gensler even just said that Bitcoin is the only crypto he would define as a commodity. I’m just curious, with all of this floating around and given your bullishness on commodities in general, are you also potentially bullish on Bitcoin? Jeremy Grantham (00:56:57): No. Blockchain is going to have legs, as they say in variety, it’ll be around for decades.
It’ll be put to users that make money. There’ll be little services that will do currency exchange and so on. It’ll be cheap and so on. That’s just capitalism that will work and it will work the same old way. You’ll make profits and dividends and so on, but Bitcoin is not there.
A Bitcoin is not a good reserve of value as we’ve seen, it’s traded like a spec. It’s lost two thirds of its value very quickly. Jeremy Grantham (00:57:28): What kind of store of value is that? It’s terrible for a currency exchange. It’s expensive to transact, but worst of all, it is deadly to the environment.
It’s incredibly energy intensive to give you what? To give you a speculative instrument to wager on, that’s it. That someone else will pay even more, but the fact that it takes our precious energy and has a carbon footprint is the worst crime of all and the sooner it goes away, the better. Trey Lockerbie (00:57:57): Even if it were used to say close a wealth inequality gap, which I’ve heard you say is the ultimate evil in the world today.
I’m just wondering if there’s any other tools that come to mind that would be able to do such a thing? Jeremy Grantham (00:58:10): No. As a speculative instrument, it’s made a lot of money for a couple of hundred people who got in early with a lot. Most of the other people playing it have now lost money, we know that. Jeremy Grantham (00:58:19): It’s the same old, same old where rich get richer and the poor get poor, so any attempt to spin this as an equalizer is just that, it’s pure spin. This is like going short.
You have to leave it to the pros. Trey Lockerbie (00:58:32): While we’re winding down here, I have some other questions around the birth rate that you mentioned earlier, because I do see that as a very big threat. Right now, we currently have two job openings for every one person in the US. I’m more curious about what is causing that? If it’s just COVID overhang, if it’s having an aging population, the declining birth rate? Is it a confluence of everything? Just your general thoughts on why we’re seeing wealthier people have less kids over time. Do you have any theory behind that based on maybe other times in history? Jeremy Grantham (00:59:05): No, I think it’s a major surprise. 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. Jeremy Grantham (00:59:22): In real terms, adjusted for inflation the cost of education, has just risen remorselessly. If you have three or four children, you need a million dollars of after tax money to get them through colleges et cetera.
You could say it was amazing we had so many children for so long. It’s easy to sympathize with taking the easy way of having one or two children or no children, particularly if you’re a woman just getting on with your life and not having to drag a man and two children around. Jeremy Grantham (00:59:53): I have no real understanding of why
2022-08-05 02:43
