Grantham Sees Stocks ‘Super Bubble,’ Says Selloff Has Begun

You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio, or watch us on YouTube. Search to Bloomberg Global News. Well, we want to talk a little bit more about COVID because this story definitely caught our attention. A Bloomberg Opinion column on how a vaccine to prevent all COVID is within reach. With the details, Let's bring in Lisa Jarvis, the former executive director of

Chemical and Engineering News. She writes about biotech drug discovery in the pharmaceutical industry for Bloomberg Opinion, recently cut up to with Dr Anthony Faucy. She joins us on the phone in Chicago. Lisa, nice to have you here with Katie and myself. When you talk about a vaccine to prevent all COVID, we're talking to what about a pen coronavirus vaccine? UM, tell us a little bit more about what you found out, Hi, Katie, Hi Carol and Katie,

thank you for having me. Yes, a pan coronavirus vaccine. There are two different ways to think about that. One would be a vaccine that would protect protect you from all the different variants of Stars Kobe too, so for the current pandemic. And then another would be a broader vaccine. So let's think about future pandemics, um, even things that have cropped up in the past, like the original Stars. So you would have a broad acting vaccine that would

protect you against many different kinds of coronaviruses. So, is this something that drugmakers are currently working on, because, like as you describe in your piece, if you look at fires or if you look at Maderna, it seems like they've so far have been really focusing on making almost variant specific vaccines. Yeah. I think one of the reasons for that is that research on these type of uh pan coronavirus vaccine feels earlier and risk here um and UM.

So we have a few companies that are working on pan coronavirus vaccines. They're most mostly in the biotech space. One of those I did talk about in the article That's your Biotechnology. Another one that does have a clinical trial running that fits into this category is called Gritstone UM, but a lot of the work is still in academic and government lab UM. I think what I'm trying to argue is that it probably would speed things along to get some of the heft of the big pharma world

behind this concept. UM, because we all know that there probably will be more variants, and we all know that there will definitely be future pandemics. You know, it was funny reading through your column, Lisa, I thought, okay, because it does sound like we're chasing these variants with like you know, from vaccine to vaccine to vaccine, and it's going to be I think you say, like whackamle, right, Like, how do you a key up? How long though, would

it take to create a pan coronavirus vaccine? Right? So, and this is something that Dr Fatti will tell you, UM to be really cautious about. UM. It could be months, but it could be years. And UM, I think it probably depends on a few different things. One would be how lucky we are and finding I talked about in the story this idea you want to find a spot on you know, in particular, say the spikes protein of the virus that isn't changing, So something that's going to

look the same from variant to variant. UM sets the first step, um And And there's some early clues on that. I think we're going to make progress on that quickly. Two is being able to test those quickly, and three is being able to manufacture those at a scale. You know, as you know, we would want to give this to billions of people in some of these types of vaccines are much different than the ones we take now, so you know years, um, but we're gonna be facing this, right,

We're gonna be facing this virus probably for years. We are going to be and so it matters, um And And I to distress that it's not that I think the variant specific approach, like creating an omicron specific vaccine is a terrible plan. It's just that by the time we have it, we may have moved on to the next variant, right, and so it will no longer be relevant. And we know that each of these variance looks a lot different from the one before it so far. So UM,

that's why it's concerning. Lisa, could you walk me through the science a little bit here? And I went to a lover arts school, so my grasp on all of this is very tenuous. But in thinking of about a pan coronavirus vaccine, I mean, would it be similar to the flu? How? How should I be thinking about this? Um? Yeah,

somewhat similar to the flu? And I mean, well, I should say, in the flu vaccine, they're putting different strains in based on what they predict is going to be circulating, right in this case, um, And people are working on universal vaccines, by the way, and a lot of the

WORKOUP coronavirus vaccines are borrowing from that. UM. What you would be doing is trying to predict, um, what's coming next, and trying to find areas again on parts of the virus that looks similar across lots of different strains, lots of different families. UM. So if you could somehow package those all onto into one vaccine. UM. The ones I described that are happening UM, that government and academic labs

are primarily working on are called a nanoparticle. So imagine a ball and if you tack a bunch of different um parts from various types of viruses onto the surface of the ball of the ball, you'd show that to your immune system and it would hopefully learn how to

attack all of them um. So that's one way, and then another is you know, again to find this common um, this common piece that is across all the different coronaviruses, And there's a few different ways that you might think about delivering that, which you know could be similar to our current MR and a vaccine. Well, if you do think about what we did or what companies did right with certainly financial backing and help from the government, but

able to create a vaccine. So if they all were working together on some kind of PAN coronavirus working out together, maybe it could be done a lot sooner rather than later. Hey, Lisa, thanks so much. Lisa Jarvis, as I mentioned earlier, former executive editor of Chemical and Engineering News, writes about biotech dructic discovery. I'm ready for a pan coronavirus, are you That sounds pretty good? Or a vaccine rather pand coronavirus. That's right. I don't want the pan coronavirus feel like

we already have that. It's a good point. This is Bloomberg. You're listening to Bloomberg Business Week with Carol Masser and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. We want to get to a story that is in the magazine, the new issue of Bloomberg Business Week. It is out, It's on newsstands, on line at Bloomberg dot com. It's a store Katie about a little known fraud prevention company that is trying to become the digital intermediary between the

government and its citizens. It's basically, you know, kind of going after our identity. How do you feel about that? I would say I don't love it. As someone who's very crypto curious, drives to be off the grid, don't love it. But it's a fascinating story. And this little known company, I mean, it seems like it's fate is riding on a very very big claim. Exactly, I d dot me. Let's get into it. Blueberg New Senior economics writer Sean Donnan wrote it. He joins us on the

phone in Maryland. Sean, it's an incredible read. First of all, I have to be quite honest, I didn't know about this company. I D dot ME Who are they Me? Is a company based in suburban Virginia. They are about a little over a decade old. It was created by two veterans who were at Harvard Business School together, a guy called Lake Hall and the guy called Matt Thompson, and originally was to try and set up a kind

of marketplace targeting veterans. And they quickly ran into this issue of how do we verify that people have served and very quickly discovered that actually the software that they had which allowed veterans to verify their identity was actually the most powerful part of their business, and began focusing

on on that. And you fast forward to and and the pandemic and UM I d ME as as as they're called, were hired by By the end of the pandemic, it was twenty seven states UH to try and verify the identity of people who are applying for unemployment benefits. And that was in the midst of a huge amount of money going out from Washington being managed by these different state agencies that were overwhelmed and also a real wave of fraud at the time and concerns about you know,

and I feel like that was such a big, big trend. Hey, Joel, come on in on this. Joe Weber is the editor Bloomberg business Week magazine. I do feel like when all those benefits are coming out, we were finding out about problems in this system and and finding out company about companies like this one. Well that's right, and and I

d ME really helps solve this problem. You know, this interface between government agencies and sort of the digital, the digital you I guess you could could think of it UM. And it really caught my attention. And and was this number that UM I d ME put it into the ether, which was this four billion dollars of fraud UM. And the moment that that was really introduced UM from from the company, I remember Sean just being like, well, that's

a really big number. And so that kind of set off like our interest in it because we no one had really been able to actually connect dots to to anything that that big, and and boy it was big. And so I think one of the things that the story and the story begins with this is you know that there's this number that gets thrown out and all of a sudden, the apparatus kind of springs up around it too, to show how government might be getting taken

advantage of that. You know, maybe maybe these programs shouldn't even um be around to begin with, because um, you know we're we're not able to actually execute them correctly. Um. But then I think it becomes more nuanced and Channa'll take it back over to you because that for under

billion number, Uh, how real is it? How do we think? Yeah? So, I mean, what's we're really interesting is the CEO Blake Hall came out with assessment that essentially half of all unemployment benefits that have been paid out by Washington had been stolen by fraudsters. He was billing it as the biggest cyber heist uh in American history at the time.

And at the time I was looking that he came out with that, I was doing some reporting on the unemployment system and people who were struggling to get of benefits that that they were owed at the time, and one of the things I kept hearing from people was that they were running into problems getting through I d ME s um verification and and essentially validating that they were who they said they were, and that a huge number of a of of claims were being held up

because of this no system. So I I kind of immediately or fairly quickly got in touch with Joel and and some of my other editors and said, hey, we really should be digging into this UH more deeply and kind of interrogating this a bit more because and then you know, you scratch the surface little when you discover that I d ME actually last summer signed a contract with the I R S to help UH delivered the child tax credit payments that went out and so that if you set up an online account with the I

r S, you have to use I d ME. Now they also have an account with the Social Security Administration. They also do work with the Veterans Affairs Department, which means veterans who are seeking medical care sometimes have to set up I d me account altogether. Now, I d me says it has sixty eight million registered users. That's one in four American adults who, whether they know it or not, have an id ME account where it sometimes verified their identity there. And it's becoming this kind of

gatekeeper to government services and benefits. And we had the stress test in the pandemic with what happened in the unemployment system. And while I d ME says rightly that they stopped a lot of fraud and so on, they also had a lot of problems associated with their software that raised a lot of questions about who we should allow to be the kind of gatekeeper the government services

and should it be a for profit private company. So, you know, one of the things that the story goes into is sort of this this Kaka esque world that can descend upon you in when you try to prove who you say you are, and that goes awry and worth mentioning that majority of people who use I d ME probably don't have this problem, but but how weird can it get? John? The identity purgatory, I think is what you called it. Yeah, and uh, one California state

assemblyman called it identity verification jail essentially. And we've also had people out in California. Um, uh, we've had activists out there, you know, say, look, we're essentially convicting people of a crime simply you know, by algorithms, sometimes by blocking them from from benefits and forcing them into this appeals process. Look, it's I got a had a call today from and that right Warmington, who we quote in the story. He's a sixty five year old healthcare administrator.

She just uh started work at a at at a community clinic. Recently. She's in a better place than she was a few months ago. Uh, but she spent a lot of her spring last year just trying to get through the I d ME system. And what she said it was it was like opening a door and running into a brick wall over and over again because when she tried, essentially one of the one of the issues that you take a selfie of yourself, they match that two scans of your driver's license or your passport or

other document. There's a facial recognition software and it often doesn't work. And then when that doesn't work and you have three tries, you get locked out for seventy two hours. Eventually, in that right, Warrington's and the lawyers, and it was lawyers to help her get through the system. We get a runch on. But that's terrifying. Um. When I was reading that, Bloomberg News Senior economics writer Sean Donnin and of course they'll editor editor U Booberg Business Week this

story in the magazine. Do check it out. This is Bloomberg Business Week with Carol Masser and Bloomberg Quick takes Tim Stinovic on Bloomberg Radio. Um, and we want to get to this next story. It is the most read on the Bloomberg terminal today. It's about an individual who says U s stocks are in a super bubble, so get ready for a super crash. Let's bring in Bloomberg News Editor at Large Eric Shatzker for more on his

conversation with longtime value investor Jeremy Grantham. This conversation, by the way, to be featured in a front row segment next week. Eric's story. As I said on the Bloomberg Terminal and Eric is on the phone in New York City, Eric, good to have you here. Um, Jeremy Grantham, You know, give us a little context for our world. I think there's many out there who know who he is. There probably are some that don't. Sure for those who don't, he's a value investing legend. He's been in the markets

for fifty years. He's been calling market bubbles almost as long. People think of him as a perma bear, But to be honest, the reputation is a little unfair. Yes, he has called bear markets before in Japan and the nineteen eighties, in tech stocks in the late nineties, early two thousands, and in the housing market heading into the financial crisis. But he has also at times been pretty constructive on

the market. Back on March to nine of two thousand nine, the day the SMP five hit its post crisis low, he said it was time to get back into the market. But now, as you said, he's calling this a super bubble, only the fourth in one hundred years, and he is predicting one epic crash. And Eric, let's walk through some of the alarm bells that he's seeing. What what is giving him the confidence to say that this We are in the super bubble now and it could be polic soon.

He says. The pattern that has played out in the past, in two thousand and in two thousand and eight, and also in Japan, I should add in the nineteen in the late nineteen eighties is repeating itself. First, there's what he calls a blowoff, which is a rapid run up inspectative stock prices, which we had uh in late two thousand excuse me late early. Then the most speculative names in the market start to collapse, and that began in February, and a good indicator of that is cathy Woods Arc

Innovation e TM, which is down from its high. And then he says, stalk the typically outperform in a bull market, like the mid caps, the Russell two thousand begin to underperform the higher quality blue chip names, and that's exactly what played out. He says, that is a recipe for a crack in the market. And furthermore, this is all statistically based. If you look at the trend of the SMPF,

I've hundred over a very long period of time. What's happening now is a multi sigma deviation from the trend and that has always, in his view, been followed by a market crash. All right, you did have a conversation with him. We want to play a little clip um and this is just a segment Eric where you ask Jeremy Grantham, if this is a sell off, what's the bottom? Check it out, everybody. I think the crazy behavior, the peak of crazy behavior is behind us, I really do.

I think we're now in the by the dip mode, which the super bubbles specialize in. You don't have two years of buying frenzy dying overnight. Typically so even you had some magnificent rallies. And by the dip is the watchword of practically every brokerage house out there, and it always is. You never, almost never have a major brokerage house say the game's over, guys, duck, it doesn't happen. The commercial imperative is it's overwhelming to stay bullish. That's

how you make money. That's Jeremy Grantham. Eric's conversation a front row conversation that you can hear and its entirety next week. You know, Eric. What's interesting is He's right. Every Wall Street house I feel like has been coming out since the sell off began this year saying we we eat bye bye. It's still okay, It's still okay, Jeremy Grantham, I mean, how do we as you said,

he's made some great calls. I'm always I always wonder about one of these kind of iconic investment voices, how we should read them, because has he gotten everything right? Or you know, how do we know? No? No, no no, And that is where we have to bring some skepticism to the conversation. He's a value investor, and let's not forget that. In the years following the financial crisis, and not just a couple of years, a decade plus value

grammatically underperformed. So anybody who listened to the value crowd ended up after those ten years a lot poorer, right, having missed out on a lot of potential gains they would have had with a much more diversified portfolio of stocks, embracing companies like Amazon, Facebook, Tesla and the like. And so you have to look at it into perspective. Um, there's no question that the market has reached some extraordinary highs.

Back in November, the SMP five touched north, and he's saying that in the next crash is going to go down to That's where the long term historical norm is right now, he says, and I'll repeat that in every past super bubble, that is what's happened. And furthermore, this time around, the Fed really doesn't have much animal left because we're living in inflationary times and they can't pump liquidity into the market because that would amount to sort

of gasoline on the inflation fire. Right. It's incredible, and as we said, the most read story on the Bloomberg today, Eric, thank you so much, Bloomberg News Editor at Large, Eric Shatska sharing some of what he talked about with Jeremy Grantham, as he mentioned longtime value investor. Check it out the story right now at Bloomberg dot com. This is Bloomberg Radio. You're listening to Bloomberg Business Week with Carol Masser and

Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio. This week, the National Retail Federation and hosted its Retail Big Show. It happened in New York City virtually and in person. It comes at a time, Katie, when I feel like retail continues to adapt and embrace that omni channel strategy that everybody talks about, but they still are dealing with supply chain challenges and higher costs of doing business and

just finding workers. Right, Absolutely, all those questions is too we try to figure out the state of the American consumer, what they're spending money on. One that shifts back to services. So really interesting time for retail. All right, Let's bring in Nicki Barchi's vice president of Retail Innovation over an Aptos. They provide hardware and software services to the retail industry. They've got clients like Adidas. B j's Louis Vuitton tapestry

so many. She joins us on the phone from Denver, Nikki, good to have you here with us. How are you and how's the retail industry doing. I'm I'm good. I'm recovering from COVID myself, which probably is a good analogy industry is doing right now. On Yeah, I would say that the holidays season was amazing. It was beyond amazing, like better than even with the supply chain issues. Retailers

didn't have to promote nearly so much. So a lot of those benefits, even in the face of inflation, really came, you know, to the bottom line of retailers, not something that they had to had to give away in in cost or and discounts from two consumers. So I know, some of the headlines had said that the monthly spending in December was down, but that was on numbers that year over year were amazingly up. And obviously, I mean

behavior shifted during the pandemic. My behaviors definitely shifted during the pandemic, but so did how people spend money. Obviously, online shopping was huge during the pandemic. Still is I mean, what is the future of actual physical stores look like? From your vantage point, Yeah, I think there's there's a

couple of things that are happening. So I do think that consumers want to go back to stores, and I think that a Macron has definitely put a bit of a crimp in that and it still remains to be seeing the news is looking great that uh there might be some much better bounced back for store traffic, you know, coming the spring. But um, I think that the combination of consumers are going to give up the convenience and some of the habits and confidence that they've developed in

online shopping over the last two years. But uh, instead we'll be seeking confuse that kind of more seamlessly into the store experience. So experiences an important word in the retail world these days because in order for consumers to have it be worth coming to the store, there has to be some kind of experience that that is there

for them to drive that kind of traffic. And whether that's something that's based off of convenience, like, um, you know, the ease of returning something that you bought online that you could just take it to your local store, or the ease of the pickups for a buy online pick up in store order um, but also the entertainment aspect of experience UM, and even just that interacting with other

human beings in real life. I think all our pieces of the puzzles for for bringing consumers back to stores and for retailers doing the things that they need to do to make those experiences UM valuable and enjoyable for consumers. So what's changed, you know, dramatically because of the pandemic. For sure that that that omni channel aspect of using stores much more heavily in order to supplement online buying.

So uh, you know, during the pandemic, there were as many compacitive constraints around warehouses themselves and how many workers you could have in a warehouse at any given time, uh, and things like that in order to be able to maintain social distancing. So uh, you know, even though consumer volume was up tremendously, online retailers couldn't just fulfill that

straight of warehouses. And the retailers that were most successful in adapting to that online surge were really the ones that were able to tap into story inventory and continue to distribute inventory to stores so that they could leverage that inventory for shoppers, both in terms of proximity to that shopper, but also just you know, I can have five people in this store. That are five more people than I could put in my warehouse. Yeah, no, I

get it. Hey, Nikki, thank you so much. Nicki Baird, VP of Retail Innovation, over at Aptosa, on the phone from Denver. I don't know how you feel, back steph, Katie. I I'm tired of stuff. I am tired of stuff. I mean I live in a two bedroom apartment in Manhattan. I just don't have that much room. Truly, I would like to get back to traveling. I'm right ready to experience things. Yeah, but you let me drive? No, no, no, please, I'll do I want to drive. It's a good question

to dry. This is the Drive to the Globe on bloo Bird Radio. It is time for the Drive to the Clothes. With us is Ben Kirby, co head of investments and portfolio manager at the independent global investment management firm Thornburg Investment Management. They have forty nine billion dollars in client assets. Ben joins us on the phone in Santa Fe, Mexico, which is where the company is based. So what I really want to know is do you went into Julia Roberts. Yeah, she lives. She she has

a place here in New Mexico. So absolutely, big fan. Okay, No, let's get serious. It's been a tricky day in terms of the markets, and I think we're trying to figure out are we settling in or this is just the volatility everybody's been talking about as the market recalibrates itself. Ben, how do you see it? Yeah? Well, thanks thanks for having me on the show. I mean, look, I think that the volatility today is just um an indication of what's going to come for the rest of the year.

There's a lot of cross current and we have, you know, a very strong economy, but we also have you know, tightening tiny monetary conditions, and I think I think we're going to have a lot of chances to to pick stocks and a lot of chances to uh either add die for clients, or or destroy value in the next in the next few months. Well, Ben, let's name some names. Where do you position yourself maybe hide yourself from some of the volatility in this environment. What do you like

right now? So I like I like strong dominant companies. Um, I think I think the place you don't want to be right now is in companies that are losing money or companies that are you know, really investing all of their growth profits, trying to trying to gain market share and and and trying to do a land grab. So focus on companies that are durable, that are strong, that have cash generation, that have most around the business. A few names I guess I would highlight within semiconductors, we

like Broadcom and Taiwan Semiconductor. We can talk about those two strong, dominant companies that are generating a lot of cash flow, that are growing, that have dividends. I think generally where you want to be similarly, you know, with an energy, I think you want to pick you know, some names that that have some some secular growth, but also that have a lot of a lot of cash generations of something like a total Energies in France is another big holding and struggle of our portfolios. Well, you

know it's interesting too. I'm so glad we're talking with you because we've got a story in the magazine we're talking about um. Eric Shatzer had a conversation with Jeremy Grantham, who's calling that, you know, saying that we're in a super bubble and we're see basically a superbust um. But there are people saying it's time to look at your portfolio, that the US has had some incredible gains and it's

time to start looking overseas. How do you see that as well, the US versus the rest of the world. I think there's a good argument for that. Uh, Certainly, valuations are a bit over outside the US. Um the rest of the world is not as far in the economic cycle as as the US, so the US is going to be hiking rates aggressively. Inflation is definitely more of a concern the US, and it is in Europe

and the emerging markets. So simple economic cycle positioning, I think I think there's a there's a good argument for international companies. I think I think more than that though, it's that that's that sort of super bubble concept versus a super superbus. There's actually a lot of companies that are not in a super bubble. You know. So I mentioned Hotel. This company is trading at a at a at a single digit p it has a five percent dividend yield, it has a nine percent free cash yield.

That's not a bubble. That's actually a very attractive, reasonable valuation. Similarly, something like broad Com that I mentioned trading at a mid teens p. So there are bubbles out there. As an active manager, our job is to avoid those bubbles and to find the places that still have a lot

of value. And But in thinking about the volatility that we're seeing, and to your point that perhaps this is just a preview of what's to come, how does the FED and their plans play into this, How much of this volatility that we are seeing in are yet to see? How much can we blame the FED here? I think we blend the FET a lot. It's going to be really really the debate right now is are we gonna

have a soft landing or hard landing? Um, But we're gonna have some kind of a landing, So soft soft landing can be the you know, stocks are volato, but maybe they end the year at a similar place where they are today, maybe even up you know, mid single digits. Hard landing is we're going to get a correction at some point, you know, in this year. Overall, I think I think that that is late, that that is behind the game. They're they're raising race trying to catch up.

Um or they will be soon. UM. There's still a lot of time left on the game clock this year, so we'll have to see how things play out. I think it's fascinating what you just said, Katie. I just think about the Grantham story with Eric and this whole idea that you know, there's some that have just had such a tremendous run up, but as we're just hearing right now, that's not the case for every name that's

out there. So um, but let's talk a little bit more about some of the names that you like and fundamentally why you like it on that list and correct me if I'm wrong. Are some big US financials right, like a AP Morgan or Visa? Yeah? Absolutely so. So JP Morgan really fits the bill or something for you know, one of those durable companies that's not going to go away. Um. Over the last five years, JP Morgan has grown their earnings per share at a fifteen percent rate and the

SMP has been thirteen percent. So here's a here's a big bank that's grown faster than the market over the last ten years. They're growing earnings that at nine percent compounded and the market is a percent. So the market includes all these big tech names, all these companies with much higher evaluations. JP Morgan is outgrowing the market for five and ten years. It trades it a p of twelve versus the market at twenty. As a divinields with

two point seven percent. So you kind of put that all together and look, there's going to be volatility in JP Morgan as rates go up and rates go down as we you know, sort of price in consumer credit and other other drivers of big financials. But the big picture, you have a growth entity here with the dividend trading at a massive discount to the market. And ben to circle back on what you said about, you know, your interest in companies that are earning money right now that

you know do have strong uh you know financials. Does that mean you're avoiding growth stocks? How does how does tech look in this environment to you? Speculative tech looks tough um and we've been we've been saying that for a while. So technology companies that are they are really trying to enter new markets. Companies might only have one product and they're you know, really having to spend aggressively

to try and get market share. You know, the capital markets are closing to those companies they have been able to raise debt, raise equity at really attractive rates, and funding is just getting a lot more challenging. So those companies that have no earnings have gone down a lot this year. They're essentially trading like hundred year bonds, and and they should. Within tech though, there there are still a lot of places that are you know, good quality

companies that have interesting free cash flow. So I mentioned Broadcom. We also like Google, so big, big dominant companies with good balanchiet structural growth. You know, they may not be the flavor of the month right now, but over time, their long term competitive position is undiminished. And that's really what we're looking for as fundamental investors. Fundamentals, right balance sheets,

This stuff really matters. Ben Kirby, thank you so much, co head of Investments imagining director at Thornburg Investment Management UM, joining us on the phone from Santa Fe, New Mexico. Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us on YouTube search Bloomberg Global News