Jeremy Grantham Discusses Sustainable Investment (Podcast)

Thursday night. Uh, it's dark out, the Bloomberg studios are empty. It's kind of interesting evening recording. But what can I tell you? His his track record is astonishing. He's created a ton of wealth over the years. His philosophy of investing is pretty straightforward. Be a value investor, be a air of the data. Understand when things are getting out

of hands. Um, you may not get the timing perfect, but when things become excessively pricey, when the animal spirits run amuck, when the bubbles begin to form, you know how that ends, and it's never well. The history he's put together of warning and positioning himself correctly before the nineteen late eighties, Japanese bubble popped, UH, the dot com bubble in the late nineties, the Great Financial Crisis. His

timing has been pretty extraordinary. He's been pretty bearish on US stocks um over the past few years and has become much more enthusiastic for emerging market value stocks. He has warned if you jump into e M, you're gonna feel foolish and uncomfortable for a period of time and not your first buying opportunity, then it becomes even more painful that your second buying opportunity. But if you have a ten or a twenty year window, UM, that's where

you want to be. We discuss philanthropy. He's basically donated all of his money to his charitable foundation, and of course, since it was Jeremy Grantham, we talked a lot about climate change. It's his favorite philanthropic issue, and he's basically warns that if we don't do something in soon, uh, there ain't gonna be a whole lot of people around in fifty years. That we're standing on the precipice of

a catastrophic um set of of changes. And he says he approaches climate change the same way GMO has approached investing. He looks at the data, he looks at the overall trend and makes what he believes are intelligent, reasonable UH decisions based on that data, and those decisions have led him to be extremely cautious about what's coming our way courtesy of UM rising carbon in the atmosphere caused primarily by burning wood coal, UH and oil and gasoline, and we need to UH figure out if we want to

be here a century from now or not. UH. He talked about the propaganda industry that's been pushing back against this, how the oil industry and the Koch Brothers have funded UH disinformation campaign, as he said, brilliantly, quite successfully, and lots of people no longer believe in science because it's profitable for these companies to have the public not believe in science. I could talk about our conversation for hours and hours, but rather than listen to me, continue to

babble with no further ado. My conversation with Jeremy Grantham. I have an extra special guest this week. His name is Jeremy Grantham and he is one of the co founders of GMO, where he is also chief Investment strategist, a member of the Asset Allocation Team, and a member of GMO's board of directors. Previously, he was co founder of Battery March Financial Management. He began his career as

an economist with Royal Dutch Shell. He did his undergraduate work at the University of Sheffield, got his MBA from Harvard Business School. Jeremy Grantham, Welcome to Bloomberg. Hello, pleasure to be here. So let's let's start with the Battery March Financial Management that was nixt nine. GMO was seven. I'm curious the seventies were not especially fun period to be an equity investor. How much of your investing philosophy

was shaped by your experience in the nineteen seventies. The seventies were hugely kind to us country to what you're suggesting. We had a battle plan to invest all our money in small cap value before institutionally they had invented small or value. Everybody invested with Morgan Guarantee Trust, and they bought the nifty fifty, the Great Avon's and ibm s, and we bought Great Lakes Dark and Dredge and which

and no one had heard of. And they went down with the rest of the market, but no more badly than the Avon's. They all everybody went down in the great and then where they rallied for a year, we just rallied and rallied, and the small cap inherited the earth. And between seventy four and eight two a small cap outperformed by well over a percentage points. So did that experience affect your philosophy? Did that make you more of

a small care up in value factor investor? It made me much more a devotee of trying to find which group might do better in a D two. We basically abandoned small cap and went into large cap because they've done so well. So we gave up our ten years of background together Dick Mayo and me and being the m M GMO being the m M GMO and and changed because when something has a run and beats the market by a hundred points, you better be ready to abandon chip, and so we did so before we get

up to the I want to stay. In the nineteen seventies, when you were at Battery March, you worked with Dean LeBaron and the two you kind of put together an idea that you first floated at a Harvard Business School seminar um, and the concept was maybe people should just buy a Brouin index of stocks and stead of trying to pick individual names'll just tell us how that played out.

Dean had a a friend, Lee Bowden Hammer, and this was a summer course for pension fund officers at HBS, and they had written a special case where these pension fund guys were going to choose between the establishment Morgan Guarantee Trust they JP Morgan basically and and the other banks in New York owned the pension fund business back then.

And the second player was tro Price, which was relatively new and represented growth, which was also relatively new, and and the third one was a little unheard of new company. They actually invented a new name for us. And they had to decide between these three. And at the end of the class, when they had gone through their proceedings, as it's typically the case, they the boss asked the visitors sitting on the back bench, had they got any comments.

You're not allowed to talk during the class, but you usually get asked. And I can't remember what Dean said, but what I said was when I looked at the case, and I looked at the data for the three players and the SMP. I was surprised that no one in the room had suggested giving their money to the gentleman from standard and pause. That was it went over like a lead balloon. No one twitched and on the car back in the drive, I had said to Dean, why

don't we take this seriously? Honestly, think about it. GM is said to have a hundred different managers. What chance did they have of actually beating the SMP. They're drowning in turnover and management fees. So if you look at it, you know one thing with absolute certainty. The players are going to pay percent or two percent a year to play the game, and the observers sitting at the bar, if you will, watching the poker game, are going to

have a market return. Therefore, by definition, the guys at the bar are going to be the average of the poker players, because there will be a zero sum poker players. Some of them may do brilliantly well by inflicting their transaction costs and their management fees on one of the less good poker players. And but at the end of the game, all the players will sum to minus one and a half, and all the observers will sum to

zero and and you would win. And why don't we suggest to the big players instead of instead of having thirty investment managers or a hundred, that they put a big chunk of their money into the market. So the entire logic was zero sum game, which was a sufficient reason to do it then and is a sufficient reason to do it today. And no one was interested. We offered it. Dean was a brilliant propagandist. No one was interested.

No one was interested, and he got written up the story in the New York Times magazine, supplement and so on and so forth, and it got a lot of exposure, and at the end of a year, Pension and Investment the Trade Rag jokingly gave us an award for the most talked about product with no business? How did you first get interested in the challenges of climate change? When when I'm giving my stump speech to financial people, I

always hope that someone will ask me this question. And what I say is, you've seen the data that I've just gone through, and you're asking me this damn stupid question. Why why would I be excited if you've seen the data? The real question is, what the hell are you doing, not being excited. How is it possible that the great majority of you sitting in the audience have done nothing and no very little about this threat, which is the most severe one you will have to deal with for

the rest of your life. There was a book out not too long ago called Windfall, and one of the conclusions of the book was the dry areas are gonna get drier, the wet areas going to get what wetter. Where it's hot, it's going to get hotter. Where it's cold, it's going to get colder. And the way this falls out across the planet is disproportionately on the poorest people in the world. Does does that still ring true? Is

that what we're looking at going forward? Yeah? I think in general the consequences of climate damage here I felt in the most sensitive areas, which are occupied mainly by the poor, they live in the least desirable parts of the world, the semi desert zones of Africa and the Far East being classic examples. However, the cold, the cold

areas are not getting colder. Actually, the further north and south you go towards the poles, the faster it's warming up, and the closer you get to the equator, the more slowly it's warming up, which interestingly has has some profound effects because the wind draws its power from the temperature differential between the pole and the equator, and if you narrow that by having the polls get warmer faster, you

slow down the winds. So now hurricanes are moving ten percent slower, So you're more likely to have a hurricane amble its way across your territory and rain a whole lot more rain, which is what happened in spades in Houston, where it rained thirty inches in three days. You have raised the question as to whether or not energy will give us a serious and sustained set of problems over the next fifty years. What what you're thinking about energy?

Looks like parts of the world are transitioning to renewables somewhat slowly, but it's moving forward. Tell it. Tell us about energy? Well, the technology and energy has been unexpectedly great. It's moving at great speed, has a thousands of new enterprises trying to push it along, and in general it's been a very pleasant surprise, meaning the costs have come down, the efficiency costs of wind have come down more than anyone dreamt possible years ago, costs of solar have come

down the same um. Solar is now equal or cheaper than coal. Is that a fair statement? A modern utility plant for solar or wind in any one of half a dozen better states is cheaper to construct and run than it is merely to run an existing coal plant. It's actually fully costed cheaper than the marginal cost of the best nuclear and the best coal plants. Do you

see much of a future from nuclear? My my motto is never underestimate science and also, unfortunately, never underestimate Homer sapiens ability to screw it up the But in terms of nuclear there are endless attempts to come up with what you might call third generation fusion, trying to bypass some of the problems that have slowed them down for

twenty thirty years based on the new technologies. They have so much invested in in the old approach to fusion that they're kind of now they're thirty billion in the hole. They feel they have to keep going, and some of these new people working on a shoestring may may get lucky, may come up with a form of fusion. There was there was a buzz A couple of years ago about thorium reactors that kind of came in, and and even on fishing thorium or new engineering tricks small scale, you

can't rule them out. If you come back in thirty years, I think there's maybe a fifty fifty shot that one or the other will have come through with something that is helpful. Um of course by their and energy storage, which is the key to wind and solar, and may have become so cheap that it's that it's not really necessary even even if it's technically feasible um solar and wind, which are continuing to decline by the way out into

the distant future as far as one can see. I just give you one example of that, and that is that the winds over the ocean is faster than the winds on land, and the bigger the wind tower, much more efficient it becomes. It's the swept area, so that a twenty fourth blade doesn't give you twice the energy of a ten foot blade, it gives you four times. And as you go up the wind speed increases, and the power of a windmill is a cube of the

wind speed. That's why hurricanes of a hundred and forty miles are so much more deadly than a hundred and twenty. It sounds like it should be seventeen percent, but it's fifty or sixty percent. And so if you can build a truly giant windmill, and the ones you drive past on a cycling trip in under two megawats, and the one you can order from ge if it's still around but delivery in two is twelve megawats, and that is almost as high as the Eiffel Tower, believe it or not.

And they are massively efficient, and you can only build them in in in the oceans where the wind is more constant. And if you could find the technology to build it in the North Atlantic and have cables that could carry it back to civilization. Uh, the wind is blowing e t plus percent of the time in the winter when you really need it in the northern hemisphere. So there is a lot of potential up our sleeve for the next few decades. In the end, I think

we will have a plentiful supply of green energy. We will not, as a civilization, be brought to our knees for a lack of green energy. The problem will be how long has it taken us to get there? So we will get plenty of energy in fifty years, will be fully decombonized. I should think in a hundred years, maybe sooner, but the damage that will have been done

by then. As the carbon dioxide count rises. We have seen and been amazed, including the scientists, by the way, at the rate at which the damage in fires and floods and the hurricanes, and the speed they build up their power drought some floods for agriculture, We've all been horrified by how quickly that has escalated. And if you extrapolate what is going on today, we have no hope of controlling this for one and a half degrees, that is merely an intellectual exercise. We have no real hope.

But two degrees, we're going to have to fight and scratch and do much better than we are doing today to keep it below three degrees. And at three degrees, all manner of bad things are already happening, and some of them may actually get out of control, become self reinforcing vicious cycles. There's no guarantee that that will not happen anytime in the next few decades. So so let's talk for a moment about agnetology or culturally constructed ignorance. Um,

you have a line that I'm intrigued by. You wrote, the misinformation machine is brilliant. Please explain. The Koch Brothers and and the excellence of the world have been basically funding a disinformation for thirty years, maybe longer, and they have help set up institutes, UM. Right wing institutes who basically defend the idea that climate change is a hoax are in that sense anti science. And they've done it well. They've been persistent, they've funded it, if you will, generously,

and they have achieved remarkable results. In comparison, science has been diffident and cautious, careful not to overstate anything, and and in that care they have garanteed they understate everything. And as I like to tease them, it may be dangerous to overstate most things in science. But one thing is absolutely certain, and that is it's dangerous to understate

climate change. If by understating it, by being too cash, cautious, too careful, you you influence a politician to underreact, you influence the general public to underreact, you may be making a huge, painful, dangerous mistake. So the tobacco industry managed to keep people confused about the impact of tobacco for decades and decades before they ultimately how to make a

multibillion dollar, multi decade settlement. How long will it take before the carbon industry, UH, similarly stops pulling the wool over so many people's eyes. I think we're changing very rapidly this last couple of weeks. That's been a confluence of reports and coupled with the terrible forest fires burning all the time in California. Regrettably, those natural horrors are

seemed seemed to be necessary to move public opinion. But the confluence of that tragedy with all these major reports one from NASA, a government agency, and and major one from the U, n H I, p c C talking about the chances and costs of holding it at one and a half degree centigrade, and and and also three or four other articles and peer reviewed seriously important journals,

what I would call the top three science journals. That confluence has created an enormous amount of attention in the press, which is so rare, and it's played, and it's played in my opinion, and I think Trump has agitated the science world into standing up and actually stating now for the first time in terms that rep present that honest belief. So I think the worms have turned fairly big time.

I I used to tease them. I hadn't actually a commentary in Nature, perhaps the number one journal, and it was called be brave, be persuays if be arrested if necessary, And there was haranguing these guys for not stepping up. Well, now Trump has done what many people couldn't, and he stepped up. They have stepped up. I should say, let's talk a little bit about philanthropy. I read a fascinating statistic. Only two to four of all charitable donations made each

year go towards environmental causes? Is that possibly right? Sadly, it's absolutely right. I mean, it's it's tragic. It reflects I think the motivation for a lot of charitable giving, which to be uncharitable, is to move in the right circles and be recognized for what you do. And you move with illuminati, and you go to dances and balls and photographed and put in in the tatler, and and

so it goes on. And in comparison, lowly defense of the environment is not very good from promoting your your your life in in in smart circles it's it's a kind of country cousin and and it gets two percent, even though without solving the climate problem. Your college is your museums, everything. In the end, it's not going to be worth much if we can't maintain a fairly stable global civilization, which is seriously at risk. And almost any

serious scientists would come from that. So let's talk a little bit about the Grantham Foundation for the Protection of the Environment. What what sort of activities does that fund? First of all, let me say it hasn't of my accumulated ill gotten gains from the financial world, and that is a pretty effective statement of how serious I think it is. I don't even see it really as philanthropy. I see it as defensive investment, trying to look after

my children, grandchildren and their progeny indefinitely. And I am always amazed that more people don't see it that way. UM, I'm not a scientist and you don't. But you don't have to be a scientist to understand the science that is coming down the road so fast. So let's talk a little bit about, um, your long term goals. How do you specifically identify different recipients that you fund? You you fund a lot of existing groups as well as

some of your own new projects. To start with the exciting stuff of our corpus UM is invested in green investing by us directly in in in venture capital. So and I have three very industrious sharp helpers and we spend I spend as much time as I can, and they spend all their all their time really um chasing down great opportunities in this field. And one of the rules we have is they have to be capable of really making it a difference, changing the probabilities of surviving

all all of these stressful points. And we spend a lot of time face to face with scientists and entrepreneurs scientists slash entrepreneurs, and it's amazing what they're up to. They have done um incredible things. I just give you a few examples. We our r n A is the kind of engineering part that sends messages to the d NA what to do. And the problem with it was so so expensive to isolate that a lot of work

just couldn't be undertaken. It was a thousand dollars a Graham and we bumped into a group that with a completely different approach, can now make it. At thirty five cents a Graham with a target of ten cents next year. That's the kind of order of magnitude you need to be disruptive. And and having obtained the material, they can

now design h endless things. But one of them they started with a very obvious one was to send the instructions to a very expensive beetle, the Colorado potato beetle um that can devastate whole fields in in kind of one sitting as it were, and the RNA says, are you a Colorado beetle? Yes, I am, Please proceed to this part of your DNA. Now we will turn off this particular switch. And what does is unique to that beetle.

It will make it impossible to digest cellulosic fiber. So the beetle munches away on the potato and dies of starvation and drops harmlessly to the ground where it's not even poisonous and can be eaten up by the other local insects, and all of the literally poisonous insecticides that previously we're used can be dispensed with. I mean that that is the kind of thing that could really change the world. And another one is we we fund a

lightweight vehicle. The trouble with the Tesla. I just received my Model three, and I'm thrilled by it, by the way, But it weighs three thousand pounds pounds and it's moving a hundred and fifty pounds of me down the road. And the vehicle we're funding via m I T work

is under eight pounds. Is that like a composite material that's been it's carbon fiber protection around a three wheeler, and you could say it's a glorified comfortable motorbike with one or two passengers, in room for some groceries and keeps the rain off. But it's also the most streamlined vehicle on the road, moves like a rocket ship, entirely electric, of course, and it has a range far beyond any

reasonable needs. The the material, the composite, stronger than steel, but a fraction of the weight is that the goal. It's ten times more capable of absorbing injury and still bouncing back than steel, and of course very much lighter. Whether it's a tenth of as light, I should think probably something like that. And you mentioned the potato beetle. I have to ask about agriculture in general, because I

know this is a topic that's been very worrisome for you. Um. I think most people are aware of the great die or of bees. Maybe it's a pesticide, We're not exactly sure what it is. How dangerous, How threatened is the food supply of Homo sapiens given all the changes that's going on. I actually think that the intestation of food problems with a rapidly growing population, particularly in Africa, is the most direct threat of climate change, because climate change

makes the growing of food that much harder. A report from the Proceedings of the National Academy said that they expect, if nothing has changed in the current agricultural processes, that the grain productivity will drop by thirty by the middle of this century. Around the corner and and the u N will tell you we need a increment to keep feeding the cattle that the Chinese want to eat, et cetera.

And the second big this problem that may be burning faster even than climate change is toxicity, and they have kind of flashed onto We're not looking for trouble. We want to keep life simple, and we can't because these problems are all interrelated. But let's start with the insects.

Two years ago, a wonderful group of amateur insect lovers in Germany looked at sixty three forest preserves in Germany, so they're not around refineries, that in a forest protected forest, and they measured that from nine until now all flying insects have gone missing. I mean, this is absolutely catastrophic. People felt there must be something wrong, but it was done so meticulously, with Germanic thoroughness, one has to say,

and there is no possibility of a major era. They put out the same net, exact same net in the same part of the forest on the same day of the year, and they'd go back and back and had

thousands of measurement periods over that time period. And then, to make matters worse, in the last six weeks, a similar study in the proceedings National Academy of Science, once again which is generally considered the second most important science journal, came out with an insects study in a protected semi tropical forest in Puerto Rico which was protected by the King of Spain long ago. And again to everyone's horror,

se approximately of the flying insects were missing. The birds that fed on insects were down by the birds that fed on seeds weren't down at all, the frogs and lizards at the insects were down by And the impact on the soil, it's very hard to find out. But unless we're careful, a lot of the compost and leaves and and dong is going to be left there unprocessed, and pretty soon soil will not be able to do what it does us. And also, of course the effect

on pollinators. You lose the pollinators, you lose the value of all your agriculture, a lot of the all the fruits need pollination, all flowers need pollination. And no one yet we've been able to find, can tell us the cascade effect of going from where we are minus a hundred. So how come no one knew this? And it turns out no one has been studying insects, so why not? And it turns out because you can't get grants because it's a boring damn topic in the past, and and

no one was funding the research. The only research that we knew were on monarch butterflies because they're kind of trophy insects and bees because they are commercially important, and we knew that they were under terrible duress, and we assumed that was unique to monarchs and bees, and it isn't. It's you know, it's common to all flying insects. So the be die off that's been in the news for the past five or so years is not so much a bee die off as it is a winged insector

the wind a flying insect die off. Yes, we know that chemicals that are commonly used can have terrible effects on fertility rates. Now we know by a study that's only two weeks old where some guys in East Anglia, responding to the Puerto Rica study, grabbed a beetle and quickly, because they reproduced so quickly, ran it through various cycles and found out what happened when you raised the temperature.

And because everyone supposed that in Puerto Rica study it was the rising temperature of the forest that was doing the damage. Insects in the tropical forest are used to no change in temperature and suddenly you have bumped it up, almost overnight in a way two degrees centigrade. And the distribution means that out there in the tail, those rare nights when it's four degrees have gone from one a

year to fifteen. So they put these beetles in the lab, and they gave them a heat wave of four degrees extra for five days, a typical heat wave that we've all suffered through, and it lowered their fertility by and then two weeks later they gave them a second, the second heat wave, and they were stera And a lot of people wrote in who were studying humans and other mammals and saying, yes, of course sperm count is terribly sensitive to heat and this ring, this ring is very true.

But in Germany, where they have tolerance, where the temperature does change, we know it's more insecticides. There are these multiple reasons, exotic insecticides, fumes from coal burning, mercury, etcetera wafting through the air, and temperature changes. It's just turning out to be a brutal war for insects and without them. EO. Wilson, the famous insect and guy, would say, we can do

without humans, but we absolutely can't do without insects. Last question on on philanthropy, Um, you created a prize for excellence in reporting on the environment. What why is such a prize? Nous? Sorry? Uh, We created it because there wasn't enough going on, and we abandoned it after a few years. Because in the great fall off on print, uh, the first guys to go with the bottom of the totem pole, and the bottom of the totem pole, sadly

to say, with their environmental journalists. So pretty soon we found we were trying to award a prize to a non existent group of journalists, and we thought, we can use that money. It wasn't tiny. We can use it to get direct investigative journalism done and research, direct research done. And it was much I think, much more effective to do that. Quite fascinating. So let's talk a little bit

about the current state of investing. I read something you had written some time ago that I found somewhat shocking, but I guess I shouldn't. From two thousand in you wrote that GMO lost half of its book of business. Uh. You guys had turned cautious while the market was screaming higher,

warning of the dot com bubble. In fact, I should preface my remarks by saying you presciently warned of the Japanese bubble in the late eighties, the dot com bubble uh in the late nineties, the financial crisis and housing collapse in the mid two thousand's. What was that experience like in two thousand and did you sort of have a repeat of it in oh seven oh eight O seven oh. Wait was the only thing we nailed. We we got it pretty well, the timing down right, and

lost very little business going into it. Um is entirely different. We had a good record running through and you normally think you have three years in the institutional business and and we lost half of business in less than two and a quarter years. Uh and and why was that? It's it's because it's completely untrue that you lose business

in down markets. In down markets, the clients become catatonic in a serious decline, and they wait to see what has happened when the smoke is cleared and their nerve has returned. But in a bull market, they are absolutely dripping with adrenaline and there exchanging ideas on the golf course and they can't wait to to make more money than their neighbor. And you want to perform in a bull market, and your life um is is reduced in

length that their patients drops like a stone. Barton Biggs had a famous quote, um bullish and wrong, and they're angry at you, bearish and wrong, and they fire you is that Is that a fair statement? Yes, I think that's a very fair statement. There is nothing you can do more dangerous to your career than than underperform in one of the great enthusiastic bubbles. And anyone who was around in is lucky they experienced a bubble bigger and better than a full of sound and fury and dot coms.

And the real test that I love is that you went to the Greasy Spoon in Boston and instead of watching the Celtic replays, you were suddenly watching talking heads on MSNBC and other channels recommending the latest dot com, pets dot com or whatever. And that was right before or so collapse. Um, we actually predicted, and we're quoted in the Economists of saying the SMP we expected to drop and the NAS deck by And the SMP dropped by fifty point zero and the NAS deck by two.

So um, they are not too bad. They were catastrophic declines for almost everybody. So after you were proven right about the dot com, did the clients come the half of the book that left, did they come back? I'm afraid to say not a single client that I'm aware of came back on the grounds that yes, we had been right and would have saved a lot of money

and they've made a mistake. Many other clients came back who felt that they would have stood their ground and we were that kind of guys, and so the business flooded in and we made up all our losses with a lot of interest. Indeed, that was a lovely time to live through for us. So let's talk about the current circumstances. I would describe you as bullish on emerging market value but bearish on US large cap stocks. I'm

using your forward seven year forecast as a basis. Uh, let me put a little little some numbers on that seven year forecast US large cap stocks minus three point nine percent is that per anum? Or is that total per annum for seven years to get it down to fair and then e M value you're talking about seven point seven percent on the positive side, which is in fact a little cheaper than it needs to be in

the long run. So that means you could sit back with that and hope to get a decent return in perpetuity. So one would think, um, you should be lightning up on US stocks here and buying EM value is a well, that would be a very conservative statement. I think what you should do here is sell all of your US. There has never been a bigger gap between the US and Emerging than there is now. And those opportunities don't come very often, and they have a very old fashioned

feel to them. And I describe it basically as you buy when they're very cheap, they become extraordinarily cheap, you suffer, you double down, maybe suffer a bit more, and then you win. And if you can take the pain, you always win. On those kind of bets. There's very little chance that you'll come back in ten or twenty years and Emerging will not have been the pants off the US. Do you look at specific countries or regions or is it just by all of the um You do the

best you can to optimize the return. And I don't want to get into my colleagues territory, but yes, you would wait the better looking countries in terms of true value growth compared to cost, and and pick the best stocks and the best industries to the best of your ability. Earlier this year, you talked about a potential US equities melt up before the next down cycle. Are we still looking for a melt up? I think the odds of dropped way down because we're living in a rather ancient

economy and a rather ancient stock market. Both of them are two of the longest that there's ever been UM and we were doing splendidly through January. January, as you remember, was a wonderful speculative month. Uh and and the market

was up eight percent for the month. And and then we got into this strange era where the administration rattled the currency markets, which whiplashed through as it usually does, to the riskier end, the emerging market end, and the dollar is in a crisis, the blue chap so the dollar was strong, helping local stock prices. And and then we had trouble with agreements and allies and NATO and go down the list, go go down the list. And it created a not an undercurrent, but an overcurrent, if

you will, of of nervousness on on many fronts. And that is not the juice with which a a great bubble proceeds. That didn't exist in we had Greenspan saying the dot com and and the internet would dry have a way the dark clouds of ignorance and introduce a permanent new era of higher this and higher that and better this. It was almost poetic, and this time we had everyone going from one little nervous twitch to another,

So I think it was nipped in the bud. Now, having said that, the market has a history of being resilient, I think it's quite likely. Since we're in the sweet spot of the presidential cycle, this is the time when presidents look to the federal reserve to stimulate the economy because it needs at least the year running start to

produce the best labor for election. And what moves the dial on election day we studied at some considerable length, and it's the shifting employment six months up to the election. A year before, it doesn't matter, it's all forgotten. Six months before the election. You've got to have a strong looking labor movement, a labor results, and to do that, you've got to stimulate the economy a year or eighteen

months ahead of it to get the lag effect. And that's what they do, and they've done it since nineteen two. The returns in the seven month window from October of this year through April of next year in every presidential cycle, which is the theoretically perfect time to do economic stimulus since ninety two, that has beaten the remaining forty one months the forty eight month presidential cycle. Just think about that. The seven months has beaten the forty one months. So

that's since nine two. So this is the last gasp opportunity for a melt up. I don't think it's any longer, but I think it's maybe twenty five chance that we will have a handsome rally between now and the end of April. You mentioned all of the international intrigues and various policies and packs and what have you. I would be, um, not doing my job if I didn't ask you about the tariffs and trade wars. What is the impact of this president's who has said it's easy to win a

trade war? Um? What what is the impact of these tariffs? Is this potentially inflationary? Is this potentially um something that could knock the economy off its footing? So net net, it's deflationary because because it discourages global growth, okay, and so you have weaker growth, slightly higher unemployment, and and as we're playing with general motors, and that puts pressure on wages. And it's very hard to have inflation when

you have downward pressure on wages. So how are you going to have a stimulative presidential cycle eighteen months in advance? If there's a tariff trade war going on that doesn't sound like it's productive for the party that has the White House. No, it's not productive. So two things would have to happen from chance to come right. You'd have to have the FED ease up a bit slow slow the rate hikes. Slow the rate hikes. No, they can

have one or two, but not four or five. And and to have the administration cool it on trade wars and make a quote surprise announcement of an agreement with China. And and there's your milk. And then you get some resilience. That sounds pretty good. Can you stick around a little bit? I have some more questions for you. We have been speaking with GMOs Jeremy Grantham. If you enjoy this conversation, check out our podcast extras, where we keep the tape

rolling and continue discussing all things investment related. You can find that at iTunes, Overcast, Stitcher, Bloomberg dot com, wherever your final podcasts are sold. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my daily column at Bloomberg dot com slash Opinion. Follow me on Twitter at rid Holts. I'm Barry rid Holts. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Jeremy.

Thank you so much for doing this. I've been looking forward to having this conversation with you for so long. I don't know if you remember. You and I had a lunch, uh sometime last year, and uh, I should have recorded that. That was endlessly fascinating. And all it did was remind me of all the questions I had for you. Before I get to my favorite questions, there's one or two things I missed that I wanna get to. Um. God, I could keep you here for another hour, but I

know you have places to be. So first, you describe yourself as GMOs Chief of Propaganda, explain that title. To be honest, I have not been making important investment decisions for quite a few years. I think my last input was exiting emerging markets in July of oh eight. That worked out to be pretty good. That worked out splendidly, and it was the twelve hour But what the hell saved an amazing amount of money? Um. But other than

that we have terrific teams. I'm eighty years old. They should be making their own mistakes and and and making their own hits. Um. So what what did that leave me? I asked myself? UM? And Lucy speaking communications, or as I like to call it, propaganda. Um. And since I've always been drawn to big picture items, that that's a natural cannon fodder for propaganda. I have overwhelmingly more interest in the big, the big issues of climate change. Do

we have enough resources to get the job done? What is the role of growth in the long term economy when you can't have compound growth in a finite planet. How are we going to deal with that? What is the role of capitalism now that it's so profit centered for the short term and has little interest in the

long term. What are the consequences? What are the consequences of the US corporate system having so much power that it practically controls the government and the profit margins have gone up and squeeze labored down by three or four points. The consequences of these kind of issues absolutely fascinating and frankly being there done that in terms of stock picking and industry picking and sanct to picking and I'm happy

to leave that to my colleagues. And um, so you mentioned big picture, let's talk a little bit about the world's of bubbles. You were right there on the Japanese bubble, perhaps a little early on the dot com bubble, on the Great Financial Crisis. The timing was as good as it gets. So the first question I have to ask related to bubbles is are there any visible these days? Where? And when? What do you see to take a little

bit of credit from a generally tough h environment. Back when I suggested a melt up, I did point out in a little box in that paper that I thought bitcoin was a classic bubble, the essence of bubble, And it was fifteen thousands the day I wrote right well, from the highest were down word about So for something that volatile, this is by no means impressive decline. Would would be an intra week setback when down to about

four thousand from about four thousand from fifteen thousand. But when you've gone up fifteen times in no time flat, you might reason reasonably think of bubble breaking as a ninety declin. We're we're else? Are you looking at bubbles? Anything else standing out for me? A bubble requires overt euphoria and other demonstrations, and they to me have been

a little lacking. Perhaps they were beginning to take place in in the fangs, and the fangs have now receded in what feels more like um reorienting the market moving from one group to another than the beginning of the end of a major collapse. A rotation, not a bubble rotation, thank you, not a bubble pop. To me, it feels that way. Uh. And and at the moment, once again, as we've had dominating this tenure nine year ball market, we have been climbing the wall of worry. There's always

plenty to worry about. And you read it freely. It's not dripping with optimism. When was it. I'll tell you when. It was for a brief period back in January. Other than that, this has been quite a pessimistic major bull market.

Hasn't the most hated bull market in history. Um. In fact, there's an argument to be made that since the dot com I'm sorry, since the Great Financial Collapse, investors seemed to be suffering from a form of post traumatic stress, and they've been very reluctant to embrace the bull with both hands. Yeah, is that what's needed in order for that to get a classic bubble breaking um, that's what's needed.

And what provided the juice in oh eight was the housing market, because we defined in the old days a bubble as a two sigma once in a forty year breakout, and the US housing bubble did a three sigma. That's the once in several hundred years. Never in history had the entire US real estate market gone up a lot at the same time it would bubble in Chicago, crash in Florida. Oh, but this one, previously, this one, everything

went up together. And it took years of moral hazard and the FED talking it up, and and and the FED saying things about the housing market that the US housing market unquote merely reflects a strong US economy, etcetera, etcetera, And and then the one I really loved. The US housing market has never declined, meaning it never would, which by the way, is completely false. If you go through history, there are many examples of the housing market supplin it declining,

but only a little bit. And what he should have said is the U s hasing market has never had a major bust because it has never had a collective major bubble, and now it has had a major bubble. The question that they should have been asking is has there ever been a major bubble in anything that didn't bust? And the answer to that is, in general terms no, But there is a special case in real estate. If you live in a real estate market where the zoning

is tightly controlled Sydney, London, you can San Francisco. You can have aberrant looking bubbles. If you live in a real capitalist market like the US Spain Island, where house prices went up and you covered the whole of Ireland and new houses and you and the south of Spain began to sink under the water from the weight of new apartment building, and the US built an extra million and a half houses over Trent in response, then you will have a classic, well behaved bubble, which we had

in the US housing market. Without that, the world would have been quite different. It was driven and the power and the juice was provided by the housing market and all the amazing subprime stuff that went with us. So you mentioned moral house hazard. Um, I don't find a lot of people who share my belief on this, but I have to bring up yours. You have suggested that we should have let more than just Lehman bro others. Visit that lovely building downtown with the columns and the

bankruptcy judges inside, tell us about that. Yeah. I think one of the problems we have today, with the steadily increasing levels of debt on each cycle wave, is that the moral hazard has never been truly broken. In the end. The bet has been if things are going well, you're on your own to make money, and if things go badly, we will come and help you. And as long as that is there, there will be more risk taken each cycle, as more or less there has been, so you end

up with privatized profits, but socialized losses. Socialized losses. They bailed out the rich bankers and made the homeowners suffer, and I thought that was a bad choice. They should have done more to help the homeowners and and less to help the bankers. And I think obviously you can't let a I G. City and the others all go under together, but you could and should probably have let

one of them go. The difference between City and and Lehman and a I G. Is that Goldman Sacks had an enormous amount of its future wealth and income hinging on a i G insurance products that were insuring all the derivatives, and yeah, the derivatives which no sane person would ever have ensured, was offered insurance by some dope department of a I G. In such enormous quantity that had they defaulted, the future of Goldman Sacks is an extreme doubt. I think they would have failed. Really, it's yes.

And if you say, what is really different between Lehman and a I G. They said they couldn't bail out Lehman, but they could bail out a I G. And one of the huge differences is that enormous amount of junk of which was covering Goldman Sacks and everyone else at it together. But my choice, nevertheless would have been city. Well, what is this the third bail out they've gone through?

And they were technically bankrupt if you mark them to market, they were way under and badget and banking authorities say, you know, if you have a run on the bank, you'd better protect them. This wasn't a run on the bank. This was technical bankruptcy. They had made a lot of bets that didn't work. They were bankrupt. There's a big difference between liquidity and insolvents and and insolvency. And this

was way on the wrong side of insolvency. And you you should have picked one of a I G or city and let it go, and you would have had a deeper You would have had a deeper pull back in something like yeah down five thousand. It would have been healthier in but it would have recovered just the same. And today the undertone would be slightly different and most of the data would be the same. In my opinion, quite fascinating. I only have you for a few more minutes,

can I? There are two a couple of issues. Sure, I really think that I have missed. You asked me what we do with the Grantham Foundation. Yes, and I should say a very important of all our grant making is done to communications fifteen little groups who do investigative journalism, who try and change the hearts and minds of politicians and the general public to counterbalance the forces of obfuscation that we have discussed. Is that effective? Are you seeing

progress in that space? Well, it's a bit of an unequal struggle. We put some money into the carbon tax in Washington State and lost. We were outspent twelve to one. But you have to do pick your spots and do the best you can, uh. And that's what we try and do. And I think in terms of investigative journalism

and other efforts, it's it's first rate. Um. Otherwise, we look for the point of maximum leverage where uh a big organization like w w F for the Nature Conservancy is doing something that we think really impacts the problems of agriculture or a climate change, the water, uh fishing, things that will really matter to the well being of the world as we go forward. Let me ask you

about to go on? Sorry. Yeah. The The other thing is I wanted to elaborate on the population problem in Africa, where all of the three billion that's forecasts for incremental population between now and is basically an Africa. And let me just give you some terrible numbers. When I was born, the twenty eight million Nigerians there are a hundred ninety today and the mid range forecast twenty one from the

u N is seven hundred and eighty million. Okay, that country's support of course, not so between now and then what misery and collapse and basically Robert Barons and regional bandit chiefs are going to go on that will be your notemare over there a nightmare? And if you ask them today would like to emigrate? And what that will be in ten twenty years? Lord and leaned Nes. And you see the damage that hundreds of thousands of immigrants have done to the liberal traditions of Europe and the

stability of politics. And you replace that an attempt to have hundreds of millions you simply can't get there from. And how much does the destabilizing of European politics effect the behavior of the Russias and China's and the us is of the world, the megapowers And where does that leave us? I think that is the thing we should really focus our attention quite quite uh frightening. Um. You

mentioned the Nature Conservancy. I was curious as to because I noticed in this part of the country I frequently see spaces purchased or donated to the nature Conservancy. There's the little sign with the green leaf. How effective as an environmental strategy is the idea of taking a parcel of land and removing it from farming, from development, from housing. What does that do for us? You need them genuinely wild pockets and cards between them to maintain a hope

of having a successful wildlife any sort of biodiversity. Yes, WWF recently said that we had lost six of the mass of all the wildlife added together above the level of insects. So we are not exactly winning the struggle. So you need that, But you also need to to limit climate change. If you have all these lovely cards and the climate goes up by four and a half degrees centigrade, most of what you've done, it's wasted any difference. Alright, So I only have you for another five minutes. Let's

get to our speed round with our favorite questions. God, I could keep you here for hours and hours more, but your wife will kill me. So all right, So tell us the most important thing we don't know about you. No, I'm an open book, open Why don't you see? That's what you get Early mentors. Who are the people who helped shape your career. I think my grandfather. He was brought up Quaker. He gave up quakery, but he stayed with the spirit of of being a Quaker. He was

a good person. He didn't believe in flamboyant spending. He became quite wealthy and used his money very wisely and discreetly. I think that's set an excellent example. And and by the way, Yorkshire values are very much value oriented from an investor's point of view, and so that when you read Ben Graham, you you tend to go, you know, cheaper is better than more expensive. I get that, and I don't. I don't see quite as much magic in

the value here is perhaps because of that background. So so let's talk a little bit about the investors that influenced your approach to investing, What thinkers have shaped the way you look at markets. Ben Graham obviously, um no, I don't think Ben Graham did much. I will give it to Dean le Baron, who I had a hard time with. In general, he was brilliant propagandist. He he could sweet talk the pension fund officers out of the trees and take them off to Russia and on trips

and things like this. And what he he showed me was that we're a pretty boring industry and a little bit of bazaars can go a long way, and how important it is to project your ideas. Having great ideas and not projecting them doesn't get you that far. So I owe him that. So let me get that on paper at least, I've said one good thing about being

the baron, and that's a pretty good thing. And I learned an enormous amount from personal experience speculating in in what was a very uh interesting speculative surge in nine in tertiary quaternary stocks, tiny little stocks that would tend to pull and then collapse. And we had an interesting group of people like changing ideas, and we made and lost fortunes. And I made enough to buy a house in Newton without without a mortgage and a BMW. But

I didn't do it I could have done. Instead, I maintained my speculative position in stocks that disintegrated, and from then on, rather like Canes getting it out of his system with commodities and and Ben Graham going into the Great Crash, leveraged long from then on you get to be much more conservative. Let's since you mentioned Keynes, let's talk about some of your favorite books. What what fiction? Non fiction, investing or not. What are some of your

favorite Well, I made a little list quickly. The ones I like to recommend is one is called Dirt, The Erosion of Civilizations Dirt by David Montgomery, and and it looks at what happened to bad farming practices, and it did to the ancient Greeks, the Assyrians, the Babylonians, and and and the Romans and the Mayans and the commerce. They overworked their local territory and when the weather turned against them, that was it. It wasn't that was They

didn't have any resilience. Another one somewhat the same theme was called in Moderate Greatness, which I recommended and moderate Greatness Yes, which is a quote from the Decline and Fall of the Roman Empire. And the subtitle is Why Civilizations Fail by William Oval, And that's a very short book that covers all the reasons hubrists, complexity, overworking your local resources, and and so on m that brings civilizations down, which is really quite terrifying because almost everything they list

applies to today's modern world to some considerable degree. And the one that I like the most really as hubris, because every civilization tends to think that they're going to survive because they're so god damn brilliant. And and the infinite capacity of the human brain, which is illiterate historically, because the brains were the same for the Assyrians and the Babylonians, as we have today on the Mayans. But

every civilization thinks it's special. And after four hundred years and you're brilliant viaducts, the Romans get pretty confident, and finally the way of bad luck and bad fortune brings them down. And that's what we have. We're at two or three hundred year old organization, sorry civilization, modern modern society, and we're the first global one. But we're not old, we're not seasoned, and we're nothing. There are Mayan civilizations. To Carl, it's twelve hundred years of of of civilization

before it was brought down. Any of the books before we get to our final question. Um, yes, there's a very good book by Charles Man called The Wizard and the Prophet, and he looks at really this continuous struggle between the Optimists and the Mathusians corn Ucopeans I call them, and the Marthusians bullog who who who engineered the green revolution that saved millions from starvation? And a guy called back two who represented mouth Thus and be careful and

try and sustain your long term ability. The Wizard and the Prophet, The Wizard and the Prophet, And that sounds fascinating. And our final question, what do you know about the world of investing today? You wish you knew forty years or so ago when you were getting started. The world was so straightforward for years ago, and there was so such a limit on the on the talent in the business that if you showed up and used your brains, you were likely to do pretty well. And he didn't

need any help. And now when I've learned all my lessons, the market is so difficult and so full of talent you need lots of help. So that question doesn't really compute for me. Well, thank you so much, Jeremy for doing this. This was absolutely fascinating. We have been speaking to Jeremy Grantham. He is the chairman and co founder

of GMO, managing over seventy one billion dollars. If you enjoy this conversation, well, be sure to look Up an Inch or Down an Inch on Apple iTunes, overcast at your Bloomberg dot com wherever your final podcasts are sold. Then you can see the other coming up on twoft. I want to say to prior conversations we've had, uh, They're available for download for free. UH. We love your comments, feedback and suggestions. You can write to us at m IB podcast at Bloomberg dot net. Uh, you check out

my daily column. You can find that at Bloomberg dot com slash Opinion. Follow me on Twitter at Ritholtz. I would be remiss if I did not think the crack team that helps put these conversations together each week. Michael Batnick is my head of research. Alatica val Bron is our project manager, Taylor Riggs is our booker. Slash producer Carolin O'Brien is our audio engineer. This year, I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio