Welcome to Maren Talks Money the After Show.
This is where we comment on the guest interviews in our regular podcast, and when we say comment, we do mean comment, sometimes positively, sometimes negatively.
Let's see where this one goes. I'm Maren Sunsetweb.
This week, John Steppeck, Senior report at Bloomberg and author of the Daily Money Distilled newsletter, which if you haven't signed up to do so immediately, joins me to discuss my conversation with GMO co founder Jeremy Grandsam.
Now, John, we have.
Had a lot of feedback from this. Everyone loved it. Everyone loves it from Jeremy. He's very well known for his big market calls. And we talked about a lot of things in this pot of been through the whole market. We've been through you know, climate change, We've been through artificial intelligence.
We've been through evaluations.
We've been through lots on the US market, a little bit on other markets, etc.
What did you think I mean?
I need to start by saying I am actually a massive faning Jimmy Grant.
She that's entirely true. There are some people on a massive fan of Germany. Granted, I don't know why these people would feel like that.
Well, I mean, I've spent years reading these stuff and probably, I would say I probably he's the person that sticks more in my mind than pretty much any other.
I just need to say something to listener. Is just about you and Jeremy. I'm okay.
Confirmation bias, confirmation bias.
I mean, I've never met him. It's not like more pals or anything like that.
But what do you think he thinks what you think?
Yeah?
Absolutely, absolutely, well, yeah, mostly, which is also interesting. But no, I mean I thought it was interesting. It's mostly not anything particularly new, because obviously you know Ready's stuff, and we've spoken to him a lot, and I do have time for the people who think that he's overly berish, because he's often he was absolutely right whenever he called the turn in two thousand and nine, which he talked
about in the podcast. But equally, you know, I think it's fair to say that gmo is as an asset manager has been negative to an extent that would have lost your money over the relative to what you could
have done. Basically, if the default position is stick all your money in an S and P five hundred tracker, then following kind of their advice about what long term US returns were going to be, Like, you know, seven years ago, when it was basically saying they were very small and that the US was very expensive compared to other markets, you wouldn't have done as well as you could have if you'd just kept things very simple. And
I think that's a reasonable criticism. So at the same time, I just think that he's an interesting guy to listen to. And if you want to hear the bear case articulated, then someone like Jeremy for example, articulates it far better die and see the eld Erubini. It's not access Rubini, but it's just that you know it's not. It's like Jeremies get very specific and clear either kind of mathematical
almost kind of reasons and kind of logical reasons. And also, I mean, I tend to think there's probably just largely just early rather than wrong. Otherwise we know and market has been too early is not the.
Same as being wrong, really, and I suppose.
So you're very unbiased, you're biased.
And of course he uses things like this shill appee, which we talked about in the podcast as evaluation method and we know that that works over the very very long term. But as a short term signal, it's pretty useless. Doesn't really tell us much about where markets are going to go, and ass we're looking at it over the really the super long term.
The model that Ben Ncurr and I did twenty years ago, it's got a very high correlation explaining pe. It doesn't predict it. It just says, how do we get here? It turns out the market is really a coincident indicator of comfort. What does it take to make a portfolio manager comfortable in an institution? And the answer is, as you suggest, steady inflation around two percent. It hates inflationary
spikes and very high profit margins. And the profit margins have been drifting down and more than people realize, and inflation has been bouncing around, but it's part of the scenery now. And the model says a shillopee should be about sixteen point eight, which is decently above average and doesn't sound ridiculously low. And that's because the profit margins.
Are still decent.
But what is it Well, a few weeks ago it was twenty nine thirty, so it was not responding in the normal way.
I mean, I like it. By the way, I love the Shillopee.
I always look at the Shillopee for all markets, but it doesn't do us much good.
Okay, I'm I think, and you should because it's it's better than most, but that doesn't necessarily mean it's perfect. But yeah, But one thing I was going to say is that it's interesting if you look at what he says about VC Adventured Capital, he's effectively saying that he
still believes in US exceptionalism. So it's really interesting that on the one hand, he's actually basically saying the US is a better economy and a better entrepreneurial environment than anywhere else in the world, which is hard to disagree with. But also he's simultaneously sort of saying that that's not enough to justify the massive premium that the US trades at.
And while I think I kind of agree with that, on the other hand, there is a part of me that's sort of starting to think, actually, maybe the US is just better and it is just the place that's the most friendly home to money, and money does go where it's best treated, and perhaps the real story of the last fifteen years I'm not sure I agree with it is that actually America is the only place where
I kind of risk capital is treated. The treatment of risk capital has been either the same or only a bit worse than it has been deteriorating in the rest of the world. I mean they have been you look at the UK investment environment, you know, in the last fifteen years, and I think it's fair to say that in terms of regulation and in terms of political approval has deteriorated. You know, people are anti capitalism in a way that they went kind of fifteen twenty years ago.
So you know, I think that's an interesting almost contradiction there, and it certainly got me thinking.
It is interesting because if you believe in American exceptionalism, and we did talk about bench capitalism quite a lot of we talked about the last time I entreated him as well, and he said that an awful lot of his foundations money in particular, is in venture capital one way or another for these very reasons, because of the US treats entrepreneurs in a completely different way to the rest of US.
But in the long run, it is amazing the quality of the people the American VC industry attracts. It's getting the best and the brightest who used to go into consulting or Goldman SAG and now they go into VC and startups and they come from all over the world. At least a quarter of the bosses of all the VC companies we talked to were not born in America.
And what an achievement for the US. We have the great research universities fifteen of the twenty and most of the rest are in the UK, but the fifteen great research universities are the bedrock for so many of these VC And you add that to a societal attitude to taking risk in the US is simply much better than Europe.
But you know, a lot of money must have been lost there. But he still was extremely keen in this podcast to discuss that. And you might think, as you say that, if you believed that, then you'd also believe that, you know, the small number of stocks, the seven right stocks that have been leading with the US market higher and higher, deserve the valuation.
Yeah, And I mean, to be fair, he did basically say that if you although you shouldn't invest in the US because it's too expensive, if you do have to invest in the US. As far as I could see, he was saying the magnificent seven are the ones to invest in, because he was.
He was saying he was in quality.
And if you look at the GMA work, it normally says, you know that in an environment like this, you should buy stuff that is high quality and cheap, although god knows what that is these days.
Yeah, a cheap relative to war. I mean, I think the other interesting thing was, and this is anodd thing I've always found interesting about Grant them because one of the big things that all they talk about the kind of green energy stuff and one thing, and obviously he's very committed to climate change and you know, funds a
lot of research into and things like that. And one thing I remember is that one of the very few big calls that he made that was wrong and where he very clearly went against his own understanding the bubbles was in twenty eleven, the peak of the commodities bubble, he wrote a big report that basically said, you know, commodities are massively overpriced compared to their history, and went through all of these reasons as to why they were expensive,
but then sort of shot circuited the logical conclusion, which was to say it was in a bubble. And he said, but this is going to carry on because basically we're running out and China's going to kind of chew up all of the you know, the resources. And of course that turned out to be incorrect. And that's one thing I found interest because I felt that his own cognitive biases kind of misled him to short circuit his process.
And that's why I guess I take some of the stuff he says on that front way a big pinch of salt, because I think that he is kind of clearly has that that's his thing, that's that's where it's cognitive biased kicks in.
A lot of it.
Said, that was interesting to hear him acknowledge that if we want to get to that zero, then we're going to have to use a lot more fossil fuels.
In the meantime, it's interesting, as mat you talk about this, that she's demand for resources up front.
I think it's something that that people.
Are only just beginning to grasp that in order to get to the clean side, we have to do a lot of really really grubby stuff first.
Really really grubby stuff, and even in the long run, you need a lot of metals which are grubby in order to get to a green world. Sorry, guys, sorry, you purist, There is no way around that one.
Yeah, there's no clean root to clean no.
And that's something you don't often hear the more shall we see ideological can only you know green people saying it's like.
Yeah, most of them think lysium just come down of it,
right or they certainly exactly, they do exactly. And so a lot of the things that we talked about around climate change, around energy transition, et cetera, had them being extremely straightforward and pragmatic, just like what the interview we did with a Conway while back saying you know, we have to get really really grubby before we can get anywhere near clean and accepting the amount of digging and mining that needs to be done as a result.
And you're right, we don't.
We don't hear that often. So that was that was interesting, although we didn't think, I want to talk about how one might investor as a result of that. And I know that GMO is still extremely keen on investing, in particular in clean energy stocks, even though they've had a pretty horrible time, a really really horrible time, but I suspect that they think that's probably a sector that people should still be invested in.
Yeah, I mean, I suppose one of those things, isn't it we are. It's like any new technology, you can't dedict which one's going to be the market we at the end of the tam it's ruled out. It is the reason everyone bought in Vedia for the AI scene, which that also came up then too.
Did we covered everything everything?
Did you say that it was a really good interview. One thing that kind of was somewhat glaring by its near absence was talk about the bond market.
I think we took it as given.
I think it was an assumption for in Jermy and I that both of the sovereign bond market bubble around the world as over, that it's burst, and that bonds are still high, and that that is that is why it's entirely possibly did so at one point during the podcast, not a forecast, but a comment entirely possible mathematically that the US market could go down another fifty percent. That was that was a reference to bond Authentic Talks. As you remember, we talked about the Russell two thousand.
The most vulnerable area, in my opinion, is the Russell two thousand is a good measure of where the vulnerabilities will be. The Russell two thousand often has no collective earnings at all. It has a very high density of zombies, companies that really can only pay their interest payments by issuing more debt. It has never been higher than it is today, and they have a very high ratio something like forty percent, don't have positive earnings, and they have
record debt. They have never had this kind of debt. So they're vulnerable on the debt front, vulnerable on the financial front, and vulnerable on a broad economic front. And this is the interesting thing. The Russell two thousand is not up in real terms for the last year. It's not up over two years, and really surprising, it's not up over five years. It's actually down quite a bit over five years.
So it is showing its vulnerability that is, et cetera, because two thousands already down an awful lot, and so some of the other things that we talked about, But so I think that was that was really where an acceptance from both of us that we agreed on the bond market bubble being over was there.
And then we talked we talked about other markets. So we talked about Japan a little bit. Well, the other cheap markets. We talked about Japan a little, and we talked about the UK a little, and these were both markets that he was interested in. Although of course there's the point that you know, the US market would go down fifty percent. I repeat, that was not a forecast. If it's just a mathematical comment. If we did, then everything else would go down a lot as well.
Yeah, that is the tricky thing at presumably they just wouldn't go down as much.
Well, you know what happens in Japan, right, you know, you always saying things are fine and it's cheap, and it's quality, and it reached to escape, escape the lots to do.
There's a virtual was so there, et cetera, et cetera, and then you know something happened in the Japanese market goes down more than other markets. So you can never take the stuff as a given.
If hearts again this team, I'm just I'm swelling north jump of these stocks.
Listen. We did get I got some pushback from a because we asked Jem at the end about gold and bitcoin, and I think we would all have predicted that he would say gold localse.
She did say gold was the least bad of the three, and I see.
I think John, at some point quite soon we should do a whole podcast on gold and why to invest in gold and when gold was good and money. It isn't bad because we mentioned it at the end, but we've never done a full one on it.
Anyway.
I got an email from one of our listeners saying that, of course you and I and Jeremy don't understand gold because we live in a stable country and we're not criminals. But if we lived in an unstable country and we were a drug dealer or a money launderer or something like that, then we would absolutely understand why bitcoin is the current, say of the future.
Okay, so he says, bitcoins. So because you said, you said that we don't understand gold. No, no, no, we do understand.
God, you don't understand I've said before.
Right.
Look, bitcoin is a good way to move money across borders where you can't sell gold coins into your you know, coat pockets or whatever. I actually agree with that. I think that that is the use case that is very different to becoming you know, like this global currency system. This is what I don't. They remind me a lot the crypto guys of the hardcore kind of gold bugs ahead of two thousand and eight, where the idea wasn't just that gold was useful for X or y or
is the portfolio insurance. It was the idea that gold was going to regain its one true place as the kind of natural money of the world. It was going to take over the financial sense.
Still haven't could still happen.
Believe I add an awful lot of sympathy with that of you, And it's one reason why I sort of sympathized with the bitcoiners, because I recognize the idealism, but it's it is idealism and it is deluded. It's not Cody Harton, So yeah, I agree with him. He's right, Beckcoin is a good way. It moves money across borders when you don't when you unequet the money out of the country because you're you know, haven't you flee the country or because you're drug I.
Do on the matter of that, on the matter of crime and go global collapse and that sort of thing. I do want to mention that Jeremy and I did talk quite a bit off the end of the podcast after we turned the recording off rather irritatingly. We talked rather a lot about the things that really concerned him. He's very worried about general toxic soxicity across the world. He's much more worried about climate change, and I think if it came across in that conversation, and he's very,
very worried about inequality. So when when he looks at money and markets these days, he tends to see things through a different lens than perhaps he did during the main part of his career. So that was quite an interesting conversation as well.
That's I mean, that's interesting my own view and inequality. I'm sure kind of match is used, which is that you know, the capitalist, free market system of allocating resources gives you the best outcome. That doesn't mean that it's perfect, but it's a bit like democracy from that point of view. You know, it's the worst system except all of the rest of them. So anyone who kind of comes at this, particularly when they've got the soft cushion of you know.
Massive wealth.
There are many hundreds of millions, yeah, massive, Well, then I think the f to kind of just maybe count their blessings rather than deciding that what for them. But it's not going to work for everyone else.
Quite now, there is one piece by GMO that people should go away and reread. They have access to it, if not all time, put it up, so I might ask GM if I can pop it up somewhere. It is something that generally wrote back in March two thousand and nine. And I know there's a lot of people out there who say, Jeremy, you know, always wrong, But in March two thousand and nine Jeremy Grant them wrote a piece encouraging everybody to have a battle plan for
reinvestment and to get on with it. And now we're not anywhere near that point in markets at the moment, but it's quite a good little piece explaining how brave you have to be and they have to overcome your terror when markets are genuinely cheap, and you need to be ready to turn when all looks black, but just
to subtle shade less black than the day before. Now, I don't know when that day will come in markets, but you know there's bound to be a day like it ahead, So we might try to get that piece up somewhere for listeners to have a look at.
Oh, definitely, that's a great piece. I'm pretty sure it was will very short.
And that when it comes to when it comes to research like this very short, it's very good. Thanks for listening to this week's Marin Talks Money the after Show. This episode was hosted by me Maren Somerset Web alongside John Staffek. It was produced by Someersiety additional editing by Blake Naples