Jeremy Grantham on How to Tell If a Bubble Is About to Burst

So obviously it does have twenty two thousand employees. It's a big company, but the revenue is what it is, and if you're looking at it from a sort of like valuation based metric, you would have to say, at a very minimum, investors are are you have to be banking on very rapid growth in the very short term in the coming years to expect good returns here.

the big talking point in markets is obviously valuations. All of this AI frenzy, is it a bubble? Is it not? But even if you think that a lot of this is speculative, yeah, my big question is what do you actually do at this point?

great year. And if like, you know, I'm not all in on two X levered Korean memory stocks, but I'm still like, these are great returns. Had I been, had someone been paying me to manage their money, I don't know if they'd be happy to get market returns right now.

which is the parallel that everyone keeps using. So Jeremy, thank you so much for coming on odd lots.

basically at the same time. And to find that being met by the highest priced market in history, give or take, is extraordinary. And I think in fifty years market historians will look back and talk in awe of SpaceX and read as a kind of novel slash joke its perspectives, and compare it with the stories they tell about the

south Sea Bubble. You know, an undertaking of such enormous value that it cannot cannot be at this time revealed it scoped up a lot of money and ran off with it, and they deserved it.

show up for work, keep your nose clean. You're doing fine. But the forming of these spectacular bubbles and their breaking really separates the men from the boys.

ball market. Luckily, we've had quite a bit of experience because since Greenspan, we've gone from one overpriced market to the next, starting with the tech bubble and then the housing bubble, and then in the sense the end of twenty one was a spectacular overpriced market and now this So we've had a lot of experience and we were more careful at handling the clients now than I think we were in the Tech Book, where we famously lost half our book of business in two and a quarter years.

They become careful and miserable for a while, and they're excited and jumping up and down for a while. But our process of trying to deliver the facts as we see them doesn't really change much.

Everyone's going to head for the exits at the same time, so you enjoy the gains and then hopefully you're slightly smarter than everyone else and you manage to save yourself before the bubble actually bursts. How do you go about thinking about timing of the bursting of bubbles? What are the signs that you actually watch out for in terms of when everyone is heading for the exits all at once.

through that. Let's assume nineteen twenty eight, you have a huge move and the stocks that lead it for going up sixty eighty percent for the year, and then in nineteen twenty nine, the junkie flyers start to go down. It's not that they underperform a rising market. The market goes up thirty five percent to the peak in twenty in October, they can't even get the sign right. The previous year's leaders, the spectacular movers, start to decline and

they spent the whole of twenty nine going down. And by the time the market broke, the S and P Low Priced Index, which regrettably was discontinued years ago, was down almost forty percent. Priced Index were a bunch of fallen angels with enormous volatility, very highbatis and they had had his spectacle in nineteen twenty eight, and they started to decline. Why is that? I have a theory that this is relates to mister Prince's unusually honest answer, why

is he still in the bull market? As long as the music's playing, I had to keep done, and that, of course is the name of that game. But he doesn't have to dance with Puma Tech. Puma Tech was the most advanced spec in ninety nine, which was a hell of a good year to be the most advanced dock and you don't have to go off the cliff in Puma Tech. You go off the cliff in Coca Cola. That's the ideal, and that's exactly what happened in nineteen

twenty nine. People in that case actually Coca Cola. They gravitated to the Coca Colas and the radios and away from the junk, and the junk started to decline. That's an incredible signal, the greatest prime primal scream from the stock market ever. And nothing like that happens again. You have underperformance of high flyers, but you never have them go down in the decently rising market until drum roll

nineteen seventy two. The top of the nifty to fifty, the SMP goes up seventeen, the average SMP stock goes down seventeen, so I can remember the numbers forever. And then we have the biggest bear market since the Great Depression. That was a truly miserable bear market seventy three seventy four, whether you had small cap, large cap, quality, junk, everything went down fifty percent, and then when adjusted for inflation closer to sixty five. An absolute monster. And nothing like

it happens again until two thousand. In the year two thousand, you may remember, the growth stocks peaked horrific in February, the rest of the SMP did not. The rest of the SMP rose about fifteen percent, so you had a coequal high in October, but the growth stocks for down forty percent, having been as low as fifty percent by then, they rallied a little, and back in September you had the SMP as high as it was in March of

two thousand. Just amazing deviation between the growth stocks who'd been making spectacular running in ninety eight, ninety nine and early two thousand and the rest of the market that continued up, and then you had very sharp break the end of two thousand, a steady break in two thousand and one, and then to rub it in a miserable minus twenty two percent in two thousand and two, and

nothing like that happens again until twenty twenty one. In twenty twenty one, you may remember the mean stocks peeled off by the middle of the year. Kathy Wood and her portfolio were going down. By the end of the year, they were off thirty five forty percent from their peak. And yet during that same six months, the s and p powered ahead. It's really quite remarkable when they get the sign wrong. And unfortunately that I had an adventure

with quantum Scape. Quantum Scape turned out to be a meme start without my knowing it, because I had a huge position personally. And the reason I had a huge position is that I was offered an opportunity to invest several years earlier on an all or nothing basis. I took this big position or I had nothing. So I took a deep breath, and it was much too big for our foundation, which we have for the protection of the environment, the Grantham family, and so I had to

own it personally. So it was the only stock that I It was a very big chunk and it came as a spac at four times my investment, better than a kick in the pants ten dollars a share, up from two and a half, and within three months it was one hundred and thirty one and let me should talk about one hundred and thirty one at the end of twenty twenty. That was the very first start to peek out at over one hundred and thirty was bigger than General Motives, and it was a battery research lab.

They were going to design with any luck a solid state battery, and they still may, but they still have not got a battery on the market. So this wasn't like SpaceX. This had no sales forget no profits, and were selling for more than general motives. Actually, I think that is more speculative SpaceX, which I think is a very very high hurdle.

we reached back towards memories of the dot com bubble or twenty twenty one. But I'm looking at a chart on my terminal right now of Nvidia revenue. So in twenty nineteen, in Vidia had revenue of eleven point seven billion, and in twenty twenty five it had revenue of one hundred and thirty billion, so the revenue has gone up therefore, I think by over ten x in six years. We talked about and everyone said, oh, market, the very high valuations.

Can't we say that the investor in Video in twenty nineteen was getting the mother of all deep value investing, given what we now know in retrospect about what its earnings were about to do well.

doesn't seem like the ultimate mode. It seems like the ultimate head start in a game where a head start is worth a ton of dough. It is worth a tent tuple in your sales, but it's only a head start. Other people Google gearing up to be competitors in the next decade of course, there will be plenty of competition, maybe even technologies that end run the current type of chip. These things happen, History is full of them.

of two hundred and eighty billion. So we see the biggest companies in the world doubling real business in the span of five years, which does not feel to me anything like what we were seeing. And I have fond memories of nineteen ninety nine myself. That's when I got personally interested in markets. These are gigantic businesses still putting up huge growth numbers that lap Wall Street forecast year after year.

And that's because our value model looked to add long term future earnings and dividends projected as best we could, and we did that through projecting return on equity, and we did that by looking at how return on equity regressed to the mean and which factors affected the rate. Certain factors slowed it down. Market domination, price setting that you could prove slowed it down, way way down, and Microsoft was the perfect example of this. It had very,

very low volatility. It was clearly overwhelmingly the price setter, and consequently our model said it was worth nine times book, not seven times book, but it was selling it. So if you have a good value model, you can buy these things. You can see them on occasions coming along. And yes, it's done spectacularly well and has had then particularly a much better mode to me than Nvidia has today.

But if you will allow me a minute here, if you look at the NAG seven, you look backwards in history and you can say with a pretty clear conscience. Each one dominates their seven different niches. They have near monopolies on a global basis. Even Tesla has a jump start, the biggest and the best for a long time in evs. And you have Amazon beginning to dominate retail, Google Research, etcetera, etcetera. Seven decent monopolies dominating the world Justice Department, et cetera.

Perfectly sound asleep. No one is interested in pulling a Teddy Roosevelt. They're not going to jump in and slash and burn and divide eggs on into seven different pieces. They're letting these things grow and fix and set their pricing and make tons and tons of money. And then you look forward starting from today, does it look anything like that? Doesn't it look like seven companies deciding they're all in the same market AI that moving the most

powerfully with the greatest investment is dominant. Are they not seen here beating their chests and saying, my two hundred billion in investment in a single year is bigger than you're one hundred and twenty seven yard boo? They know how much gets paid off to the first mover who grabs the market. They all want to be the first. There can only be one, as they say in the movie, and there's seven of them fighting it out, it could be a very messy, blood curdling game. I suggested that

they have it outside the White House. What a comparison. Just imagine ten years from now looking back and saying you couldn't see the difference between seven easy monopolies and a dog fight of seven dishes, rich companies, huge cash flow, huge understanding of the virtues of being dominant, all deciding at the same time to fight out in one market. And you could say, yes, there was the cloud, what

about that? And the cloud was a nice, well behaved oligopoly, Three of them genteellly deciding to compete in genteel ways, exactly the right thing to do if you find yourself in that position, and clearly not the approach that is being adopted this time. We have seen huge investment. You look back that idea heavy, capital light. You look Forward's hope they're idea heavy, but they are capital heavy this time.

It's like a watershed in almost everything that matters between the past and the future, and nobody seems to be talking about it in that way. And I don't get it.

sea diving. Yeah, totally and get rich that way. You are a car I'm a sir, of historical financial market bubbles, which one is most similar to the current period that we're in.

and went a couple of thousand miles. I mean, it was utterly revolutionary. So what happened. Everybody could see that the railroads were going to change the world, which they did. Everybody wanted to have a piece of it, and they could.

Everybody put their money in it, and you had the biggest bust on both sides of the Atlantic that you could imagine, and everybody lost their money in railroads and out of the ashes, the tracks were still there, the locomotives were still there, the demand was still there, and it changed the world. And then you fast forward to the internet. Powerful idea, clearly, by the way, accompanied by a lot of silly stuff as well, but underneath it

a very powerful idea. So you had Amazon go up six or seven times in ninety nine, and when the market broke, it went down famously, infamously ninety two percent, check it ninety two percent, And then it rose from the ashes, just like the railroads, and inherited the retail market more or less. To have a great bubble, you have to have decent economic times. The better off, the better the bubble. You have to have easy money, The

better and easier, et cetera, the better the bubble. And you have to have a fabulous idea, and you have to have it so obviously be important that everybody can see it. Now, they're very very rare events, aren't they. This one is as big as anything but the railroads. I am not even prepared to say it isn't bigger than the railroads. It may be, but they're the two super champs. Besides them, I think the Internet is a bit of a piker, but they're the two colossal ones.

If ever, there was a massive idea that will change is already changing the world, it's AI. Does anyone not know that? I think everybody knows it. Does anyone want to put their money in it? I think SpaceX et cetera gives us a pretty good idea. Ninety percent of the value if you read the prospect prospectus is based on AI, even though that particular AI seems to be having its bottom cacked by two or three others as we sat. But wouldn't let facts get in the way

of a really good story. And this is an absolute classic. It checks everything off one after another which haven't been checked off many times in history. So this is it. If you think this is not a bubble, you are going to be in for a bitter disappointment.

me it was ideas. And I could have made a lot more money if I'd focused on profit maximizing, but for me, the idea was the dominant principle, and the idea of being competitive was everything hinges on trying to outthink the enemy. The easiest way for me, it always seemed was to be longer and wider and more comprehensive and stand further back than the other guy. And what you quickly realize when you do that, so no one else is even trying, So this is not a fair fight.

Everybody is focused on the near term and if you want a profit, maximize that's not a bad idea. And very few people are attempting to be in the market and simultaneously asking questions that are several years out and even to some extent a decade or two. So it's been very easy for me to be both competitive and cheerful and often wrong.

I say so. And I've only done that twice. On July the fifteenth, two thousand and eight, I wrote a quarterly letter which basically which actually said abandonship, soave keeper the French equivalent, and actually quoted the nursery rhyme, don't be brave, run away, lift to fight another day. Do not take any risk you don't have to take. We all have restrictions on how much we can get out of the risk taking business. But do not take anything

you don't have to. Okay, that's pretty clear. And the last thing that we had been bullish about was emerging markets, and I said, I've changed changed our mind. We think this is the end of the line. Sell any emerging that you can. And we did the biggest trade that we had ever done, getting rid of the last of our emerging I must say shortly before we published the letter.

now get your tail out a boid. The market, I'm happy to say, S and P went down like a rocket ship minus twenty five, growth stocks down thirty five, mag seven down forty and the bond market had the

worst year in the history of the bond market. And then, as I also like to say, my nice spare market was rudely interrupted by JATGBT, and the economy that was doing its usual thing of gracefully moving into a mild recession because animal spirits were going down, was also changed by massive and increasing capex spending on AI which dragged kicking and screaming the animal spirits of the rest of

the economy. They didn't change easily, by the way, the S and P the rest of it went down for another ten months, but they kept going so powerfully in the market, so powerfully in the Kampex business that they changed the game. That's only happened once in history. And I don't know how to predict things like that anymore than COVID and new things are a pain. There aren't happily many of them, but they're the two most interesting ones in my career. COVID was novel. How do you

treat novelty if you're a historian, you don't. You have to work it out on other principles. And this AI interruption of what was a perfectly ordinary and I thought predictable their market because it flagged my great discrepancy between the market leaders going down as the blue chips continued up. How do you do that? I don't know.

the Fed hasn't cut rates, has expected, et cetera. These classically macro indicators that we did recession, business cycle, et cetera. Had just seemed to be blown out of the water. Yeah, blown out of the water by the AI trade.

predicted double collapse, and it still keeps rising. The only function of interest rates is that it makes debt easier to acquire, and the function of easy acquire debt is that it helps the economy. One little problem. If you go back to Alan Greenspan, you find that before he gets there, there is a very very slow increase in debt to GDP ratio, just because the financial business is becoming more complicated. And then after him it rises at forty five degrees and it goes from a small fraction

of GDP. If you throw in all debt, it triples and quadruples, and it does it over thirty years. You have biggest economy in the world thirty years to test. What happens quadrupling of the debt to GDP and the growth rate goes down. So how can debt be a real mover of growth rate when you've had that wonderful macro test seen from looking back over forty years, huge increase in debt, decrease in GDP growth rate, very strange. So I leave all that stuff way alone, if you

will let me back up. I was saying too clear, get out of the market. Calls plenty of the market's overpriced. The market has been overpriced since two thousand. I admit it. It's been overpriced, and we have said so the whole time, because looking back at the twentieth century, the twenty first century has been overpriced. They used to sell at fifteen times earnings. We have been selling at twenty three times earnings.

That is not a small fraction of an increase. It has been a different world the twenty first century, but based on history, it's been overpriced, and of course it still ist. But I have made two bull calls in my life. The only time for the first ten years we got quoted was in something called the Wall Street Letter long deceased. I think it was attached to the Wall Street Journal, and it was a weekly kind of

gossip thing about the industry. And they're hidden in the tail end actually of that letter is my first opportunity to quote. And it's July eighty two, and the pe of the S and P is seven times, and I say, I think we're close to an unprecedented rally in both the stock and the bond market. And I've always been thrilled to give people copies of this this near letter.

And then the market shoots up and we become more careful for a long long time, and then finally the market comes down in on nine and by miracle that only occurs once every two lifetimes, we published a letter, one pager. Only two of those were done in my career of thirty years letter writing. It's called reinvesting. When terrified, and I think is the best thing I wrote, mainly because it was short and it just said, you won't call the bottom of the market. Don't bother with that,

don't even try it. Just concentrate on the fact that the market is cheaper than it's been for twenty two years. Even on our seven year forecast, you're dealing with twelve percent a year compounded returns in the S and P equivalent to a higher numbers in emerging and foreign equity. Get together a plan, take it to your committee. Any plan is better than no plan. You have got to

start recycling your money back into the market. And the good news is, as far as I'm concerned, it only counts if you wrote it saying it is too peripheral. I guess washed away into the ether. But I wrote it, and we sent it to the Wall Street Journal, who didn't get back, and day by day, four days passed until my advisor on propaganda and I decided to hello

with this. Let's post it ourselves, And because of that delay, we posted it the day the market hit It's slow six hundred and sixty six on the S and P five hundred, less than one tenth of where it is today. My god, this has been a bullmarker.

term gains rather than longer returns. And at the same time, you've had a lot of retail money flow into the market courtesy of new platforms Robin Hood, and whenever I think about Robinhood, I think about clicking buttons, and remember they used to have the animation where it would like celebrate if you're chased to trade. That's a lot of new money coming into the market that potentially thinks differently to the way investors for much of the nineteen hundreds.

it's sold for sixty five times earnings. And if that doesn't make a value manager wake up in the middle of the night screaming once in a while, nothing will. Because we went up finally to thirty five times earnings in the tech bubble, never having been over twenty one. That's pretty spectacular jump. But Japan had never sold over twenty five times earnings, and when up to sixty five and I'm happy to say we survived that quite well

through good luck. And the good luck was that international investing had only just come in and we were selling people their first international portfolios that they had ever had, including Havid Yell. And that is quite remarkable, by the way, how slow the US was. Scotland and so on had been doing this foreign investing for a long long time, but not It was not fashionable in the US. Because of that, no one was comparing international with an international index.

It was only two or three years or two or three months that they had had in international portfolio. They were comparing it with the S and P because all their competitors were still in the S and P. And the novelty there was betting International against the S and P. It was winning. The international was so far ahead that we could underperform because of Japan, and we underperformed by ten points a year for three years, and we lost no business at all, and we had a decent market share,

and then of course Japan broke. The lesson from Japan is pretty clear. The biggest bubble in the history of the stock market of an important stock market, second only to the land bubble in Japan of coincident more or less coincident timing? And what was the price you paid for having it go from twenty five to thirty to forty to fifty to sixty sixty five? And the Solomon Brothers team went around at sixty to sixty five explaining that the bond raid in Japan was so low it

should be one hundred times. I am not kidding you. I'm not getting it. What is the price you paid the last twenty years? Really not ten years? Thirty five years have to go by before you get back to a high. And I don't think even that is adjusted for the modest inflation that they had. I mean, you want to have a bigger bubble and a better bubble, go ahead, just be advised that the correlation with a longer and worse decline is pretty well wong.

dangerous to the environment. Do you have any optimism at all that AI in particular will be of service to humanity in tackling some of these concerns that you have about sort of ecology and so forth.

is simply no agreement on the future of AI. It will either make us all incredibly rich. We'll sit on the beach and be served by robots, or the robots will go one step further and get rid of us inadvertently or deliberately. This is not bad. This is the ultimate complexity that one has ever heard, and you cannot possibly know what is going to happen. You can only plan for a while range of outcomes. But we know for a fact that it chews up enormous amounts of electricity.

We know for a fact that that is associated with an awful lot of carbon dioxide production and real pressure on the environment, So we start knowing that it will be tough. And by the way, you make robots, every twenty minutes, these humanoid robots have to go off, take a coffee break and plug themselves in. They will run through energy like we have no idea. We can hardly support the energy demands of current AI confined to your laptops.

The energy demand of having machines running around will dwarf that beyond recognition. We will have to have multiples of the global energy production that we have now. We are simply living beyond our means. The real experts who studied for thirty years say we need one point seven planets to maintain the current level of income in a sustainable way, and if we want to live like Americans, we need

five planets. And AI in the best of all possible worlds might help address this, But it's hard to imagine AI becoming self aware and being better at everything than we are. It's hard to think of an example, as Jeffrey Hinton would say, where a smarter civilization, a smarter species has been dominated by a comparatively stupid species, we somehow implicitly rely on their benevolence. We are not spending that much time and money trying to design a benevolent AI.

We are spending money trying to design a more powerful competitive devil. Take the hindmost type of AI. It's inherited our style. You know, humans have been the survival of the fittest. Grab what you can, why you can, don't worry too much about three or four years from now. I find that exactly the same in corporate America and capitalism. By the way, we don't act as if we value our grandchildren. We play soccer with them at the weekend, as I'd like to say, and we help pay the

school fees. But then we go back to work for a chemical company or fossil fuel company and act as if we mean to kill them more. It's a strange nature, except it's the same as every other species on the planet. Grab what you can live for today, and here we are doing the same. Something we all recognize is a bigger danger than anything we've ever met before, living with a with another intelligence that is going to be inevitably

much more than we are. And we are left worrying about pees when the survival of our species is at stake, When are strangely, our climate is going to hell, not as we used to think in twenty thirty, forty years, but now our baby production is going to hell, not as we used to think in fifty years or one hundred years, but now China is producing futility or eate of one A baby production that every thirty years has that in ninety years is an eighth and career is

a third of its baby production each thirty years, a ninth in sixty years, a twenty seventh, i e. They're out of business in a single lifetime unless it changes, and it has been changing, but it's been changing steadily for the worst. Sixty five percent of all countries are below replacement, and quite a few, like China, are way

way down towards one, and nobody cares. We are not programmed to worry about long term slow burning problems, and they're all coming to bear together, and they're compounded by our ignorance or lack of concern about the risks of AI. This was going to be a very exciting.

our population by sheer luck. We are the first generation in history who are deciding to have for perfectly good reasons, one hundred good reasons, we've decided to have fewer children. And if we keep doing this, we go out of business. It's quite simple. If you don't have two point one healthy, well educated children, you're on your way out. And almost nobody does. In the developed world, and even in Sub

Saharan Africa, baby production is falling like a stone. It's just falling from a very high level, falling from seven babies per mother to four. They have lost more babies over the last fifty years than Europe has. It's just that they've lost them from a much higher level.

of dominance of their verticals. But I have to say, like his conversation there at the end, and he's like, well, will the robots be our butler's on the beach or will they accidentally kill us? Or will they purposely kill us? Or will humanity extinct ourselves because we're stop having babies? Like yes, it sort of does make you like, why

are we wasting time talking about PE ratios? Like when these are like the big questions that were like right up against yeah, like why are we talking about PE ratios?

GLP ones and evs, et cetera. And Jeremy is making that point like history was a little bit boring, you know, the nineteen fifties like oh co copen new factory. That was news and what that means is literally and other people have said this like time is speeding up, like there are just more events per day happening.