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Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date. An investor field guide, dotcom.
Patrick O'Shaughnessy is the CEO of O'Shannassy Asset Management, all opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shannassy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shannassy Asset Management may maintain positions in the securities discussed in this podcast.
My guest today is Jeremy Grantham.
Jeremy is the co-founder and chief investment strategist at Gitmo. Jeremy has an encyclopedic knowledge of the history of markets, which made it such a pleasure to have him back on the show. In this conversation, we discuss the three key signs of a market bubble, why Jeremy believes we're in a bubble right now and how it's being led by retail rather than institutional investors. We close with the important role the demographics in productivity will play over the next few decades across the world.
Please enjoy my conversation with Jeremy Grantham to be excited to do this with you again.
The last time we spoke in early July of last year, we were still in the throes of the early stages of the pandemic and the market was about thirty five percent below where it sits today. And not a whole ton has improved about the economy. The market has done quite well and the topic of our conversation today, I think, is going to be your view on the state of this equity market and its potential to be in the bubble category with some of the great bubbles that you've studied as a market historian.
So to begin, I would just love to hear your broad market perspective through what lenses you're viewing this market and what history might teach us.
Incidentally, I've been making a hobby of collecting the many measures of speculation and overpricing. The simplest low tech way of doing that has just been to take screenshots.
So I have an army of little measures that pretty clear to me. I think about 80 percent of them of the value measures have this one higher than 2000, which was the champion way over 1929. The 2000 tech bubble was a real hero, trailing 12 month earnings with 35 times earnings. And in nineteen twenty nine it had peaked at twenty one and it never got back to twenty one until the run up to 2000. And when you compare that 2000 peak to today and you change the value approaches a little bit here and a little bit there, you find about 80 percent of them have today higher and about 20 percent of them still below 12.
So I conclude on the sheer weight of numbers. This is more impressive even than 2000 on value. And then, of course, in terms of timing, I've always thought that other things were more important than value. The thing you have to bear in mind if you're going to use value as a timing mechanism is that in Japan it went to sixty five times and it had never sold over twenty five times in the Japanese cycle. That peaked in eighty nine ninety until it did, and then it went to thirty five.
I like to say that that's the nightmare from which value managers wake up at 3am sweating in fear. If you look at the straightfoward vanilla schleppy, it's higher in 2000. If you normalize for profit margins, which I prefer because I believe this chunk of time since about 2000 is historically abnormal. If you take it back to long term normal profit margins, this is more impressive than 2000. We were talking about the timing and values of very poor timing mechanism.
What is much better? The two factors acceleration and crazy behaviour. When the stock price starts to move up at two or three times the normal speed, which it did in ninety nine, which it did in nineteen twenty eight twenty nine and did in Japan for a couple of years at the end. That's a pretty good sign that a long, long bull market is coming to its end. Perhaps the single best one, although hard to put your finger on.
Precisely. It's crazy behaviour each cycle the craziness is manifest in a different way. Obviously there was no bitcoin equivalent in nineteen twenty nine, so each cycle is different. But the common most easily noticed factor is not newsworthiness. When the financial page headlines migrate to the front page, you know you're getting very warm when the evening news mentions the market or some crazy behaviour of GameStop. Tesla, my favorite example from 2000 with lunchtime greasy spoons that we went to in downtown Boston.
Then they all had quite a few television sets and they were all playing. Sell tickets on the pads for a few months there in late 99, early 2000. They'd close the sports ones and translate for them to CNBC and we'd have talking heads talking about the latest Pat Dotcom's. That was terrific. That gave you just a month or two to plan accordingly, plan evasive action. And I would say we have passed the acceleration test brilliantly and I would say we have passed the crazy behavior test brilliantly.
And a lot of the craziest behavior actually taken place this year and January, February, the number of new issues and sparks have gone through the roof. The total issuance as a percentage of GDP has gone way up. That is now modestly above 2000, like many of the other indicators. So you mentioned some of these in your letter, you call these touchy feely characteristics of a bubble that aren't necessarily quantifiable, they're always different. I'd love to just ask about a few of them and hear your perspective.
And you mentioned sparks there. So I think that's a great place to begin. Again, as a market historian, how do you approach something like this? Proliferation of SPAC issuance? I can't remember the number. It's one hundred and thirty billion of capacity or something that's been raised and sparks that are all on a clock to your clock typically. How do you approach something like this?
What are your thoughts on the rise of Spatz in the cycle as an instrument spac so terribly speculative, undesirable, unnecessary instruments.
They're really a license to rip investors off. The first rip off is for the organizer, organize the user's name recognition or reputation, whatever, scoots around the countryside looking for a deal for six months, pay the two million dollars for a time, energy and organization and then in return takes 20 percent of the money you give him for himself or herself. Quite remarkable. Secondly, the professional hedge fund types sign up immediately and then when it comes time to actually put up their money when the deal is booked, half of them also do not.
They get a decent return in the few months while they're waiting to see they are given traditionally a few warrants as profit. Some of them are useless, some of them are great for nothing. And then they take their money and we sign up for the next back. The burden is borne by the other half who put up their money under normal conditions, get a submarket return. And that has been established by academics. But seven years of specced, they did dismally.
Now, of course, in the late stages of the bubble, everybody makes money and speculation and these are speculations. So you'll make some money. Despite the rip off structure, they are hardly regulated by the authorities, so they're not the same level of protection.
Basically, they shouldn't be allowed. It's a testimonial to the sloppiness and slow moving nature of the S.E.C. that they haven't banned these things long ago.
Is there a version of them that you think could be virtuous, especially if the economics were better reflective of who is taking the risk and in what amount? I guess a different way of asking the question is there's been interesting discussion on the IPO process and aspects of it that may be suboptimal for the companies going public. Do you have any thoughts there on alternatives to that or whether it's a problem at all? Yeah, the traditional IPO is sadly deficient.
Also, that's a pretty lame excuse for having spikes, but they should improve the IPO structure.
A direct listing made a little easier. It would be entirely doable, perfectly straightforward. But the traditional IPO, as we all know, suffered from the fact that there was a big financial incentive for the investment banks running the deal to bring it to market lower than the expected value. So they would have a big jump on the open. They would then market this hot deal to their favorite large fidelities, who would have an unspoken agreement to reciprocate by doing a multiple of that potential gain and commission that worked for years.
It was unethical, but legal. It guaranteed that the people who bought on the open did relatively badly for a few years. The people who were given the hot stocks had a license to steal and would sell at the open or within the first day or two, the Habs did well and the regular investors were screwed. And that's the typical IPO. And you have to change that so that you put the incentives to get closer to market and a direct listing, a modified direct listing would be much better.
But the spikes don't seem to have addressed that issue of ripping off the average investor. They've actually made it worse. And of course, you know, the irony that my biggest investment ever was in quantum scope seven years ago, a brilliant, solid state battery research enterprise. Seven years ago, it was three years old already.
We bought in five times up in price and it had a long list of very, very difficult physics problems, engineering problems, chemistry problems. And it does appear that almost all of those have been taken care of. But to my surprise, they came with a spike there with still. Four years left to run before they actually have their battery running down the production line for years, that's a pretty long time. Anyway, it came at 10, like they all do.
And at 10, it was the same price. We had been informally carrying it on our books, a multiple of four, four times our investment over seven years. Very good, but not utterly sensational. And then it went from ten to one hundred and thirty at one hundred and thirty. It was worth more than General Motors. It was worth more than Panasonic, if you want to call it batteries. That I think we can agree is amazing.
In fact, it compares pretty well in scale with anything around in nineteen twenty nine or 2000, for that matter.
To have a company that has no earnings or sales before. Is brilliant or not. And to look out that far into the future and make it worth more than General Motors. That's a pretty good demonstration of something.
I would say and it was a wonderfully ironical because by then I'd already been sounding off about the undesirable ness of facts. And there I am with far and away for a second or two of the biggest investment. We're not allowed to sell it, of course, until May.
The first about that's another delicious irony, because here I am also predicting that will be rather lucky to have this bubble last until May.
Like, I can't sell it at one hundred and thirty.
When you paid two and a half, that's fifty three times our investment.
And it was the biggest investment we ever made. So it wasn't even a small fortune, it was a large fortune.
I think the story is wonderfully representative of a lot of individual episodes like this in markets today, where it seems as though the horizon over which the market is willing to discount outcomes is forever and the the color of their glasses is very rosy in predicting the potential of these outcomes. And I want to make sure that we go through kind of each of the three dimensions, if you will, of bubbles that you laid out at the beginning, valuation, acceleration and speculative or crazy behavior.
And I want to ask maybe the obvious question, which is about what it's like for you as a historian to watch this episode with GameStop and other stocks that were pretty intense, short squeezes and driven by retail behavior and record volumes. As you were watching that, what were you thinking and what were you feeling? What did it make you remember or consider in history?
I have to confess that I find it all exhilarating. I'm only concerned somewhat for the relatively new investors who get drawn into these things as they do and then find out the hard way. I'm very tempted to tell my story because I am sympathetic and I don't know if I tell you this story last time, but nineteen sixty eight sixty nine when I was in the pump and dump business without thinking of it in those terms, gotten into the mutual fund business.
And I got in because my friends were having much more fun than my classmates. And then the other industry, one of the reasons they were having fun 1968 69 was a lovely little bubble in tiny stocks.
The bubbles were not tiny, the stocks were tiny, but the movements were sensational. And after I'd gone to Boston, joined this mutual fund group and we'd have lunch together with all the guys at Fidelity and so on, fellow classmates and compare notes and talk about the stock of the week. And one week it was American raceways, which was going to introduce Formula One Grand Prix racing, which had not taken off in the US but was hot as hell in Europe and South America.
Speed and power and danger and noise, death. It sounded very American to me. We bought one track, the firm that had one race, and everyone showed up. It turned out for novelty reasons, but what did we know? And it was gloriously profitable and allowed us to extrapolate into fourteen tracks around the countryside times three or four races a year times bonanza. We had the Sterling master world champion, former world champion on the board.
I bought three hundred shares at seven, went on my summer vacation with my wife to England and Germany. When we came back three weeks later, it was twenty one.
I did what every good value manager would do and I sold everything else I had and tripled up nine hundred twenty one involving considerable debt, by the way. But by Christmas that was one hundred. So that's what we went through. And there were hundreds of those tiny little stocks.
Almost all of them did what American raceways did and that is went to zero. But very cleverly I jumped out a third of the way down and got into another brilliant idea to trade options about twenty years ahead of its time. And then by the time I jumped out of that and the third one, I was back to the three thousand dollars that I'd had two years earlier. At the peak, I'd had enough to buy a house without a mortgage. I learned a lesson.
It was absolutely thrilling, the whole thing. That was one of the most thrilling years. We went from nothing to having quite a lot of money and then losing it all was extremely exciting. So I sympathize completely with these people out there and during this bubble, but they've always ended very badly, and I've no doubt this one will.
Do you think that investor education is possible, the repetition of the same things over and over again that GameStop today is your American raceways back then? What do you think can be done about this? I think the answer just now can do nothing.
By the way, this is not primarily an institutional bubble. This is an individual bubble. These are very rare. We haven't had one of these other than my micro one I just described in 68, 69. Nineteen twenty nine was kind of institutions and individuals. They were rich individuals. In those days, the ordinary individuals didn't play the market. But 2000, which is the real McCoy bubble, is basically an institutional book where you had pension funds, foundations, endowments and so on, where the majority of almost every committee we dealt with were an institutional investment they bought into the golden era.
They all believed, Greenspan, that the Internet was going to drive away the dark clouds of ignorance and produce permanently higher productivity for decades to come.
And that was a bit heartbreaking for me. I was completely shocked that they were so easily swept up in the bubble in psychology. But they were this time, I think, not so much. But they're going along for the ride.
But the individuals are absolutely crazy and they have expanded their share of the market trading and they have really entered into the market with great enthusiasm for the first time in decades.
Do you think that the lack of the institutional role in this one tells us anything about what to expect in terms of how this plays out? I would think that one of the things looking at this market is when I talk to also institutional money managers are talking to some of the same people, it seems as though everyone is maybe their guards down a little, but they're still considering things like the valuation ratios that you mentioned at the beginning. These tools are proliferated.
The top stocks in the market, the Googles of the world, don't necessarily have those same characteristics that the top stocks did in 2000 when it was more institutional. How do you think about that? The fact that this one is more retail and less institutional and whether that will impact the outcome?
I'm having enough trouble with the first derivative effect. You know, when you start getting down to second and third derivatives, you really have to say it's a very uncertain world and every bubble is different. They have different players. They have different origination stories. They're nearly always very strong economies, very strong profits extrapolated forever. And you can get your brain around that if you extrapolate handsome profits and unusual growth in GDP and profits and you extrapolate that forever, of course, they're worth many multiples of asset value.
Of course, it never happens. Those abnormal high profit margins and abnormal growth windows always closed, but you can see how people could believe it. This one, of course, is unique in that we had a fairly damaged economy from covid a very long in the tooth economy before that. So you'd had this 11 year economic growth ending up with full employment and not too much spare anything and then you give it a real kick. So it's quite unique and you wouldn't want to extrapolate the damage ad infinitum.
So what you're doing here is you're leaning on the second component, which is every bubble, in addition to having hitherto a nearly perfect economy, has had a very friendly Federal Reserve situation, favorable money supply, favorable interest rates.
By the standards of the time this time since the economy was quite damaged, you had to rely one hundred percent on the future behavior of the Federal Reserve and the federal government. That makes this one unique. And of course, they can't be sustained forever any more than profit margins. And abnormal growth can be sustained forever.
Sooner or later, something goes bump in the night.
Reminds me of Hyman Minsky's point that stability is unstable, which so perfectly described the financial crash that if you give me stability, I'll take more debt, I'll take more risk, I'll use up my stability units.
Eventually, when something goes bump, we're completely stretched out, having used up all our stability units and we'll have a sickening crush. And he said for that reason, periodic financial crises are, quote, well nigh inevitable, unquote. You can apply that principle to the stock market and the Fed if you get. Low rates and plentiful money, I'll borrow and invest and borrow and invest and borrow and invest and use up all those extra units and then one day something will go bump and I will be exposed as having extended to the limit.
And the consequences will we might be approaching a rather similar Minsky moment and the not too distant future know the market tops out when in a sense the last bull has put his last money in. I know that's an oversimplification. Everyone is getting a little richer all the time. Some people are. And so there's always extra money can push the stock price. But in terms of a general cycle, there is a moment of maximum enthusiasm and the next day there's plenty of enthusiasm but less than the previous day.
And so the the buying pressure is released a little bit like the famous water jets under the ping pong balls. You know, you turn the faucet down a little bit and the ball is still way up in the air, but it's just dropped a couple of inches. It's that process of slowly lowering the pressure and the overpriced ping pong ball, if you will, slowly descend until it hits the proper level.
You remind me of two other interesting features often shared in common of great historical bubbles, which is the general attitude towards market bears and also the behaviour of clients, institutional especially. Can you say a bit about what you've seen historically and the attitude towards market bears in bubbles, how it changes and whether or not we're seeing rymes of that attitude today?
Yeah, I think rapidly rising hostility to bears is a very good, very late signal.
The bubble is way advanced because this is an individual game.
You expect to see the most egregious hostility from individuals. I did an interview with Bloomberg called Front Row, and I gave my fairly bland opinion about Bitcoin. I would have thought just that it was faith based. There's nothing new or shocking about that.
But armies, armies of individual fanatics descended on the comments. There was no insult. That was not good enough for me, not just senility and old age and complete ignorance about Bitcoin. It sent me off to study Bitcoin.
Another level of detail, I will say, that hasn't caused me to change my mind, but it did cause me quite a few hours of extra work.
But I got three insults about my big ears, which I hadn't had since I was seven years old.
I was wonderful reading. I could only take about one hundred of them and I thought from my ego, I better limp away. But in 2000, an institutional bubble, the people who were upset were institutions.
Quite a few of them talked as if it was deliberate, as if we were deliberately almost robbing them of money that was somehow a malevolent intent to have them. Like the market. We were up 16 percent and the market was up twenty four.
And Fred was always a Fred was up fifty two and they hated us.
And the classic one, which actually made it into a business school, it was so good. We went to a local account for a breakfast meeting. They had the usual committee and we're all hanging around eating cookies and, and getting the coffee early in the morning. And the boss of the investment committee says, come along, let's cut the crap and let's get on with this. Sit down and and Jeremy, explain why things are going so badly.
And for heaven's sake, don't give me any more of this nonsense about regression to the mean time there I was staring at my notepad. I kind of flushed looking down and little bubbles were going through my my head, get up and walk out, surrender, apologized.
And finally I said, I'm sorry, I can't get that from here. There is no way I can both answer your question and avoid talking about regression to the mean, because that is what rules everything so well. What the world is all about, regressing around the long term normal. And of course, we did we did regress once again back in 2000, the Nasdaq went down eighty two percent just to rub it in. The S&P went down fifty.
I'm very proud to say that in The Economist we were quoted as saying we thought the Nasdaq was worth minus seventy five percent and the S&P was worth minus fifty. And we got that one right. We did hold out the possibility that it would overcorrect. The S&P did not have. That was the first time in history, by the way, it went down from the magnificently overpriced it had trend the old fashion trend that had been going on for 75 years and bounced every other bubble, breaking like the Nifty 50 of 1965 and 1929.
They went way down below trend in 1965, which really broke in seventy four. It didn't get back until 87. And of course, 1929 didn't get back until the early to mid 50s.
And that was typical. But because of the Fed throwing the kitchen sink at everything, the S&P minus 50 had enough buying support to stop a trend and bounce back and had to wait a few years until the housing bust. Much more dangerous and a stock market bust, incidentally.
And it did finally go through the trend for the first time then in decades.
What do you think of the rate of change of I'll call it economic dynamism in the United States and globally? Because you mentioned this idea that typically at the end of these bubbles, you've got fantastic economic conditions, that the markets are extrapolating too far into the future and then we get a reversion to the mean. In this case. You mentioned already that it's peculiar and that the economy, by any measure is, I guess, growing faster now, but is not good.
A lot of people unemployed and the pandemic has continued to wreak havoc on economies around the world. So we're in a very different economic situation today. And therefore, we're faced with interesting things like incredible fiscal stimulus, the likes of which we've probably never seen the potential for there to be this pent up demand bounce back. That would be a better economy. How do you think about just the long term trend of of our dynamism has been going the right or wrong direction?
And what have recent events done to change your view on the nature of the economy in the intermediate term?
I think there's a real hope that an emphasis on infrastructure is just the right thing. And like Summers, I do worry that writing big checks will use up too much of the resource going to individuals and will then undercut the ability to spend much money on infrastructure, infrastructure and particularly green infrastructure have a very high return. You can borrow at the government level at negligible real cost and interest rates, and then you can invest it in storm windows and insulating homes in the north of the United States and training retraining workers in R&D on average has a very, very handsome return.
If you invested in green energy and improving farming, what is not to like about spending long term money, a decent returns which your borrowing at negligible rates? That's a pretty handsome return for everybody. So I would hate for that to be undercut. They talk a good game and I was really counting on it. But if they by writing huge checks, so raffle the political courage and perhaps short term overstimulate various parts of the consumer economy and of course, the stock market, as I believe the first one did to some considerable degree.
I think that's a problem. But if they really focus on infrastructure and kind of grind away, I think that could kick up the growth rate of the economy for perhaps a decade or two. And that would be very handy longer term. What I worry about is that before covid arrived, it was clear that we were hitting a steady reduction in growth rate, which had not been fully appreciated by the authorities. And the main reason was the population bust.
When I came to America in the sixties, we were having years where you'd have as much as one and a half percent increase in labor force, natural growth. And now we're down to point to and within ten years we'll be about minus point to. Europe is already flat to down. Japan has been down for over 20 years and South Korea will be down momentarily.
And China, incredibly important, will be having declines in the 20 year olds coming into the workforce pretty soon.
So all over the world, you're having declining growth rates of workforce workers. And then the second part of growth is productivity.
And if you look at the data, whether it's the US or international in the developed world in particular, it's clear that for 50, 60 years, the productivity level has been wending its way down from in the 60s, which was pretty much a peak, almost three percent a year. And today, somewhere in the one to one and a half percent. So if you have one to one and a half percent productivity and minus point to growth rate in the workforce, and if you keep up the tendency for everybody to work a little bit less, about zero point two in the US, we like working here, but still point to.
Is a real drag, you're going to struggle to do much more than one percent and the authorities, particularly the Fed, have been very slow to get that point. I wrote a paper called Seven Lean Years 10 years ago and followed it up a couple of times, pointing out that our long term trend was really more like one and a half. And the IMF, the World Bank and the Fed and the OECD were all using three and now they're down to two is about the going rate that they're going to come down lower as time goes by.
So we are facing a slow decline. Probably productivity is always hard to call, but it has had some up legs for a few years. It's pretty steady downtrend and the baby bust is a done deal and the baby bust is going to be worse than anybody thinks. It's going to change the world. Basically, we had a very strange era for the last 20, 30 years where five hundred million workers in China went from being more or less totally useless on the farm, redundant to part of a very efficient, hard working industrial system in the cities.
Five hundred million compressed into 30 years. And then you had thrown in the middle of that a couple of hundred million Eastern Europeans who hadn't really part of the capitalist system, who had been pretending to work while their employees pretended to pay them, was with the communist yoke. So you had several hundred million and that put enormous pressure on workers pay rates, made it easy for brands to make more money, and the unions became very weak and so on.
And inequality, if you will, prospered. And that's over. China has gone from some of the fastest growth rates in young workers because of emigration from the countryside to a bust fertility rate. Two point one is replacement. Their fertility rate last year was politically embarrassing. It was about one point six and the earlier report not all the provinces are in yet is that covid knocked it down by 15 percent. So they'll be below one point four. And the Kovik numbers will be so shocking that you'll be reading about this all over the place in the next few months.
South Korea is the only one efficient enough to get their numbers signed, sealed and delivered. And they coincidentally have the lowest fertility rate ever recorded in normal times, which was one point zero, which means every thirty five years, every generation you have your number of babies anyway, under covered, they went to point eight five, which is outside of the bubonic plague, the lowest fertility rate in the history of man. The US is one point seven Prekop.
The UK is one point seven. Italy is one point for Hungary is one point three. They're finding it very, very hard to encourage people to have more babies when they don't want to and they don't want to.
It's not just a choice, but it's postponement. Women, quite understandably, want to have their babies later and get their career going and so on.
But they're postponing into lower fertility years. In the end, they have two children instead of three or one instead of two. And then into this morass, there is coming toxicity. And the disruption has been working its way since World War Two. But it didn't matter because we were so overengineered we could stand the shock. And the sperm count in the developed world is down to a third of what it was. And it didn't really matter until about a dozen years ago.
And suddenly starting that the number of young couples having trouble has started to go through the roof.
And it's about fifteen percent now, but it's growing at almost two percent a year. You're going to come back and that is the infertility problem is growing at two percent a year. So you're going to come back in twenty years and the median couple, young couple is going to have some problem and need advice and help. This is dramatic. So you're choosing to have fewer. You're postponing. And then when you postpone your finding, the toxicity is leveraging that postponement because toxicity doesn't have much effect on a sixteen year old Nigerian just to pick on them because they have very large families, five children.
If it takes an extra year or two to get the five, that's OK. But if you're thirty six year old Parisian and you've postponed and then you find you're having endocrine disruption problems and your man, that's going to make an important difference. So we're going to have to get used to perhaps a baby bust way off the scale of anything we've ever talked about. And that's going to have a powerful effect on a lot of things.
It's going to increase the significance of the workers. It's going to mean there's a shortage of workers. It's going to mean that there's pressure on inflation to get those workers, that inequality will go into reverse, as it did for one hundred years after the bubonic plague. Incidentally, for the same reason, it's also going to mean that the population pyramid is inverting an upside down pyramid and it's happening at a speed unlike anything we've ever seen. So suddenly you will find the percentage of people over 65 today is five times what it was in 1960 and China five times the ratio.
So you have a shortage of workers. And the one thing about old folk is we take an awful lot of resources. If you include labor as a resource, we need to be looked after. We need medical treatment. So you move a lot of your resources to looking after them and that we are totally unproductive as a group. And then you have even fewer workers in the business of being productive, making the goods that we really, really need. And the price pressure becomes even more interesting, shall we say.
It will move us back to a world that feels a lot more like the 20th century, where workers and unions have more influence, where you have to do capex to keep up the productivity of your diminished supply of workers and where you actually welcome the labor saving devices instead of fearing them as we have unnecessarily, I think. But we've always had a great fear of them for the last 50 years. And now, as in Japan, Japan has done brilliantly.
Japan has had more productivity per man hour and then the US since that crisis.
And they have five times the number of robots worker that we have in South Korea has a lot to you're going to have to do that. You're going to have to improve your social contract to you. You have to do a lot of tough things. You have to look after these old folk. You have to be efficient. You have to keep your society moving as a stable enterprise.
So what I worry about is as we come out of a bust in overpriced asset that has a negative wealth effect like it always does, piles on the agony when you least need it, like it did in 2009, 10, 11, we're going to have this headwind of slowing global growth that's going to change a lot of things.
So I think the inflation will tend to drift back towards 20th century levels where it's moderate. And you have to be a little more careful that real interest rates will drift back to where they were, where you get a respectable return. And, of course, pricing of assets will tend to drift down.
Let me just point out that overpriced assets are the worst things that can happen to young people and to society over the long run, that if you take a farm or a forest, for example, which I'm reasonably familiar, and you look at the yield on a forest or farm, it used to be six percent.
It came down to three percent in this 30 year repricing. At six percent, you're doubling every 12 years. And at three percent, you're doubling your society's wealth.
Every twenty four years and forty eight years, you're down to a quarter. In 96 years, you're down to a 16th of the wealth that you would have had in the old 20th century world where you had a handsome return. The same on the stocks. We used to consider four and a half percent yield normal. Now you're lucky if you got two. So we're compounding the wealth of society much more slowly. And if you're not in the game, just think how terrible it is.
You pay twice as much for a house. You simply can't afford it. The mortgage is great, but you can't afford it.
And the stock market is twice the price it used to be. And every damn asset, the farm up the road, if you're in the countryside, is twice the price it used to be.
What a disadvantage for the well-being of society it is and how quickly it only takes 12 years to reveal how much better it would have been to have had cheap assets with a higher yield compounding away.
And yet we think it's glorious. It's glorious for the people who own a lot of assets, for old fogies who are selling their assets, that's terrific. But for everybody else, and particularly the young, it's a pain in the ass.
I'd love to turn from the population part of the growth equation to the productivity side a little bit and ask a question at the risk of having someone make fun of your ears. Again, one of the interesting arguments, I would say I'm no religious Bitcoin follower. One of the interesting arguments you see thrown about is to study the period of history when we had a hard money standard, a gold standard, the productivity growth and the technology advancements that happened under that standard.
People often point to the late eighteen hundreds through the end of the gold standard as a particularly productive time. As you did that deeper dive on something like Bitcoin, whose strongest proponents, of course, hopes that it does usher in some sort of hard money standard again and changes time preferences and encourages more innovation. What's your take on that concept?
If you'll allow me to start the kind of metal level? I am not as impressed with the significance of the financial world as apparently almost everyone else on the planet is. I think that, for example, is overwhelmingly nearly double entry bookkeeping, as I like to say.
Why would I worry that half the Japanese. The other half, a lot of money, why aren't I as impressed with the fact look at all the Japanese who are lending people money, how rich they must be to sustain such a massive level of debt?
The thing is, for every dollar of debt, there is an offsetting entry, there is an asset.
And consequently, I don't believe the banks are nearly as important as they would love us to believe. They managed to fakers, not me, incidentally, but they faked the majority of people in 09 into thinking they were so desperately important that if we didn't bail them all out, we'd be deep in 1932 in the Great Depression if we let a single banker go out of business. And consequently, we threw a lot of our stimulus at the banks instead of the mortgage holders who were getting ruined by the housing bust.
So that's step one. You can't transfer real wealth or real income across time.
Everyone says, are you living off the future, et cetera, et cetera.
That's all B.S. pensions are paid out of this year's GDP pie. The Germans know that they account for it. Pay as you go. We pretend that there's some sort of lockbox and that Social Security and those assets that you can actually pull out. It's all nonsense.
All you have available each year to look after your retirees is this year's GDP pie. The flow of that year's goods and services.
All you can store is a few cans of bully beef in your basement. Or if you insist you can have the infrastructure be up to date because of crappy infrastructure is a burden on the future. It's not exactly transferring it, but it's almost as good.
So for heaven's sake, do the little that you can do to prepare for the future, which is to have a great infrastructure and a great educational system, of course, for the same reason. Reality is the quality and quantity of your workforce, how motivated, how happy, how well organized they are, how well trained they are, and how well retrained they are if necessary. Plus the quantity and quality of your assets per worker. That's real life paper.
Ah, just to facilitate transactions and to keep a record of this and that. It is not an underlying reality. So that's my top level thing. I just want to point out we have very low real interest rates.
I think we can all agree the only virtue of low interest rates is to facilitate borrowing. They have obvious disadvantages is that they take the return away from retirees who spend every penny and facilitate life for hedge funds and borrowers who don't.
Generally speaking, we know there's plenty of disadvantages and presumably they're all upset. The argument goes by the facilitation of debt.
OK, great. So therefore, debt must have its own virtue. And the theory is that debt increases on the margin economic activity because you go out and you borrow and you make capital spending that otherwise you would not have done so. Back to Greenspan. Let's start in nineteen eighty five. Nineteen eighty five. You look backwards to the war and you see a very slow increase in total debt to GDP ratio. Very, very modest due to the commercial technologies of banking, just facilitating the very early days of credit cards so you have a drift up and then in eighty five it kings and starts to shoot up to the top right hand corner of the page at a 45 degree angle.
And just around the numbers you go from about one times, including all that one times GDP to three times, and this ignores the special effects of it. So that's a pretty noble experiment. You take the richest country in the world, the biggest economy in the world. You take a big chunk of time. Thirty five years, you triple your experiment, your ratio debt to GDP.
What happens? CapEx steadily declines as a ratio of anything. There is utterly no evidence that it increases capital spending. Therefore, not surprisingly, if capex has been dwindling, productivity would dwindle, which it has. Productivity dwindles that entire thirty five years, not regularly. There was a four or five year bump for Internet, but it declines the net effect.
Of course, since we know population has been kind of neutral in that period, you have a diminishing GDP growth. So what an experiment. You tripled that on the back of lower and lower interest rates. And let me just point out that in eighty to the 30 year bond was sixteen, it comes down from six to twelve. We get a bull market from 12 to eight. You get a bull market from eight to four, you get a bull market.
And from four finally to a half now one and a half. And you've played that game. And what happened? Growth. Slowed my argument here is, if you look at the metal level, which I love to do, there is absolutely no proof that lower interest rates stimulate the economy, but that stimulates the economy. There is no association between those two. If you want it to be mean.
You would say there was a negative association for the reasons I just outlined. There is a convention that we will assume it to be the case, which happens a lot in economics.
We assume the market is efficient, that the guy from Dimensional Fund Advisors in today's F.T. saying how efficient the market is and that Tesla doesn't disprove that. I wanted to ride it to the left, that it only goes to prove that you can fool some of the people all of the time.
I mean, to say either Tesla was efficient at an eighth of the current price a year ago or its efficient today at eight times the price and the sales are up. A very handsome twenty five percent, but hardly compares to a hundred percent. So which is efficient, one of them is gloriously inefficient.
The market is 17 times more volatile than is justified by the flow of dividends and earnings.
If you were clairvoyant in nineteen twenty five and you were looking at real life, you had that handsome advantage of knowing exactly what was going to happen and you built the world's greatest dividend discount model. You have a very stable market gain of two or three percent real plus dividend a year.
In real life, it is 17 times more volatile because we're a crazy marketplace full of irrational human beings who behave themselves 80 percent of the time and then 20 percent of the time totally freak out one way or the other.
I love the concept of what really matters is the quantity and quality of the assets and the quantity and quality of the workforce. Obviously, things that boost those two things are good. I think things that detract from them are bad. Just to round out the question on the money standard, do you think that there is any influence that the prevailing money standard has on the potential to improve those two things as differently and more finite? Harder supply of money might encourage more investment in those two things than less?
Or is there just no evidence of that sort of thing, in your opinion?
My opinion is that a big chunk of the commentating world has been freaking out about currency and inflation and debasement of the currency and the end of the world and wrack and ruin my entire investment career, which is 55 years.
It's all B.S. The dollar is reasonably fine, the euro's reasonably fine, the renminbi is reasonably fine, and even sterling has not been the end of the world.
All things considered, the semi decent stores of value are backed by governments who can raise taxes. They will take their currency as payment of taxes, which is absolutely critical. I think it's good enough that is not the problem.
What do you think is the best way to incentivize or what is the rosiest version of the future of investment in infrastructure assets and people's skills and willingness to do work? What would you love to see happening in the world right now that would make you more optimistic about the prospects of the improvement of those two categories, huh?
Yeah, that's not my area of expertise. So let me say, I don't know, OK? And then I can give you my guess. My guess is that a massive increase in government R&D, which is, by the way, in general, very good. Yes, of course it backs loses, don't we all? But it also backs Teslas and so on. Since I spend most of my day these days in Green B.C., we're always bumping into people who've had help from some of these government agencies that put out small, helpful loans to brilliant new ideas.
If we massively increase that, we will get a very high return. We are not at the top of the heap rate for the amount of money we spend on the early stage R&D. We do a lot of development, but very little research, and we are hopelessly outspent as a ratio by South Korea and China as a percentage of its available wealth, if you will, and Israel and a few others. We should endeavor to make it very hard for anyone to keep up with this.
We're a rich country. We have a wonderful venture capital industry. All our best and brightest want to go into venture capital these days or start a new company. So that's great. We're very tolerant of failure here. I think capitalism in the US is particularly fat and happy. It's not in good shape at all, but the venture capital part of it. Is terrific. It is not an accident that the fangs all jumped out of venture capital in the last handful of decades, but GMAR, when we started our firm, we hired away a potential employee number.
Twenty five from Microsoft. Microsoft and Apple are the two oldest ones, but that isn't very old.
These were not the Coca-Cola of the nineteen twenty nine era or the General Motors or the General Electric. These are new firms.
The fact and they have created huge amounts of value as a fraction of the total, all of it really dependent on a healthy venture capital industry and on the great research universities on which America also is truly exceptional. And the UK is pretty good too. But great research universities go hand in hand with terrific venture capital. It's the one true exceptionalism that we have left.
Americans love to think they're exceptional to close the book on our discussion of the present bubble, as you see it in equity markets. I guess more specifically, we sort of talked about these three characteristics being valuation, individual behavior that's speculative and sort of crazy and the acceleration of returns vertical to some degree. We have all those things. Obviously, the world can't put all their money in venture capital, especially large institutions. Venture capital historically is a very small amount of absolute dollars.
Each year has been or may be able to be deployed. What is one to do if one is in a traditional asset allocation, some sort of diversified basket of assets globally? And faced with what you see as an extreme bubble on the order of some of the historic ones, what is one to do?
Well, asset allocation comes with an enormous amount of career risk and business risk.
If you're an institution, you have to look fairly traditional. If you play against the convention, even if you win, they merely pat you on the head while you're in the room. And when you leave, they describe you as a dangerous eccentric. And if you lose, you will not receive much mercy.
And that is true if you get out of the market with your clients a year or two early, even if it makes enormous sense on the round trip like it did in Japan or 2000 tech bubble, you'll lose tons and tons of business. The big enterprises would never do that. It's not short term commercial, which is the game they have to play. Individuals are lucky. They don't have the career risk. They don't want to look foolish with their neighbor.
And I concede that seeing your neighbor get rich is about as irritating as anything that life has to offer.
So they're under psychological pressure, but they have no career risk. They have the luxury that they can build up a decent cash reserve. And if they're eighteen months too early, who cares? On the round trip, it will come in very, very handy. And that's what I recommend for them. For institutions, life is more difficult, but happily, in most bubbles there is something that is cheap to them was the perfect asset allocators. Dream bonds were cheap tips yield at four point three, reach yield at nine point one percent against one and a half.
In the S&P, all the value stocks were at a legendary relative low. SmallCap was a legendary relative low. You had wonderful set of opportunities, despite tech being brutally overpriced and the S&P being very overpriced. If you bought tips, you made thirty percent by the time the S&P was minus fifty. Just think about that. The S&P had to go up one hundred and sixty percent to close that gap and small cap value made two or three percent versus minus fifty, even though it had a high beta.
A cheap really matters in a major meltdown. What we have this time is that value has been hammered for eleven years on a relative basis to growth. Last year was world record was hammering in two hundred years of data and the ten years before that was the worst decade in data. So that's a terrible combination for a value manager. But the consequence is that the factor value almost however you define it, they're relatively cheap, however you define it, and then you have the emerging and emerging has had a decent rally since the covid low, but it's about as cheap relative to the S&P as it has ever been.
It's been this cheap a couple of other times and both times worked out handsomely. The intersection of those two is value. I prefer low growth. By the way, as a definition you can't value in high growth, don't really fit together, but low growth and high growth are, of course, opposite sides of the market. So if you take the low growth companies that are intrinsically valuable, as you could select from emerging markets, I guarantee it almost you will have a 10 and 20 year return that will be perfectly acceptable.
These are not overpriced securities at all, which, considering the pricing of the US market, is quite remarkable. So there is a glorious haven. And you should take advantage of it, and if you're an individual, perhaps have, in addition to that of your money in simple cash, grin and bear it as best you can for the duration and then have some money to really buy some bargains when they occur.
If we were to close on sort of an interesting I'll call it high note, you mentioned you spending so much of your time in green venture capital on a daily basis. What are you seeing in those portfolios, technologies, teams, whatever that has you most excited about the future as specifically as possible?
Quantum scope has been a wonderful example. A quantum scape has a battery that when it finally makes it to market in four years, automobile engineering takes forever as they as they all know.
But it's half the weight and half the volume. So you can squeeze two days into an iPhone, you can double the range of a electric car. They don't burst into flame, which is pretty important. You make a thousand cars, you don't want one of them to blow up and they don't. Solid-State does not do that. It charges in 10 minutes, maybe turns out to be eight, maybe 12. You can have a cup of coffee and you're on your way.
It will just get better with time. Now, this is a done deal. We have killed gasoline and diesel cars. They'll be cheaper to build electric cars. They're already cheaper to run and cheaper to operate by far and safer and better to drive. My Tesla model three is a fabulous machine.
We have all manner of things in the farming area.
We have engineered RNA that will tell the Colorado potato beetle and only that not even a cousin beetle is the fact that it will be instructed that it cannot digest carbohydrates. So it eats the potato and dies of starvation and drops death. A gram per gallon does half an acre or whatever. It's unbelievably cheap and effective and doesn't involve the toxins that we drip on in modern agriculture. We have a a microbe that will fix nitrogen. This it's amazing. Like a clover and nitrogen fixing plant, acacia trees.
This will take the nitrogen out of the air and provided as a fertilizer for growth in the ground. And normally they last a few hours, as will last already a couple of weeks, and engineering it with aspirations to last long enough that you'd be able to supply enough nitrogen to grow the entire crop. Half of the people on the planet exist because of Habab. Nitrogen, enormously energy intensive, originated in World War One, exploded and then converted to fertilizer and enabled a great booming population, which is its own problem, carbon sequestration.
We invest in five or six of these biological sequestration, seaweed farming practices, physical sequestration. We are going to have to sequester carbon. We don't reach a satisfactory point just on good behavior. We end up with far too many particles, molecules of carbon dioxide and other gases in the air. We have to take carbon dioxide back eventually to two hundred and eighty. And we see endless opportunities and they need the government to eventually have a carbon tax and a credit for these things.
And I think in 30 years we can extract carbon dioxide at fifty dollars. It does much more harm than that on the margin today, perhaps as much as two hundred dollars of damage per ton. But I believe in 30 years we'll be able to extract it at fifty dollars, possibly even twenty five dollars so we can do this. But we really need a government help to drive that forward and nothing will drive it forward as effectively and as simply as some form of sensible carbon tax.
I don't mind rebated to every man, woman and child equally at the end of every year. That's neutral from an economic point of view. It induces massive behaviour. If we just said will adopt the UK's carbon tax, which is that forty dollars a tonne, and we're going to increase it by two dollars a tonne per year for thirty years to one hundred, that does the job. You don't need a hundred today because everyone who's building a 30 year plant is booking that increase into the game.
You get a lot of it for nothing. It will change everything in a real hurry.
You mentioned earlier that one of the interesting features of this bubble, if it is a bubble, is that the participation is so deeply retail and that also this expansion, market expansion is quite long in the tooth. So there's many participants of this that maybe are 30 years old that have really never seen any market carnage. I'm hopeful that this episode, given your incredible personal experience, having learned by doing but also being such a deep historian, I hope that this episode reaches a lot of people that weren't around in, say, the 09.
To that group, do you have any closing thoughts on this market or any closing advice?
Yeah, I'm not optimistic that anyone caught up in this wants to hear my advice and consequently would act on it. When you get into that kind of excitement, mini frenzy, pretty hard to stop you with dry historical stories.
You know, that was then. This is now, baby. Get a board. You don't understand. You dinosaurs don't get it. Well, the trouble is, we we do get it. And I sympathize. How can I persuade you? There is no way I can persuade them.
Just trot out the regular story and one out of one hundred might listen. I will sympathize with them when they're cleaned out.
Well, Jeremy, this has been, as always, a fantastic conversation steeped in history and ideas and cautionary points and optimistic points. Thank you so much for your time.
You're entirely welcome. Thank you for having me on.
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