Jeremy Grantham

Calling a Super Bubble: Front Row With Jeremy Grantham (January 26, 2022)

He predicted an epic stock market crash a year ago, which hasn’t happened yet. 2021 was a great year for stocks.

This is consistent with bubbles of the past. The blue chips have kept strong right up till the last second.

In 2021, the Russell 2000 (companies 1001-3000) was down whereas the S&P 500 was up 23%. The Russell 2000 normally outperforms the S&P 500 index in bull markets.

S&P 500 peaked at 4,800. Trend line is 2,500. Most great super-bubbles go below trend, and stay there for a while.

In 2000, stocks only declined to trend because the Fed came to the rescue.

Grantham expects a decline around 50% from peak.

There are less overpriced areas of the equity market around the world. The US will decline a lot more than the rest.

Value stocks in emerging markets, Japan, and the UK should do alright.

There is a large chunk of companies in the NASDAQ and Russell 2000 that are not making any money.

A standard bubble is a 2 sigma statistical event. This should happen every 44 years statistically, but actually happens every 35 years cause we’re humans.

A 3 sigma should happen every 100 years. These occur 2 or 3 times more often then they should - we’re a crazy species. Super bubbles can really wipe you out, like 1929 did.

The 2000 bubble was highly concentrated on US growth.

Stocks are overpriced and bonds are overpriced so the traditional 60/40 portfolio is useless.

The Fed has fewer tools than before. The “Fed put” is lower than it was before.

Grantham expects inflation to be a pest that’ll keep on rearing it’s ugly head going forward. It won’t be like the last 30 years where you didn’t even need to think about inflation.

We’re in the early stages of running out of raw materials. Growing food is not getting easier. We’re going to live in a world of bottlenecks and price spikes.

It’s pretty clear that we’re running out of labor. Fertility rates have dropped significantly. China is reeling from the fact it only had 10.8 million babies last year. It was only 7 years ago when it has 20 million babies.

The cohorts of 20-year olds entering the workforce will be smaller-and-smaller.

He doesn’t think the Fed understands the pain involved with a bubble breaking.

He didn’t like Greenspan, Bernanke, Yellen or Powell. He thinks low rates have caused assets prices to rise, which has exacerbated the problem of equality.

Asset ownership of the bottom half is basically zero. They haven’t benefited from the rise in asset prices.

The 0.1% has doubled it’s wealth during COVID. That certainly hasn’t happened for the bottom 50%.

The US is the least equaly society in the developed world. We have the least fluid economic mobility. This is quite unamerican to be honest.

“Green” is going to become living within our means. Planet is becoming toxic. Human fertility is going to hell. Our sperm count is plummeting.

ESG Investing: The Race of Our Lives

Link.

Grantham is 80 years old.

He thinks we have a bubble of epic proportions in the US stock market, US bond market, global real estate, and commodity markets.

He has pledged 98% of his 1+ billion dollar fortune to the Grantham Foundation for the Protection of the Environment.

GMO launced a climate change fund in 2017. You can access the fund from Fidelity and Schwab.

You can look at the data and see that we’re accelerating into trouble. The pace of climate change is increasing.

Green technologies are also increasing. Wind and solar are cheaper than running an existing coal plant in half the world now.

There have been major enhancements in battery technologies.

The rate of progress in green energy is accelerating.

China has cancelled plans for a lot of coal plants and is now investing heavily in wind. Last year, China’s wind production was 75% of the energy the US has generated from wind, in the entire history.

They wrote the Race of our Lives in 2013.

The recent G7 statements were a pleasant surprise.

The bad news in the data for the last 7 years (ocean level rise, drought, fires) was more impressive than the progress, even though the progress was significant.

GMO has a climate change fund.

Everything changes if you have to decarbonize the entire world.

You need lithium, copper, and cobalt to decarbonize the world. There is no way to mine these chemicals in an ecological manner. Mining is intrinsically a dirty industry.

The government subsidies that were vital 20 years ago are no longer needed for wind and solar. They’d help in certain countries.

We will have an abundant supply of cheap, green energy in 20 years.

In order to green the world, everything has to be electric, and all the electricity generation has to be green. We can do all of this, but it’ll take trillions of dollars a year.

25% of his foundation is in early stage green VC.

Boston is a great place to be a green VC because of new ventures that flow from MIT and Harvard.

Green VC is a great way to make money going forward. It’ll clearly be encouraged going forward. There will be carbon taxes, subsidies, etc. going forward.

He is very excited about solid state lithium ion batteries.

The Bull Market: A Bubble of Epic Proportions (July 2, 2021)

Link.

He called the tech bubble in 1997, three years early. Called the market bottom in March 2009.

In 2018, he called a melt-up. A late stage, 2-3 bull surge towards the end of a market cycle.

He thinks the current bubble will be viewed as one of the great bubbles of history, right along with the South Sea bubble, 1929, and 2000.

There is market craziness and meme investing which is even crazier than pets.com back in the 1990s.

Right now we have a lot of overpriced asset classes:

Bond market (arguably most bubble all time)
US equities
Housing (same multiple during 2008 bubble)
Commodities hit same peak from 2011

This is the first time we’ve ever risked 3.5 asset classes bubbling at the same time.

If we reach a period of pessimism, the unraveling of wealth will be bigger than it has ever been before.

Grantham doesn’t buy the “relative to the bond market, equities/housing aren’t that overvalued” argument. This argument was used in Japan in 1989 by Solomon Brothers. Japan’s real estate and stock markets still haven’t recovered back to 1989 levels to this day.

TINA - there is no alternative.

Thinking there is not alternative is a grim way to look at life.

When Grantham was young, he ran up a huge fortune on leverage and got wiped out.

The psychological power of bubble to lure everyone in is unstoppable.

The least bad is emerging markets. It’s at one of it’s three points of maximum difference to the S&P 500 and both of the other instances worked out wonderfully well in favor of emerging markets.

Emerging markets was at a premium to the S&P 500 in 2007 and had terrible subsequent returns. We’re in the opposite situation right now.

Value stocks have been crushed compared to growth. Value had the worst year ever in 2020.

He recommends a cash reserve of 20-30% to take advantage of cheap stocks in a not too distant future.

His resilient portfolio recommendation:

70% low growth, value stocks in emerging markets
30% cash reserves