Jeremy Grantham: The Most Expensive Market in American History 6/26/26

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0:35Access new online courses, insightful webcasts, articles, engaging videos, and more. All curated just for traders. Plus, guided learning paths with content designed to fit your unique interests. And no sifting to find exactly what you need, so you can spend your time learning to trade brilliantly. Learn more at schwab.com slash trading. Bring in show music, please. Hi, I'm CNBC producer Katie Kramer. Today on Squawk Pod. Investor Jeremy Grantham is a veteran in the field. He founded one of the first index funds in the early 1970s. Based on the value of the stock market compared to the GDP with modification.

1:17This is the most expensive market in American history. And he's a noted contrarian, a perma bear who says bad days are ahead.

1:26Andrew Ross Sorkin:A 70 % decline you think is in order. Yes, I do. And bear in mind, we said a 75 % decline for the Nasdaq in 2000 in our quarterly letters. And it went down 82. Grantham's warning in a special interview. Avoid U.S. stocks. The rest of the world has looked perfectly fine. Plus, the rest of today's news, OpenAI delaying an IPO, your iPhone getting more expensive. The Apple story may be the story of the year. And waiting on an Iran deal as well as a World Cup win for the U.S. men. You'll have that winning. Winning. It's Friday, June 26th. Squawk Pod begins right now. Stand Andrew by in three, two, one, up and Andrew, two.

2:16Andrew Ross Sorkin:Good morning and welcome to Squawk Box right here on CNBC. We're live at the NASDAQ market site in Times Square. I'm Andrew Ross Sorkin along with Joe Kernan. Becky's off today on this Friday morning. A little bit of rain outside, a little bit of rain in the markets, though. Take a look at what's happening in the energy markets right now. Let's show you what's going on there. WTI crude,$69. You can buy Brent,$72.29. And then take a look at Treasury yields. We're looking at the 10-year note and the two-year. Look at the 10-year there. 4.38. You're looking at the two-year just straight at two. I think the Nasdaq was up.

2:49Wasn't it up over 600 when we were looking at it yesterday? Closed down 100, down another 300 today. Still worries. We're going to talk to someone soon. But still worries about chips, AI trade, all that stuff. Shares of Apple coming off a 6 % drop. Their worst day in more than a year, the decline. After Apple raised prices on MacBooks and iPads. And with the company looking to pass on the surging prices in memory and storage, passing it on to consumers. In a statement, Apple said the rapid expansion of AI data centers has created an extraordinary surge in demand for memory and storage. We have never seen a component price increase this quickly, this much, this quickly.

3:32The company didn't raise prices on iPhones, but it left the door open to future hikes. And Senator Bernie Sanders, weighing in with a post on X, probably on his iPhone, calling yesterday's move unacceptable. He said corporate greed is Tim Cook, the billionaire Apple CEO, claiming that hiking prices on Apple products by over$200 is unavoidable after it made$112 billion in profits last year and spent$310 billion on stock buybacks. Hours after Apple's announcement, Microsoft said it would increase what it charges for Xbox consoles because of soaring component costs. But this goes back to sort of the long term political gouging argument across the board.

4:22Andrew Ross Sorkin:I thought, you know, I thought President Trump's comments the other day were wrong. I thought Elizabeth Warren's comments over the years about gouging have been wrong. I think Sanders's comments have been wrong. this is about as bipartisan an issue as you could get. Yes, I have nothing to add as we both occupy the middle and honestly report how we feel. At least I do. You are pretty honest at this point. Although there are certain things I don't think you, I'm willing to admit because you get to a certain age and it's like, you know, so sue me. you're still at a point where you could do something to damage the long-term prospects of uh you know of the sorkin empire um so i might be a little bit more more blunt but that's come on bernie i've seen some good things on like babylon b and um it's like the elon musk made a lot of people rich right he did he did a lot of billion seen it the only person bernie sander has made rich and there was a picture of him here up here a different photo different him over here the only person he's ever made rich is himself okay done nothing for in my view uh is almost just kind of i don't know what he is he's almost a caricature at this point i'm glad we have him to point out you know if you want to point to someone who has no idea about any of these see this is where you won't say this is where you won't know because you know i don't want to i don't want to i don't want to you want him on the show no i don't i don't want to have to attack the president on the other side of the side about it's not that's not it's not it's like comparing that's like comparing trump's mental state to what we watched with joe biden which is done every day on every website because they get a picture of him looking down and he's supposed to watch this here this will this will be joe kernan falls asleep on set that's what they do to trump now let's talk about the ai trade right now because fears over the rising costs of ai infrastructure also hitting stocks in Asia.

6:21Andrew Ross Sorkin:South Korea's KOSPI falling close to 6 percent. Japan's Nikkei now down more than 4 percent. Take a look at this. SoftBank leading those losses in the region down more than 12 percent. In Korea, SK Hynix falling 8 percent, while fellow memory chip supplier Samsung lost about 5 percent. And then just yesterday, SK Hynix has just surged following plans to raise close to 30 billion dollars in what would be a U.S. market listing. And what has turned out to be a standout, those standout results from rival Micron. Now, today's declines also extending into China. Take a look there at what's going on.

6:56Andrew Ross Sorkin:You've got Alibaba off close to 6 percent, as well, Baidu close to 4.5 percent and down the line. And one factor that could be contributing to SoftBank's decline is a report from The New York Times that says OpenAI is thinking about delaying its IPO until next year. Microsoft Bank's a major investor in open AI. The Times reports that says that CEO Sam Altman has pushed advisors hired by the company to achieve a$1 trillion valuation with anything less than that unacceptable. But watch what's happened recently in the AI trade. And tremors have hit the tech market lately alongside fears that AI companies may not return the high profits that some investors had been expecting, at least not near term.

7:42Times report says SpaceX's fall in value since its listing two weeks ago has worried OpenAI executives and advisors reportedly told Altman OpenAI could wait until next year for a public listing, then maybe at a trillion dollar valuation or hold an IPO sooner that values a company under a trillion dollars, all the way back to 150 on SpaceX. You watch the rounds of capital that are raised by private companies, and you'd think they just go up forever, right? Is it ever with a hot item like an open AI? Every single round, it's like, oh, my God. But there's also no genuine market. That's what I mean.

8:27But if people are telling you, look, we could price this at a trillion, and it could be a crappy debut. No one wants that either. Remember when Google dropped initially when it came out, I think? Yeah, we've had a whole bunch of these guys.

8:43Andrew Ross Sorkin:Facebook was the biggest. They had the real drop. The question is always when you're pricing an IPO, what are you doing? You get everything you can. Are you trying to raise a ton of money? Is that what this is about for some of these companies? Is it about the long-term value of what you can do with the stock? I mean, that's the whole game. It seems eventually to get to where it should be. But initially, I'm the opposite of you. I make it scarce. That way, you know, you sell 5%. The other 95 % is totally overvalued because it's so. Well, and then the question is, what can you do with the overvalued stock?

9:20Andrew Ross Sorkin:To their credit. You can't get out anyway. Well, you could argue, by the way, that SpaceX took their stock in the literally, what, 72 hours after the deal and bought Cursor. Yeah. Right? That's a good idea. I mean, think about that. Yeah. I think, you know, SpaceX at$150 is fine. Was it$135? Wasn't that the IPO price? Whatever. I think. So this, I think that was a pretty solid debut in the way it was handled. We'll see. We're going to talk to Jeremy Grantham later. He's got a lot of views about all this. He wrote a book called How to Become a Perma Bear, didn't he? Or something like that. He's got a lot of views.

9:58So he copped to it.

9:58Andrew Ross Sorkin:He's got a lot of thoughts. A U.N. agency pausing efforts to evacuate ships stranded near the Strait of Hormuz. An unknown projectile struck a container ship near the coast of Oman yesterday. Now, a U.S. official telling MSNOW that Iran was behind that attack. Unclear, though, if it constitutes a violation of U.S. moratorium of understanding that paused, of course, the fighting in the region for 60 days. Traffic in the Strait of Hormuz has been picking up. But Iran warning earlier this week that new routes established without approval would be dangerous. Now, separately, the Wall Street Journal saying that Iran sees itself potentially bringing in billions of dollars a year by charging for safety and security in the strait.

10:42Andrew Ross Sorkin:The reports say Iran has pitched the idea to other Middle Eastern countries as well as China. And you can imagine the kind of revenue that that country could pull in. And then, of course, what you could do with that money. Yeah, but not their strait. just because you're able to do that we could do that places that's that's not going to fly i don't think the u.s are finishing the group stage of the world cup with a loss uh to turkey and i'm going to drive you crazy here andrew because i'm going to tell you a bunch of things that you don't really care whether you know or not but you saw yesterday the entire time uh it was versus turkey T-U-R-K-I-Y-E.

11:24And people were asking why. There's an umlaut over the U. People didn't even necessarily know it was Turkey. They were, okay. In 2022, Erdogan changed the international spelling of Turkey to T-U-R-K-I-Y-E to better reflect how Turks actually say the country's name in part of a broader effort to assert Turkish sovereignty. It's harder to adopt. You need an umlaut, which we don't use above the U. So most people still just call it turkey. But if you're wondering. Turkey, but they compare it to a turkey like Thanksgiving. But turkey is, yeah, turkey is an English word for, you know, if you call someone a turkey, it's not great.

12:03So they probably don't really like that. So that's the practical reality most people. No, but the other thing is we lost. And it didn't matter because, and it was the final kick of the match, eight minutes into stoppage time. The results don't matter. They're already headed to the knockout stage. But my question to you is, if you put in substitutes and you don't really try to win as hard as you could, does that sort of instill that it's okay to lose? Are you trying to suggest that they were throwing the game? No, I'm just trying to suggest that I think you should try to win every game. This is what's happening in the NBA right now.

12:46But there's an argument that someone could get hurt. You see it at the end of the NFL season. I understand that, but you don't want to get used to losing. Like, it's okay. They play Bosnia-Herzegovina on Wednesday, and hopefully they'll have that winning.

13:01Andrew Ross Sorkin:Winning. You know who said that? Love that guy. Charlie. Charlie. Yeah. Have we asked him to come on? We've asked him, but it just hasn't happened. Would that not be something? That would be a fun show. So you would do that? Absolutely. Okay. But I mean, the stories are not work safe that he's got to tell us about. It's cable. They're work safe in my world. I mean, you know, we'll have to tell the children to go to school. Some are their camp. You could tone it down, baby. Cheese will be next. Winning! Coming up on Squawk Pod, a conversation with legendary investor Jeremy Grantham. He warns a downturn is coming.

13:41Through the 2010s, were you ever bullish through that entire period? 2009, almost there. I posted my only one pager called reinvesting when terrified. Plus what Grantham thinks of Bitcoin and AI. You don't want to miss this. We're either going to be sitting on the beach getting served mint juleps by machines, or they're going to kill us accidentally or on purpose.

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14:26Andrew Ross Sorkin:Call 1-833-OZEMPIC or visit Ozempic.com to view the medication guide and learn more about Ozempic semaglutide tablets, 9 mg, and Ozempic semaglutide injection, 2 mg.

15:06There's a pill version of Los M-Pay. Schwab is now powered by Ameritrade, bringing you an expanding library of education with even more ways to sharpen your trading skills. Access new online courses, insightful webcasts, articles, engaging videos, and more. All curated just for traders. Plus, guided learning paths with content designed to fit your unique interests. And no sifting to find exactly what you need, so you can spend your time learning to trade brilliantly. Learn more at schwab.com slash trading.

15:37Welcome back to Squawk Pod from CNBC. Today with Joe Kernan and Andrew Ross Sorkin.

15:44Andrew Ross Sorkin:Stand Andrew by, up in Andrew, cue. Our next market guest is a legend. He's got a long history of calling bubbles. Jimmy Grantham is here. He's the co-founder and long-term investment strategist of GMO, an asset management firm with$85 billion in assets under management. And he is the author of Making of a Perma Bear, The Perils of Long-Term Investing in a Short-Term World. And we're thrilled to have you at the table this morning. Good morning. So we're cooking with gas, apparently, or with grease. And the question is, are we in a bubble? Are we not in a bubble? Are we always in a bubble? And how much of this is about being able to call the timing versus being able to actually understand the underlying economics at play?

16:29Okay. We needed a definition of a bubble, so we found a very precise one, a nerdy statistical term, two sigma, the kind that would come up every 44 years if it was completely random, and actually it comes up every 36 years, so it's pretty close. and we tracked through and found all the bubbles that met that definition. And we asked the question, how many broke all the way back to the pre-existing trend? And there were 26 of them and 26 broke all the way back to the pre-existing trend. And some of them went up from two sigma to two and a half sigma. And in the case of Japan, almost three sigma.

17:08So they can be painfully higher than just two sigma. And that's the problem, because the client's patience is not quite as long.

17:16Andrew Ross Sorkin:So I appreciate the problem of calling it, but the other problem is that it has paid shockingly well to be a perma bull over the last hundred years, more than it has paid to be a perma bear. Oh, of course. We live in a rising economy in the long run. But half the time, you're waiting to get back to the old high. People don't realize that because we've just spent the last, whatever it is, 16 years going up. But in the long run, it's half the time. After 1929, you have to wait until 1954. After 1972, you have to wait until 80, 80, a long time. 81 or 82. 81 or 82. Yeah. And so where are we now then?

18:06Andrew Ross Sorkin:What's the comparable to you? In a very real sense, I'm not sure there is a comparable, but the tech bubble of 2000 would come the closest. On the ways that the value systems are the most predictive, based on the value of the stock market compared to the GDP with modifications, this is the most expensive market in American history. And if it's the most expensive market in American history, does that mean that it's overvalued and has to go down from here? or is it possible that it could continue to go up for many more years? My guess is sometime between two weeks ago, two weeks from now, two months, two quarters, and conceivably two years, the timing is always terribly uncertain.

18:52The market's going to peak out and drop back to trend. And getting back to trend from here is closer to a 70 % decline than a 50 % decline. A 70 % decline, you think, is in order. Yes, I do. And bear in mind, we set a 75 percent decline for the Nasdaq in 2000 in our quarterly letters. And it went down 82. What was in 2021 and 2022? What was your super bubble call? And that predicted an imminent catastrophe crash across stocks, bonds, real estate, commodities and stocks. Another one in 2023, another collapse prediction. No, no, no. How about in 2021? A super bubble. One of the only two times I clearly said it's now.

19:41The other times I said it's overpriced. The 21st century has been overpriced by the standards of the 20th century. A hundred years of data, we've been overpriced.

19:51Andrew Ross Sorkin:But is there any argument around, I was going to make an argument around technology. Or 2010. But through the 2010s, were you ever bullish through that entire period? 2009 almost there I posted my only one pager called reinvesting when terrified but but most of the time by a miracle it was a big big bull market 2010 to 2020. 666 okay but and nobody else by the way was touting the market okay that week that month but through 2010 a huge bull market to 210 to 220. From 2010 until today, the PE has averaged over 60 % higher than it did for the prior 100 years. Now, I don't know when you decide to say the market is overvalued, but if you're traveling at 60 % higher PE than it used to be, I think that it doesn't say the market's going to collapse, but it does indicate it's expensive.

20:47Andrew Ross Sorkin:Well, that was my, but my question, this goes to the technology piece of it, and I think we're in this moment now with AI where everybody's, you know, asking the question, which is the most dangerous words in economics, is this time different. You talk about a 60 times P.E. Are we in a situation... No, no, 60 % higher than yesterday. A 60 % higher P.E. Are we in a moment now, though, where the technology fundamentally is different and it fundamentally is going to rewrite the rules of investing and valuations and everything else? The great new inventions, railroads, are always accompanied by it's going to rewrite the rules.

21:24internet, a huge invention, changed everybody's life. They were always accompanied by overinvestment and temporary collapse, out of which the railroads changed the world, the internet changes the world. This is exactly the case today. AI is so obviously a dazzlingly important idea. Everybody knows it, don't they? We all know it, and therefore we all want to put our money in it, don't we? So we all put our money in it and it sucks in more than you can shake a stick at and you get over investment. So everyone in the end, in those situations, loses their shirt. They lost their shirts in the railroad.

22:02Brilliant idea. They lost their shirts in the internet. These are the three great ideas of the last 200 years and they will lose their shirts in AI. Now, out of that, bear in mind that Amazon in 2000 came down 92 percent. It had gone up six times. It came down 92 percent and then inherited the earth.

22:24Andrew Ross Sorkin:Well, so what I was going to ask is, you know, I'd asked Jeff Bezos about whether we were in a in a bubble when I saw him and interviewed him on this broadcast just a couple of weeks, maybe a month ago now. and he said we might be in a bubble, but actually that bubbles unto themselves when you think about sort of great innovation and great progress, even for humanity, is required. Think of the fiber optic cable that got laid. It ruined everyone at the time back in 2000, but we used, eventually, we used all that cable. The trouble is, by the way, that fiber optic cable would last a long time. Chips today may be redundant in two years.

23:03So you think there's actually a big distinction between some of the investments that were made then?

23:08Andrew Ross Sorkin:And, you know, we were talking when I was talking to Jeff, it was about biotechnology and actually a lot of stuff that actually, you know, there's that biotech bubble. And but a lot of great things came out of it. You think less great things are ultimately going to come out of this sort of data center? I think this is going to change everyone's life. The disagreement in opinion is more profound than I've seen in any other. anything in the stock market ever, really. The Nobel Prize winners disagree. The bosses disagree. The worker bees disagree. Everyone disagrees about the consequences. We're either going to be sitting on the beach getting served mint juleps by machines, or they're going to kill us accidentally or on purpose.