Jeremy Grantham: Stop Ruining My Perfectly Good Bear Market

30:06Why? I don't know why that's just the way we were. We were a little too quant, a little too academic, a little too. A little too rational in an irrational world, maybe. Thank you. A little too rational in an irrational world. And you pay a high price because the client does need a little more tender, loving care, a little more sympathy. Candy. You can't expect. They need some candy sometimes. You can't expect your clients to be able to chew on career risk that much. Impossible. They just can't do it with the school fees and anything. So obviously, you wrote a whole book about your experience. One of the things that I—I don't know what you could have said differently or more.

30:46This must have been an incredibly challenging personal time in your life, just going home day after day, emotionally, raising a family, running a business. I'm sure that was hell. What was? What period? The late 1999. Yes, it was because a lot of people who I wanted to help, friends at GMO, were feeling the stress of their clients. You know, it felt like a personal betrayal and you let them down. are the salespeople that you hired. Yeah. And they were taking the brunt of it. They were taking a terrible toll. And on a Friday evening, you know, they kind of, the ones more friendly to me who'd been there for longest would kind of come in wanting or needing a blood transfusion.

31:40Yeah. You know, tell me the story once again. Make me believe in it. And the boss then of marketing didn't really believe that we were right. He thought we just made a mistake, which meant that the second in command and all the others, that was added stress. So no, it was terrible stress for them. And feeling that, I felt bad for them. Can I ask you another emotional question about investing? So Michael Steinhardt said, there's no better feeling for a money manager than to make money when everybody else is losing theirs. So you are a humanitarian. You care about people and civilization. I'm sure as a human being, you must have felt like, I told you assholes, in 2001 when it burst.

32:28Like you must have felt like a million bucks tap dancing to work every day that you were right. Because how could you not feel that way? But, and also, there were serious problems in the economy. Like people are losing their jobs. That's got to be a weird push and pull. Yeah. And you have a job to do. And I have to say, it was nice, but we took it for granted. One of my secret regrets is that in the era for the first 25 years when we walked on water, I just didn't appreciate it enough. If it happens from the beginning, we won the first nine years in a row by an average of eight points a year, old-fashioned alpha.

33:06Unreal. I know, it's unreal. So you don't know any different. You don't know any different. Right. So you know it's good. You just don't know that one day when you've entered the real world, you'll look back and say, holy cow, why didn't I go out and party? Do you know that's why we stopped hiring kids out of college? Because we think we're the greatest firm in the industry. But how do they know? So I want to be somebody's second job or third job. I want you to go somewhere else before I bring you here. Go call and sell life insurance. Right, go sell life insurance for two years, then come see me.

33:41I want you to appreciate this. If you come right out of school, to me, how do you know this is good? Yeah, yeah. So I definitely get that. And maybe all of us don't appreciate our successes as much as we should do. Well, I do. I failed first. So I definitely appreciate it. I failed first. Because we seem to feel the pain. And I don't appreciate it. We feel the pain every last delicious little drop, right? Yeah. And then the pleasure, if it comes, particularly if it comes bunched up, and particularly if it comes early, you kind of coast over it. So can I ask you, so the market in 99, March of 2000 comes, negative catalyst, negative catalyst, negative catalyst.

34:21Finally, NASDAQ breaks, takes the rest of the market with it, although not to the same extent. And not yet. And not yet. It happens sort of in - Through September, the rest of the non-growth was up 12 % more. Right. So now, so now like Warren Buffett is back on the covers. And they say, oh, we were wrong to ridicule him in 1999 that he doesn't get it. I guess he gets it after all, right? He had spent 98 and 99 buying companies that make carpeting and, you know, like aluminum siding. And they laughed at him. And then, okay. But you're in that same camp. Yeah, we made money in 2000, 2001, and 2002.

35:03So the market is down 50%. And we've made cumulatively maybe 35%. Are people who abandon you coming back? Not one. Nobody. Not one solitary person. It isn't amazing. It's human nature. I like to say I completely get it. It's like selling a stock at three and buying it back at 12. Can't do it. Humans can't do it. Someone, I mean, on paper, it's all sunk cost. It doesn't matter if you're an economist. You don't even know that you sold it at three. But humans can't do it. And it's a bit like that. You had these guys. You fired them. you bought a growth manager, you lost half your money, and they made a few percent.

35:43And now you're going to go back? No way. It was such a cataclysmic shift where we went up and they halved that there's no way we'd get, we didn't get one back. I don't know how many there were. Let's say 80. Would you have taken many of those people back? Of course. Absolutely. We'd I would love to have had them back because they were kind of seasoned people who had been through hell like we had. And I was sympathetic. I got why they fired us. I would love to have made some money for them. Would they have become more well-behaved for what was to come next? It's not them, by the way. It's their committees.

36:22Sure. They were pretty cool. They kind of got our storyline. They understood value. They understood the time horizon problem. They understood career risk. In the end, they just understood paying the rent. By 2003, though, we're blowing the next bubble in real estate and housing and mortgages. Would those people have stuck with you again? Yeah, I hope so. Rolling into the next crisis. They might have done, particularly since the housing bubble was the one exception in our career where we made money on the upside because we played emerging markets. And emerging markets didn't just outperform. It was 2.8 times the S &P.

36:59Oh, that decade. Yeah, it's impossible to diverge that much that quickly, but they did. And we played it not up to the peak, but also down for the only time in our history. We actually overstayed our welcome a bit. Instead of getting out here and regretting the miss, we got out just a little bit later than the peak. So almost maximized the return. So we made a little bit of money being much, much more conservative. And the housing market was a perfect bubble. Perfect. Three years up, three years down, home ownership goes up by three or four percentage points to the highest in history and gives it all back.

37:38So that was mean reversion triumph. And very nice too. Jeremy, I want to ask you about market structure. So one of the reasons why you identified index funds as being a good solution is not that you thought markets were efficient. I'm guessing you still don't think markets are efficient. It wasn't that. it was the nature of active management being a zero-sum game. And any frictions that you take out are now in the investor's pocket. Right. And so you told the story basically about, think about like a poker table. Well, if you lose enough, you come to the game. You're not going to come to the game anymore.

38:15You're going to stop playing. So there's this weird dynamic in the market where on the one hand, John, if you could throw some of these charts on when you get a chance. On the one hand, you've seen that exactly. You've seen active outflows persist. The cumulative outflows are$3 trillion out of active mutual funds,$2.8 trillion into index funds. I'm sure you've seen this chart a million times to the point where ETFs and passive mutual funds have now passed over active. So there's less people playing the active management game. But on the other side, you have the rise of the retail trader. So you have this one dynamic with professional investors and retail investors.

38:54And then you have something like this. So we grabbed charts from Robinhood, data from Robinhood. And we're showing that since the third quarter of 2023, the total equity value traded on Robinhood is up 273%,$647 billion in the third quarter alone. And I'm using Robinhood as a proxy, but whatever, the point stands. And if you look at options contracts, it's the same thing, up 103 % since the third quarter. So you have people trading their ass off. It's estimated that the retail trader is now 25 % of the market. But then you also have people that are saying, I'm not playing the game anymore. So how do you think about market structure today?

39:28And is it so much harder than it used to be to win? Mag7 notwithstanding, just the level of competition, because there's no more suckers. I mean, there are these suckers, but it's a messy story. It is said that in 29, there was an awful lot of ordinary people for the first time playing and losing their shirts. And I think that wasn't that a big echo for decades, how easy it was to get buried in a professional market and the professionals would kill you. And people in the 50s, 60s, 70s, 80s really stayed out. They played real estate with their money. But if you were the median rich person, you didn't bother with stocks.

40:11And then COVID and that incredible issue of money to keep the economy ticking with everyone hiding at home. And the fact that they had nothing to do but get on websites and learn a bit about speculation. Couldn't even watch a sporting event. There weren't any. Right. To the moon, to the moon. Yeah. Let's play these games. And it's an exciting game. Let's face it. I told the story of getting sucked in when I should have known better and making a fortune and losing it. And that's what they were doing. And that's what's going to happen to them. A lot of them will have made a fortune. A lot of them will have lost everything by now.

40:47But they're all going to lose almost everything sooner or later. It's a setup. They are being set up beautifully by circumstances. And that's a major theme in this market. Edward will be writing in 15 years, with any luck, about that aspect of the market that a big chunk of ordinary people who had, for the first time, their hands on enough money to trade a bit. And some of them, a third of them, made a lot of money, and they went on to trade a lot. Can I offer an optimistic take on these people? I think, not I think, most people know what's happening. Most people understand that they're gambling.

41:31I think that there is, of course, some level of delusion within those traders. Of course, right? For the people that are just starting, that have seen nothing but success. Of course, there's a lot of delusion in there. But these people have seen a bear market because a lot of them got killed in 2022. And my optimistic take would be that these are people that are contributing to their 401ks. They're buying index funds. They're eating their meat and potatoes. And this is their fund money. And they're not - You're the one who said it's 25%. This 25 % is not their 401k trading. This isn't their mutual funds that they bought.

42:02This is their - Their crazy money is not insignificant, is my point. And your point, too, really. It's enough to count. But it's only one chunk, one game, one sub game in what has become the world's most complicated bull market ever. You're right. 25 % of the volume, it's not an insignificant amount of money. And certainly there are people that will lose everything. But I think that there are people that are maybe learning the right lesson because they are trading and if they lose, they stop playing, they graduate to more serious investing. I was a 12 at 28. I'm a semi-professional, for heaven's sake.

42:37I'm a good quant. I understand life. I'm a historian. I've always been interested in history. I knew about 1929. I knew I was speculating, but the speed with which I got wiped out, I was not ready for. And no one ever is. When was this? This was... Was this the Nifty 50? 69. Okay. Before the Nifty Fifty had really settled in, before people really knew there was a bear market, by the way, there was a magnificent bull and bear market in not just small cap, but pink sheets, under the counter, tiny, tinies. You remember which stocks wiped you out? I'm sure you do. Yes, of course. But they had these wonderful names, too.

43:21Palms of Pasadena was my favorite. But the one that killed me was American Raceways. Sterling Moss, the world champion, was on the board, and they were going to introduce Formula One, which is now ticking over decently in America. Formula One to America. You were early. You were right. I was right. Five decades early. I was five decades early. But the next one, because I got out with half my fortune, and I immediately went into market monitor data systems, which was going to put a little monitor, i.e., et cetera, machine on every broker's desk, so that he could trade futures, I'm sorry, options on individual stocks.

44:01That's hilarious. And it was a brilliant idea, but it was 15 to 20 years too early. The technology, which now makes it trivial and people trade them, couldn't handle it. And so they had these machines, but no orders came in. And so the company went bust and took me with it. I got a package in the mail in the middle of the pandemic. And somebody said, they wrote a letter. They said, I don't have much time left. And I'm giving away everything I have. And I don't know what to do with this, but I thought you would. And it was boxes. And I opened the lid. And it was, I don't know, maybe a thousand, maybe 2 ,000 issues of a little magazine.

44:48the New York Stock Exchange used to put out. And it was like, I had a very beautifully illustrated cover and it looked like it was a weekly digest of everything that happened on the New York Stock Exchange that week. So every cover would be about whatever stocks they were talking about. Now, I still have these things in boxes. I did not, it turns out, know what to do with these things. But I was looking through them and I think I saw something like that device you described. But like, it's amazing when you look at the history and it feels like, oh, that was the 60s, nothing like today. It's incredible the degree to which things repeat.

45:24And you could just randomly pull one of these magazines out, flip to any page, and it's an article about something where if you just change the name of the company, it's almost identical to something that's happening. We had the seat you're sitting in, we had Andrew Ross Sorkin sitting in two weeks ago. And he, of course, wrote 1929. And he said the same thing. I'm researching this book about the 20s, but like it could be the 2020s. It's almost remarkable. Do you still find it remarkable after all these decades that you've witnessed? In some ways, I find it even more remarkable because into the things that I was kind of used to, even expert in, we've had this extra spin of a subset with real money speculating, and then a much bigger subset of AI changing the economy.

46:21It wasn't just back in November, they interrupted my nice bear market. Right. And for 10 months, 11 months, only the MAG-7 went up, by the way. 2023. In 2023, only the MAG-7 is going up. The other stocks are drifting a tiny bit down. And then they throw in the towel and they start to go up in about October, November of 23. But it changed the economy. If you take out the 1.5 % of extra capex, we would have been almost flat. And then my hero, Cain, says, what happens to animal spirits? The animal spirits were not great in 22. too. Without that one and a half percent, without that oomph in the stock market from AI, we would have had a recession and the market would have continued down and it might have hit trend minus 50.

47:16We'll never know. There's no doubt that the bear market would have continued. Whether it would have gone down 50 is up for debate, but isn't this such a great lesson in capitalism? It didn't have to go down another 50. It had gone down 25. All it had to go down then was another 20. But I guess to Josh's earlier point, like it's always something, especially in America, which you wrote about in the book. We are so delusionally optimistic, our willingness to take risk, to fund these early stage companies, which I know you do a great deal of. It's really hard to bet against the long-term nature of the stock.

47:49You never know when the next chat. So in other words, people look at valuations and they say the market's expensive. And I'm a little bit sardonic about it. I say, yeah, we'll find out why. And that was a really good example of we found out why we weren't in a 50 % drawdown. Because people were willing to bet that something would happen. And then nobody knows what it is. And then this thing comes out of nowhere. But the market hadn't turned in anticipation. Market was nicely going down. Bang. They introduced chat. Day three, I'm on there saying. This is something. No. I said, please summarize War and Peace in 12 points.

48:32Yeah. I thought, that's very cool. Now try it in German. Yeah. I thought, holy shit, this is going to be something, isn't it? You've ruined my bear market. And you've ruined my bear market. And it meets every condition of a great bubble in itself. So this is a new game, but becomes almost immediately meeting the conditions of the truly great bubbles, which is everyone on his dock can see that it's unbelievably significant. It is completely obvious, and it's going to change the world. It's as obvious as anything since the railroads. In fact, I think historians will say you had the railroads in the 19th century, nothing much in the 20th century.

49:23And you had this one in the 21st century. You think it's that significant that it dwarfs everything that came before it in the last 50 years? Yeah, yeah. Including the original advent of the internet. Yeah, yeah, yeah. But the market's rejecting the bubble in many ways. Like if you look at now, you could find speculation all over the place. But Oracle, for example, and Microsoft, these are two of the stocks that are the epicenter of the AI bubble. And you would think that they would be bid up to, but Oracle's down like almost 40%. And Microsoft, since chat, has barely outperformed the market. I'm shocked that these stocks aren't going vertical.

50:02NVIDIA is selling at 24 times this year's earnings. Meta is in a 15 % drawdown. Yeah, I'm very surprised. It doesn't look bubblish yet. But NVIDIA, the bubble is not in the PE, for heaven's sake. The bubble is in the fact that they have bought millions of these ultra expensive chips on which they have not yet made a buck. That is a classic, classic bubble. You want them to also bubble the PE? I mean, give me a break. It would be neater. It would be neater. It's not necessary. It's hard to blow the bubble on the PE for NVIDIA when it's already at$4.5 trillion. In other words, how big should it be?

50:46$9 trillion? To have a 70p would be completely absurd. Right. Well, it doesn't. Fortunately for all of us, it doesn't. Jeremy, I think one of the things that you got the most wrong, no fault of your own, but with the benefit of hindsight, and I don't think anybody could have seen this coming, part of your work that made you so successful was the fact that, and this was a fact, that margins would mean revert. It was one of the most mean reverting series in business and in life. And you said the fact that a company's depressed profitability reverts to its average level seemed to me just the fortunes of war.

51:22And that all changed really with the MAG7. They have broken the laws of profitability. John, throw this chart on, please. And I know you wrote about this in the book and you have a similar chart. And actually, it is kind of funny that this stopped going down in 2023 when Chad came out here. But the level of margins and the fact that they didn't mean revert to previous norms for a million reasons that are now obvious back in 2013, 2015 was very hard to see coming. That this would just continue to go up and to the right. Let me just say the 5663, when you put on the series to the left of it, looks like noise.

51:56Right. Okay. So what we're really talking about is starting in the 21st century, there is apparently a paradigm shift or something very much like that, which for a number of decades causes the profit margins to go up and the share of GDP to go up. And that happens pretty seldom because in order to do that, you have to squeeze individuals. You have to squeeze regular income. And what has been happening in the 21st century in particular is the share of money going to average Joe hasn't moved so that the real wage for an hour's work has barely changed since 1975. Look it up. If it's up 15%, I'd be amazed.

52:41The average Frenchman whose bottom we have been kicking, I know from reading Businessweek over the years, we have been kicking consistently and who've suffered from, you know, this sort of problem and that sort of problem, eurosclerosis and so on, is up 140%. And we're up 15%. And the lowly Brits are up 50 or 60. So why are they the ones protesting in the streets? Why is the Frenchman who's up 140 % in, what is that, take-home pay? Quite a lot of time, yeah, yeah, take-home pay. Why are we so wimpy? Why is it that the American worker has been screwed and screwed and royally screwed and has not really objected?

53:24What do you think? Well, they're badly organized. The opponents are more powerful. better organized, systematic, have a plan. It's not an accident. It's not just a drift. The rich and powerful actually use their resources to maintain the current system because it's working fine. So they have not moved to stop the squeezing of the bottom 50, have they? What legislation was effective in changing that drift? Well, Trump has run on that, but he hasn't actually done it. Exactly. Yeah. And other people have run on it without doing it. There is no president since 1975 where the pendulum swinging for 60, 70 years in favor of the rich away from the poor.

54:17There is no president who moves that back for four years, eight years. Clinton holds it, right? It stops moving for eight years, and then it starts to move again. Every other democratic keeps moving. Was that legislation or circumstances, the economy? Everything. Everything together. Point is, Clinton stopped it. Good for him. Obama, et cetera. They didn't stop it. It continued to move. We've lived in a world that is simply favorable to the rich and powerful. Okay? and that I say rich and powerful because that was the exit poll language at Trump 1 16 and I it was longer than this table and it was full of every question you could possibly imagine and it was 623 Hindus on this and Protestants and Catholics and so on and rich and poor and Republicans and they asked them all the questions and you had the red-blue effect on everything except this one, which nearly shook me out of my seat.

55:29This country needs to be saved from the rich and powerful, and every goddamn group on that table agreed. And I'm saying, you know, it would be 91 % of the Democrats and 89 % of the Republicans, and even the rich agreed, and I agreed, it needed to be saved from the rich and powerful in 2016. And what has happened since then is just you look at the data. It's more of the same. But it's a stock market. How do you fix that? Because the rich people own the stock market and it's going up. You don't pick one element of it. How do you fix the stock market? It's how do you fix the whole game? And it's been how did we get here from 1975?

56:08From 1935 to 1975, the pendulum moved slightly in favor of the poor. They got richer, slightly faster than the rich got richer. But everybody got rich. So you had this very high productivity, 3.5 % GDP for 100 years. What era is this? This is 35 to 75. And what's the top marginal tax rate during that period of time? Who knows? Okay. It's higher than it is today. But one thing at a time. Okay. So you have this 40-year period with the highest productivity gains in American history, 3.5 % a year for 40 years, maybe closer to four. 100 years was 3.5 on average. So this was even better. Let's say 4%, maybe even 4.2.

56:56Magnificent increase in wealth. And the poor were just slightly higher. So the poor were like 4.5 and the rich were 4. and you can keep that up for 40 years and no one's going to take to the barricades. It's a perfect environment for the poor. It's a perfect environment for everybody. And because it just goes on so smoothly and such a long time, it creates enormous harmony in the economy and that was the golden era. And then when you look from then on, from 1975 for 50 years until 2025, and uh was it the gold standard that the rich take it all in round numbers but there must be a catalyst or two that you could think of the bottom half take nothing what do you think but first of all we should not have the income it's like a a slope isn't it between the very rich and very poor and some countries like japan is quite modest and some countries like brazil and now we have moved up to be like Brazil.

58:04We're very steep. We shouldn't allow that to be decided by the random features around the world. Oh, China has a lot of people going into the cities. Should we allow that to make inequality in America? It's easily fixed. You fix equality by a tax structure, don't you? What we did is we allowed Chinese farmers to go into the city to make our goods for us. We start making them. We just put the brand on it. Our profit margins go through the roof, et cetera. That's a random fact. And there are several of those things. But outsourcing was a powerful factor. They're easily corrected. You're corrected by the government.

58:52The government decides that they will tax capital a little higher, income a little lower. You're meant to tax. Anyway, taxing income is not the world's greatest idea. There are some things away from the tax. You tax things you don't like, like tobacco. You don't tax things you want to encourage, like work. But government is run by the rich people, and they will never do this. I was going to say, like, doesn't power always consolidate? I think that's the key difference between the 3575 era, where there was a sense of noblesse oblige. The local companies ran as if it mattered that the city they were in, their well-being mattered to them.

59:25It really did when I was first here. And there was a minor undertone of Noblesse Oblige in Congress. Eisenhower left. He opens his famous retirement speech with, I've got to thank both parties for the serious cooperation that they gave me. Right. Nobody's doing that now. Serious cooperation. Yeah, yeah. And then he goes on and on like that. We mustn't squander the resources of our grandchildren. No Obamas of the world have not said anything that enlightened about long-term sustainability, for example. That profit margin chart, though, very specifically, like you say, it's a 21st century phenomenon.

1:00:07I agree with you. And it is the hardest thing to have foreseen. Like, why won't this go back to the way it used to be? I think we just we stopped doing antitrust. in we never had companies this size that could acquire anybody that competes with them until the point where you can't compete right and that keeps profit margins abnormally high relative to history absolutely and then the second thing is writing my book again uh citizens united yeah so all right from 1930 to 1970 or 1975 votes actually mattered now we have super PACs and and media time and the only thing that matters is who raises the most money and there are no limits It's literally - Citizens United is like a - 2010.

1:00:48A dagger in the back of democracy, isn't it? I think it's gasoline on the preexisting fires that were already burning, but there's almost no way back now. And the Justice Department does not have to go to sleep. In the earlier period, it was out and about from time to time. It broke up. Imagine, it completely broke up Standard Oil. It's massive. And then it broke up the steel syndicate, et cetera. and it broke up telephone. A single company owned the whole telephone system and it broke it all up. And then they went to sleep. In the last 50 years, it occasionally shapes up so that you'll think it's not asleep, but then it does nothing and backs off.

1:01:31So it will threaten to break up a Microsoft. It will threaten to break up and et cetera, et cetera, et cetera. And then it will basically do nothing material. So every industry has had an increase in concentration. Every industry. Some a lot, some a little. But they've all become more concentrated. And monopoly is the very essence of profit margin. What is our definition of quality? Stable, high return, and no debt. And why is it that? It's because that's a workable definition of monopoly. You're a price setter. You have stable pricing because you're setting the price. You have fat profits because you're setting the price.

1:02:10You have no debt because you're making so much money you don't need any. Quality has outperformed instead of underperforming. It's the AAA bond, for heaven's sake. It should be minus one. Everyone knows the AAA bond returns a percent less. But the AAA stock does not. For 100 years, it's returned a half a percent a year more than the market. You should not be getting a premium return for buying the highest quality stocks like Apple. But you do. It should be so obvious, but you do. And why? Because they're the essence of the creeping increase in monopoly. Those Coca-Colas of the world and NVIDIAs are allowed to have more power.

1:02:49Well, Amazon's a great example. I mean, it's not enough that they were the biggest retailer in the world. Then they dominated cloud computing. They bought Whole Foods. They bought MGM Studios. Now they're getting into pharmacy. I mean, they'll basically get into whatever they want. And the case that they can make in an antitrust conversation is, well, we're not the only player in the industry. There's Walmart. And it's legitimate. There is Walmart. It's true. Right. So what slows this down? Forget about reversing it. I mean, is investor preference going to change all of a sudden? I don't want to rain on the parade.

1:03:21I mean, I think history would say what happens is an unexpected stumble. Hyman Minsky arrives back into action. And it is revealed that the size of the bezel is a lot higher, that the level of leverage is a lot higher, that the stability of the global system and the dollar is a lot flakier than you thought it was. And you don't know where the strut cracks on this elaborate bridge. So here's one potential. And this is not necessarily a pinprick or a catalyst. It's a gradual thing. I think Jeffrey West is the author. Jeffrey West wrote a book called Scale. And there is a limit to how big things can get, whether it's society or animals or companies or cities, before they start to buckle under their own weight.

1:04:09And maybe we're not too far away from that, where things just start to deteriorate. There's too much glut, there's too many people, there's too much bureaucracy, whatever the case may be, where investors say, hey, you know what? Why am I paying a premium for this size? It can't grow anymore. It's only going to shrink. And it may be something as intangible as that. What I think about is Henry Ford. He was a pretty good capitalist, you know. I have to pay them a decent wage. Otherwise, they won't be able to buy my car. Who's going to buy the car? Right. If you think of the bottom half, they need cars.

1:04:40If you only sell cars to the top half, GM and Ford are toast, you have to sell to more than the richer people. Can I ask you a follow-up question to that, though? No, you can't. Eventually? Eventually. We're in danger. If you look at the number of poor people who can't pay their auto loans, They're defaulting at an abnormally high rate in a strong economy. Why? Because they're not the part of the strong economy. They're the excluded part of the economy, and they're beginning to hurt. If they stop buying cars, that's a strut that can just crack. No one talks about it. It's just the poor are squeezed so much, they stop supporting those parts of the economy that echo right through.

1:05:25And auto is, of course, a classic. But it could be what you're saying. It's such a complicated system that you build it up and you build it up. And I could list, unfortunately, a lot of things. Climate change used to be just a kind of bad idea for ruining your evening. The last two years, it is big enough in damage, fires and floods, and bad farming conditions. is big enough to affect the GDP. Just the last two years, the cumulative damage is running at something sometimes in excess of half a percent of global GDP. And I'm not vouching for this data, but it was worked out by somebody that from 2000, about a quarter of the growth in GDP was preparing to fix or fixing climate damage.

1:06:23So doing stuff to reduce the risk, building better, or fixing the village that got burned down. Half a percent, I'm sorry, a quarter of the GDP growth. So that is squeezing. Now you have the population thing, which is what I came back at the end of last time, to harangue everybody. If you're reading the paper, you will see that there is shocking. Every week, there's some shocking tidbit that, whoops, China was meant to decline, and gross population in three years had declined this last year. This actual total population decline. That's a lagging indicator because of old people living long, that their workforce is declining all over the place.

1:07:06Japanese workforce, get this, 20-year-olds entering the workforce, 50 % of what it was at the peak in 1948. 50%. If we were down seven, we'd be in a panic mode. They're down 50, and they're leading the charge, followed by South Korea, followed by China at an unbelievable speed, followed by India, who is 20 years ahead of the game to get down to 1.9. They weren't meant to get to below 2.1 until about 2040. What the hell is going on? So which side do you want? Because on the one hand, you could say that that's putting less pressure on our natural resources. It is, but it's putting more pressure on this bloody bridge that I'm talking about.

1:07:45Because the demand is going. People aren't applying to college. Schools are closing down and so on and so forth. And villages are being abandoned in Japan and South Korea getting for the same thing and the same in China. And my argument is, if you live in a country where two or three decades have declined, you lose your moxie. If you kind of grow up and the nursery schools are closing, and now the grammar schools are closing in Japan. I went on a bicycle tour and we got fed by the local old ladies, very nicely, sandwiches in a closed grammar school. When you grow up in that world, how are you expected to be as bullish as you used to be?

1:08:29Why would you reach for extra debt, open another factory when you know everywhere in Japan there are fewer people? Yes, you go for exports, but there are limits to how much you can do that. And they're terrific in Japan. They have a social contract from heaven. And yet I think they had real moxie in 1980. We were terrified of the Japanese. You know, we would have 5 % failure rate in chips and they would have four. Oh, that's unusual. Three and a half, three. What the hell is going on? Two and a half, two. They got it down to one before we really woke up to the fact they were kicking our ass. Every television set was, becoming Japanese.

1:09:11You stuck these things on your belt, the first kind of high-techy things of walking around listening to music. And everything they did, they seemed to do better, and now they don't. They're competent. They're professional. They just lost it, haven't they? So one by one, China's entered this. It spreads around. They used to say France was the exception. last year was 1.6. America, 1.6. At 1.6, you're losing a quarter of your babies each 30-year generation. For the last 14 years, global baby production has dropped by a million. This year, the year just ended, China went down by a million babies, 1.2 by itself.

1:10:03and and and we've gone down from like 150 million babies globally to 138 or 137 how many years do you want to keep doing that so global vitality is going to start going anyway so these are two climate damage already much faster than we thought population bust much much much faster than we thought. No one's prepared. We're so profoundly into wishful thinking. We're simply not prepared to talk about stuff like that. Elon Musk said that by 2027, he'll be selling humanoid robots to families, households. Japan has been experiencing this demographic ice age for a few years now. And as a result, they're basically the world leader in robotics.

1:10:50You said China will be next. OK, and then eventually it'll get around to us where it'll become apparent that we're just not growing the population. So do we turn to more immigration? That seems doubtful. It sounds like we're going to turn to robots. And the source of immigrants is pretty short term anyway, because Africa has actually in the last 40 years lost more babies than we have. It's just that they started so high. So they've gone from six to four minus two. Right. And we have gone, you know, from three to one and a half minus one and a half. What do those numbers represent? Are you talking about percentage?

1:11:30Babies. How many babies do you replace yourself with? You need 2.1. Right. And they were, you know, six. So they had a generous sufficiency. A lot of babies. A lot of babies. And now they're four, which is still a lot of babies. And people tend to, oh, well, they have a lot of babies. At that rate of decline, which is every year, how long do they have? And the answer is about 25 years. But every time anyone works out the 25 years, it happens in 21 these days. So we have a couple of decades where on paper, a lot of Africans could emigrate. But someone has to pay for them. Someone has to receive them, be willing to receive them and integrate them.

1:12:12So I don't know whether one should hold one's breath or not. This is all very uplifting. Jeremy, I know that you are investing a lot of money into causes that will long outlive you and maybe even the next generation to make the world a better place. Can you give us, can you leave us with something optimistic? Is there technology that you're seeing? Is it too late for us? Like, where are you putting your money for all of our benefits? I mean, the good news is we're crap at long-term thinking. We don't do serious analysis of long-term problems. We don't address it in a very emphatic way. On paper, we could.

1:12:52We just don't. But we are very inventive, okay? We can all agree on that. So the thing that we really do well, particularly in America, is we take risks. We get together. We experiment. Fracking is just a minor miracle when you think. Bloody solid rock they have to get. It's just amazing. And if you take fracking out of the US extra performance in GDP, it becomes a very modest component, by the way. People are very bad at doing that. They don't really know how to do it. But it's spread out its tentacles. It's not just every manufacturer, because natural gas is local, every manufacturer has cheap energy, one-third the price that they're paying in Europe or Japan.

1:13:44This is not an insignificant advantage. So people are building chemical plants in America because they have cheap natural gas, cheap energy. And then natural gas is the feedstock for plastics. So we're all building plastics factories. Everyone wants to buy our natural gas. It's coming out of our ears. So we're building these very complicated transshipment systems, which are unbelievably expensive. There's domed LNG terminals, LNG tankers, unbelievably expensive. And that technology waffles around so that, you know, the guy at the coffee shop is benefiting from the drilling activity and the cheap building that's going on.

1:14:31Not the cheap building, but the building based on cheap energy. I digress, of course, but I'm just making the point that fracking was amazing and accounts for a lot of the American success against the rest of the world. And we will keep doing that. But if you could take the fracking genius and transfer it to geothermal, geothermal is just about digging holes laterally to capture more heat, send the heat up, steam, generate electricity, and so on, power. And it is a natural if we could do it. And now we're showing signs that we are transferring talent, trial and error, money, resources. We're also working on can you get the temperature down with which you can make useful energy.

1:15:29And maybe we'll do both of them. If you do that, we could wake up in 13 years to pick a random number and find that instead of 1 % of the planet you can dig in New Zealand or Iceland where it's close to the surface, it's 13 % because you can dig twice as deep and you have more skillful ways of catching it. And it's infinite. You never run out. Mankind will be long, long gone before you could show any rounding error of loss of energy from the heat of the interior of the planet. So that's amazing. We have the skill set. We have a brilliant example. All we have to do is transfer it. Our foundation has quite a few investments in this area, not surprisingly.

1:16:23And people are beginning to fund it. They're beginning to perk up. It's interesting. Are you impressed by any other technologies that you think our audience should read about or try to learn about? You should keep your eye on fusion. There's plenty of jokes about fusion, but that's life. Things often happen very, very slowly and then quite rapidly. Nuclear fusion. as a new energy source that we could harness. Yeah, they have made progress beyond the imagining. You know, 1 ,000 times progress over 15 years in this particular part of the technology. 10 ,000 times, 400 times. It's just all over the place.

1:17:02They just miscalculated. When you go back and you think, they thought it was around the corner. That isn't because we did badly. That was because they were idiots when they made... It was next to impossible. in 1955. We shouldn't have even bothered it look so impossible. We have done so well, it is now more than possible. I think it's probable. Now, how long will it be before? And will it be cheaper now? And the other thing, which is really bullish, is solar and wind and storage, but particularly storage. Storage over 20 years is 5 cents, 8 cents on the dollar. It's just come down much more. And there's a kind of a joke because one of the Energy Institute people who crank out energy numbers every year have underestimated the improvements in energy storage for something like 17 consecutive years.

1:17:57Wow. And you think, why don't they change their model? That's what we used to do in Quandary. And it's going to keep going. I mean, we will have energy 10 cents on the dollar from today. I guarantee it. It may take 20 years. It may take, you know, 12 years. But it will be, in the end, it will be there. And it may take 35 years. But we will have incredibly cheap storage, even cheaper solar and wind. And the question will be, you might come up with fusion, and just the capital intensity will mean that other alternatives are cheaper. But there's backup. There's layers of energy. And energy is one of the, if you wanted to survive as a species in a world where we're living beyond our means, what you need is fewer people.

1:18:47Ooh, what a coincidence. And infinite cheap green energy. And frankly. Sounds like we're getting both. We might get both. And the real experts in the rise and fall of empires have missed those two points. They're really good. I agree with them on everything, more or less, except I think they've missed cheap green energy combined with fewer people. If you only have cheap green energy and you power ahead, growing like a weed in population, you just still run off the cliff. You run out of everything. You poison all your water. You run out of resources. You crowd the world until people don't realize compound math is not one of our skills.

1:19:31You know, we drive around the Arc de Triomphe with unbelievable skill. We do compound growth like idiots. And I was giving a talk at the Supercomputing Center at NYU, and I got to the part where I wanted the PhDs in computer studies and math to make an estimate. Okay, ancient Egyptians, 3 ,000 years, 4.5 % a year is the growth rate we've had the last three years when I gave the talk. 05, 06, 07 was 4.5 % a year globally, the peak of Chinese explosive growth. Imagine keeping that up for 3 ,000 years, which is the length of the Egyptian empire. Same language, same pharaohs, same religion. and what would it be if you started with a cubic meter of physical possessions and you increased them four and a half percent for three thousand years how much do you have and i'm not going on there was this embarrassing silence and finally someone says uh oh it's a lot you know it'll be several miles deep yeah around the earth several miles deep that's a lot and then another voice says, oh, Fred, it's going to be much more than that, perhaps from here to the moon.

1:20:59And that is a lot, lot. And so I'm able to say, how many times do you get a room full of PhDs? And they can't come up with one billionth of the right answer. It is more than a billion times that. It is billions of solar systems full with our crap at a lousy 3 ,000 years of four and a compounded. And if you don't believe me, you can now check it on your phone. You could not that year, but you can now pull out your iPhone and dial in and it will tell you, instead of error, it will tell you that what I say is correct. Jeremy Grantham, ladies and gentlemen. Did you have as much fun this time as we did?

1:21:44Is that all we get? He's just getting warmed up. No, dude, I got all the time in the world for you. I just think that I just find you to be such a remarkable thinker and speaker. And we just, we appreciate it so much. So we want to be respectful of your time. But I love that we can have a sort of uplifting answer, like how we get out of this. And those are two really good answers. He's not done yet. I do want to say that I think that the first go-round here was the most fun I had. Right? So that's something. Okay. And secondly, you are talking to the only person who reads the comments on these days.

1:22:25Oh. Yeah, I am a blanking expert at comment reading. Steve, you got to talk him out of it. Because the comments reveal the flavor of your audience. Okay. And you have no reason to know this, but you have the best audience out there. Amazing. Oh, wow. And this is not me sucking up to them because I have no career risk. I don't give a shit. Sorry. What do you think about me? I'm just giving you the facts. The comments are your audience is really interested in the stock market, really interested in giving someone a decent hearing and thinking about what they say. And a lot of audiences are just kind of pro forma, simple one-liners that you've heard 800 times, 8 ,000 times.

1:23:12It can be very disappointing. And you can't tell. It sounds pretty dignified. You'd imagine they'd have a good audience and they have all these morons. Yeah. And whereas you guys, I thought they'd all be, no, I'm just kidding. Right. Never judge a book by its cover. What a nice way to end. Thank you. Our audience will absolutely love hearing that, as do we. So thank you so much for saying that, Jeremy. We appreciate it. I want to tell people where they can buy the book. So Amazon, Barnes & Noble. Go to the Monopoly. The usual places. Airports, gift shops, et cetera, right? This is everywhere. We're good?

1:23:47All right. For those of you listening, not watching, it's called The Making of a PermaBear, The Perils of Long-Term Investing in a Short-Term World. And it is written by the legendary Jeremy Grantham with the help of Edward Chancellor. And I highly recommend it. And I hope you buy at least one copy. And if there's someone in your life that you think would enjoy it, buy two. Like, what's the big deal? right what's the big deal alright guys thanks again for listening we appreciate it thanks for watching we'll talk to you soon and it is fair to say that it reads rather like our kind of rambling bullshit session it sure does I really do it sure does thank you Jeremy thank you you are the best thank you so much thank you you're the best

1:24:40Thank you.