Calling a Super Bubble: Front Row With Jeremy Grantham
Deflation is a terrible thing. Inflation you could tolerate to trade anything as a trend. You think about Bitcoin. I don't think it's a currency. I think it's a commodity today wherein that everything Bob. I'm Erik Schatzker and welcome to an on call edition of Bloomberg's Front Row. Jeremy Grantham has been investing for a half century and calling bubbles for almost as long. He's a living legend in financial markets. A year ago Jeremy predicted the pandemic rally would end with a historic crash. Here's what he told me. When you have reached this level of obvious super enthusiasm the bubble has always without exception broken in the next few months not a few years. Things didn't play out that way. In fact the S&P 500 gained
almost 27 percent. So I had to check in with Jeremy again. Had he changed his mind. Not one bit. Jeremy says U.S. stocks are in a super bubble only the fourth of the past century. Super bubbles can really wipe you out like 1929. That's where we are now. As you might imagine I had a few urgent questions for the
co-founder of Boston's GM. What should investors do now. How worried is he about inflation and Fed policy. Cushion the blow. Is he still a crypto skeptic. Here's my conversation with Jeremy Grantham. Jeremy a year ago you predicted an epic collapse in stock prices and you told me it would rival the 1929 crash and the dot com bust of 2000 2001. Were you wrong. No I don't think so. I noticed reviewing it last night that there was one little element of contradiction. At one stage I said you can't call these events to within a few months. And at another point I said history says that when you reach this level of craziness the market tends to break within a few months rather than a few years. And I think with hindsight.
The markets started to get distinctly weaker about 10 months after we talked. So that's a few months plus a little bit all the same. Twenty twenty one was a great year for stocks. If I'm not mistaken the seventh best in a half century. And this has been. Exactly how the great bubbles have broken the blue chips. The
S&P 500 have kept strong right up to the last second and wave after wave of the stocks that had made the real running peel off and drop. In 1929 the flakes. We're down for the year before the market broke they were down 30 percent the year before they'd been up 85. They had crushed the market. The really classic example of this is the Russell 2000 which is stop number 1001 to 3000 multi-billion dollar companies. They're a serious enterprise. In
the last year they are down. They have not made any money at all. The S&P has made 23 percent. The Russell 2000 is meant to go up about one point two times the market in a bull market. Like you're saying there was it should have been up about 30 percent. It wasn't even up recently. Since this is a huge divergence of a kind that has never happened other than the super bubbles of 1929 and 2000 2000 you may remember the growth stocks peeled off and were down 50 percent. The S&P was flat which meant the remaining 70 percent had risen 20 percent. This is an enormous divergence and it happens on the upside for the blue chips. So this is
absolute. It's almost eerily classic. It's a pattern. It's a pattern. It's a very rare pattern. And we have been checking off this list all year. When they sat down a year ago we had seen the accelerating phase that you need in a bubble. That had taken place last year with the Nasdaq up over 100 from the low but also up 58 percent from December of 2019. So even granted that Covid decline it was a hell of a year it was a year of acceleration. And the Nasdaq has started to weaken relative to the blue chips. The Russell has started to weaken much much more so even than NASDAQ at the risk of putting words in your mouth. You are as certain as you were then if not more.
I would say clearly more. I. I did freely admit not in our conversation but elsewhere that I wasn't quite as certain about this bubble. A year ago as I had been about the tech bubble of 2000 or as I had been in Japan or as I had been in the housing bubble of 2007 I used to think that in terms of near certainties. This time I felt highly likely but perhaps not nearly certain. Today I feel
it. It is just about nearly certain. The hallmark of a bubble. Is what you have termed. Crazy behavior. What would you point to today right now as further evidence of crazy behavior. I think the crazy behavior. The peak of crazy behavior is behind.
I really do. I think we're now in the buy the dip mode which the super bubbles specialize in. You don't have two years of buying frenzy dying overnight typically. So even in 1929 you had some magnificent rallies.
And by the dip is the watch word of practically every brokerage house out there and it always is. You never. Almost never have a major brokerage house say the game's over. Guys duck. It doesn't happen. The commercial imperative is overwhelming to stay bullish. That's how you make money. If you're right. And stocks are in a multi sigma deviation from the statistical trend. Tell me what happens. The S&P 500 peaked at almost eight
hundred points. What is the bottom. The trend line being slightly generous is twenty five hundred. And most of the great bubbles the super bubbles go below trend and stay there for quite a while. In the Greenspan era that tendency stopped in 2000. Yes the Nasdaq came down 82 percent which was fairly brutal. Amazon came down 92 but the Federal Reserve raced to the rescue so loudly
and strongly that they stopped the decline in the S&P a trend line. It only declined 50 percent. 50 percent is a hell of a big decline but it was only enough to get it back then to trend this time trend is at most twenty five hundred. And I would expect even if the Federal Reserve tries to do the same it will be hard to prevent the market from declining to that level. We're talking about a decline of certainly from the peak of almost form over 70 percent and of course a decline very quickly 50 percent in 1929 a decline 50 percent in three years in 2000. And the housing market which was another great American super
bubble went all the way back to trend in three years. Jeremy it's one thing to predict a collapse in stock prices. It's another altogether. To tell investors they should sell. Should they. As I said a year ago I think I think they'll do pretty well by selling. I'm sympathetic to how difficult it is to get out entirely out of equities. And I would point out as I did last year that there are less overpriced parts of the equity market around the world. In fact everywhere is less overpriced in the US. The US is the peak of this bubble as it was in 2000.
And what it meant then is what it will mean today and that is the U.S. will decline a whole lot more than the rest. It's also true that the value end of the spectrum as opposed to the growth that is about as cheap as it gets. So if you can combine those by buying value stocks outside the US I would say particularly emerging markets. But there's quite a few countries Japan the U.K. where the markets are if they're overpriced they're only moderately overpriced. The US is not moderately overpriced. It is shockingly overpriced. You and I have talked about the perils of shorting single name stocks. Dangerous business. But given where things are and your level of certainty would you short an index. Would you short tech stocks. Would you short the S&P 500.
Personally as opposed to GMO in the foundation we have for the protection of the environment. We are indeed short a decent amount of Russell 2000. So we haven't been hurt in the last year which is amazing. We're also sure to about half as much again as in NASDAQ which did hurt us but not sensational. And the point there is a lot of our money is in venture capital. That's very growth. We need some hedging and. If we weren't exposed to a large amount of growth stocks I suspect we would skip. The hedging we would skip going short. In any case I would never shot an individual name. I would only shot a broad index and the indices I would shot if I was up for that would be the Russell 2000 because they have a high density of flaky companies that aren't making any money. And and the NASDAQ which also has a high and high percentage of companies
not making any earnings at all. What makes the NASDAQ more complicated is that it has these remarkable fang stocks in it and. That that makes life complicated. What if I'm a long term investor. Say running a pension fund or managing my own for a 1 CAC which I should add I don't. But what if I'm one of those people and I look at history and history tells me that over time independent or including crashes. Stocks deliver a handsome return and if I just stay in the
market I'll get that return whether it's 7 percent or 8 percent or 9 percent or 10 percent over time. You know if you could set your dial for 50 years and. Throw the key away that might make some sense. Let me remind you that in 1929 you didn't get back in real terms until about 1954. That's a long wait. In 2000 you didn't get back for 13 years. By modern standards that's a pretty long wait.
And in Japan which is really the granddaddy of both bubbles land and stocks they are not back to their 1989 peak. Today. That is a very very long wait. So if you think you can stand it for 10 or 20 or even 30 years. Be my guest. But history says a lot of you will not stand it. A lot of you will become more conservative deep into this kind of correction. And what about. The real sour grapes critics the ones who say you're just a broken clock. That's only right twice a day. We have a relatively humble measure of success and that is at some future date. If you got out when I said get out you will be glad. It doesn't
mean you won't suffer. In the meantime but at some future date you will be glad that worked in Japan. We were very early. But if you'd gotten out when we got out and you'd suffered as the Japanese market went up you would still have made and saved a lot of money on the round trip. The same in 2000. We were basically recommending that you ease up on on U.S. equities by mid 98. And that was a hell of a rally. And that was brutally painful. But it was still a level where you made tons of money. By 2002 the market was much lower than that. Why doesn't getting out mean. For GMO included mean liquidating going to cash. I think commercially it's too extreme to be brutally honest. And secondly if you can execute. The strategy that I described there is a really respectable
chance that you will make money. You say that the bubble you described back in January of 2021 has further inflated into a super bubble. And I'm curious to know I think others would be too. What's the difference between a standard bubble and a Super Bowl. A standard bubble we defined over 20 years perhaps 25 years ago as a two sigma statistical event. It's just a measure of how much of an outlier you are.
So you have a historical deviation from trend. Yes you have. You have a price series of the S&P. You can calculate a trend. Statistics one to one is not difficult and you can work out how far away from trend you are in a two sigma is the kind of deviation that should occur every forty four years. And because we're a little wilder and less efficient than we should be it occurs every thirty five years. It's not that we meaning human beings we base species IBEX as a species every thirty five years. It was a little closer than I expected back then but every thirty five years feels about right. One a career twice a lifetime that feels like a pretty decent definition of a bubble and a three sigma should occur every hundred years. Now we. As I like to say we do crazy pretty well as a species so they occur much more two or three times more often than they should.
They they are out of kilter much more than than two sigma. So two sigma you can have some fairly standard bubbles. They they they give you a certain amount of pain 30 40 50 percent pain. Super bubbles can really wipe you out late 1929 and. That's where we are now. We ended a few months ago into three
sigma territory super bubble territory and the other great risk is. Last year we also entered bubbles in real estate. So this is a very dangerous year that we've just had. If the super bubble bursts as you predicted will what happens. What happens to the economy. What does history tell us. Some bubbles are very specialized to US growth stocks like 2000. And they and they hurt. There is a wealth effect. People lose
money. They pull back on their spending but they don't hurt anywhere near as much as when you combine that with a housing bubble. So in 2008 where we had the only housing bubble in American history that burst and the stock market came down 50 percent in sympathy then you're talking serious damage to the economy through the income effect. Because this time we have as a multiple of family income US housing suddenly is more overpriced than it was ever in the housing bubble of 2006 to 2008. And they got bad this last year. Since we last spoke the biggest increase 20 percent that the US housing market index has ever had has taken it to a new high. And they are in the US still much cheaper than Canada Australia New Zealand.
London Paris et cetera. So that is a global event that could cause enormous pain. So we have a housing problem. We have a stock market bubble like 2000. We have overpriced commodities. Oil is eighty eight. And we have of course the lowest real rates in the history of man. If bonds are overpriced. And stocks are overpriced. Does that make the traditional 60 40
balanced portfolio useless absolutely useless. For years investors have taken comfort in the notion of an implicit put anytime the market stumbled. The Fed would effectively bail it out with a rate cut or more recently by injecting liquidity. The Greenspan put became the Bernanke put which became the
Yellen put. And finally the power output. Does inflation and the handcuffs that it puts on monetary policy eliminate that implied option. It complicates it and yes it limits it. It probably does not remove it because of inflation. Yeah. And because of low rates and now you don't have the tools that Greenspan had. But Nike was more limited. He needed a lot of help from from Treasury. From government spending. And what about now. Now you have a much higher ratio of debt to GDP. You have much more debt on the balance sheet of the Federal Reserve and you have much lower rates. They will try. They will have some effect. There is some
element of the put left. It is just heavily compromised as you suggest. How worried are you about inflation. I haven't written about inflation for 20 years. When I did quarterly letters I never featured inflation. I didn't think it was on the radar screen. It is now on the radar screen once again. It's not that inflation will go roaring back to 1972 1982. Instead it will always be part of the discussion from now on. In my opinion instead of forgetting about it it will be spiking and irritating and falling back and then spiking again. It will be part of the scenery in the way it used to be in the second half of the 20th century. There's a lot about this economy.
I think that will be dragged back into the late 20th century. We've had a very very abnormal honeymoon Goldilocks period for 20 years which I think is ending. Let me put it this way. We're in the early stages of running out of raw materials of costs. We live on a finite planet. There's only a certain amount of cheap oil. Cheap nickel cheap copper. And we're beginning to hit some of those boundaries. And we're going to have bottlenecks here there and everywhere. The food price index of the UN is about as high as it gets. Growing food is not getting easier. Climate change is coming with heavy floods.
Serious droughts and higher temperatures. None of these make farming easier. So we're going to live in a world of bottlenecks and shortages and price spikes. And we have to get used to it and learn to manage our way around. So commodity prices that people perceive to be high right now may yet go quite a bit higher. I think so. And it may well turn out that owning commodities or oscillate to commodities will be something of an escape valve. Commodities have a long history of doing quite
well when inflation picks up for obvious reasons. And inflation is quite likely to pick up. Looking out into the future it is pretty clear that we are running out of labor. Fertility rates have dropped like a stone. China is reeling from the shock of finding that it has ten point eight million babies last year. It's only the other. The other
year seven or eight years ago it had 20. And this means absolute certainty that the cohorts of 20 year olds coming into the workforce will will be smaller. Going forward everywhere everywhere in the developed world we're below replacement fertility. You know the universe of professional investors as well. Is there anyone out there whom you expect to
navigate these waters. Well. I think there's quite a few. Hedge funds that have a style of making a one hundred small bets a trading. Gas prices against diesel prices and Brent oil against Texas oil. They do a thousand arcane little relationships. They're all independent of the market. If they do it well they'll make a few
percent maybe even quite a few percent. And there will be some enormous dynamic moves in resources. The Federal Reserve is confident that it can contain inflation with a series of incremental rate hikes. What do you think it'll take. I think the Fed absolutely does not get. The pain that's involved with a bubble breaking you can see that
in the history of the last. 50 yes. Greenspan encouraged. The tech bubble. He bragged about the productivity gains from the Internet that would last forever. Actually productivity has declined slowly but surely since then. When it broke it caused a lot of pain. But Nike learnt nothing. He encouraged the housing bubble. He denied its existence even though it was a three sigma one in 100 year event that had never occurred in American history before. And what have we learned. We just went straight back into the game overstimulating pushing the rates down down and down. They have gone for 50 years. So they started at 16 percent on the long bond. And now the real
return you would get is minus two. You've been a longtime critic of Alan Greenspan. That's true. You're a critic of Ben Bernanke. And I suppose by extension Janet Yellen to. Do you have any confidence in the current chairman Jay Powell. No. No he hasn't expressed any reservations about the Greenspan Bernanke Yellen.
Powell policy of pushing rates down. They act as if a low rate is a panacea and comes with no downside. That is clearly nonsense. It's created I think the biggest evil in our society and that is inequality. If you drive up the price of assets systematically and it's bound to happen if you drive the rates down to negative territory. Who do you make money for. You make money for the people with assets who owns the assets. The top 1 percent has 35 percent of all the assets. The top 10 percent have practically all the assets. What are the what's the asset ownership of the bottom half. A rounding error. Practically none. So you mark up the assets
and that that's your contribution contribution to society. What you're doing is pushing down on labor pushing down on the bottom half with no offset from increasing their assets since they have not. And you're making the top 1 percent ineffably rich. And the data bears that out. Right down to the last two years when the top point one percent has doubled its wealth during Covid. And the bottom 50 percent. I can assure you has not doubled its wealth. The dominance of a handful of firms has increased
steadily in most subsets. And so profit margins have gone up and the power of corporations has gone up. And they've been able to use more of their power in influencing government. And they have. There is a lot of regulatory capture where people from business tend to run the agencies that regulate the industries. So it's been a wonderful time to make money. The corporate system and the share of GDP that goes to corporate profits has steadily risen and the share going to labor has steadily fallen. This makes it a dreadful cousin with with the asset class inflation that we've had. They both have two things in common.
They make the rich better off and they make the working class worse off. And that I think is the great poison at the moment in the American system. If we do not address rising inequality we will be in real trouble. We are the least equal society measurably in the developed world. We have the least fluid economic mobility for heaven's sake. You know when I arrived in America. In the 60s it was a joke. How rigid the UK was. The UK is now less rigid than the US. The number of people moving from the bottom quarter to the top quarter in a lifetime.
Is half of what it is say in the Sweden's of the world. In the US we are the least mobile. I mean this is so un-American. It is so far from what people believe to be the case. But check it with the least mobile with the least equal society. And it it's a poisonous influence. And we have facilitated it. We have moved to the taxes on capital. Capital gains tax dividend tax interest tax. We've moved them down. And by definition the amount that has to come from income has gone up. Here's what some of those rich people are doing. Institutions family offices. And most recently retail investors have been plowing money. Into private equity private credit growth equity. And more and
more venture capital. And they believe they're going to get superior returns with lower volatility. Is there safety in private markets. I like to draw a very clear line between venture capital and everything else. Private equity is just another form of money management.
Your shuffling the existing pieces of paper around. If you make money someone else loses. And to do it well is exciting and useful for your clients. From a society's point of view you don't add a lot of value. Venture capital is completely different. Venture capital facilitates and expands new ideas. Innovation change all the things that we will need to deal with
climate change to deal with inequality to deal with future to deal with progress. You need as many innovations as you can get and venture capital does. And America does venture capital very well indeed for many many years. The venture capital industry was dominated by a handful of powerful Silicon Valley based firms that Kleiner Perkins is the Sequoia is the benchmarks the Andreessen Horowitz is. Increasingly though it's a playground for hedge funds. Tiger Global being the most prominent example. Is that a good thing. A healthy development. It's like many things. It's good and it's bad. The bottom line in climate change in particular is that the sums involved are colossal trillions of dollars have to move. And.
Yes I think there's something to be said for Simon pure specialists in venture capital who do terrific research and et cetera. But in the end we need money. So we welcome. I welcome the hedge funds. I welcome the new people who make investments very quickly. I'm very light research. And of course there's a bubble element to all that. And some of it will be priced much more highly in the last few months than it will be sometime in the next couple of years as the bubble fully breaks. But in the end look back at the Amazons. Look back at the Internet bubble. There was a lot of money wasted but my God did push it did push along the technologies of the Internet and it was the US who emerged with the Amazons and the et cetera. The a wealth of that of that era. Jeremy I'm curious to know if
in the 12 months since we last spoke you've changed your view on crypto currencies. I have to spend a lot of time in the last year on crypto currencies. They may not be good for buying groceries. They may not be a store of value. They may be highly correlated with the speculative stocks. They may have come down 40 50 percent. Like
the spikes but they do something. Way over my head to understand. Do you buy the argument that there is an important difference between Bitcoin on the one hand and at least a couple of other crypto currencies on the other. And I'll name them a theorem that's a block chain. Ether is the coin and Solana and the difference and I'll do my best to articulate it is that those other block chains are actually building blocks for new businesses that will prove to be revolutionary because they will eliminate things or help to eliminate things that I suspect you don't like. Transactional friction in the banking system and rent taking that remains embedded in legacy financial institutions. So the question is is there a technology block chain that will turn out to be very useful whether done by corporations and governments and everybody else. I am sure the
answer is yes. There is a useful technology et cetera et cetera. Does this justify trillions of dollars of perceived wealth. No it doesn't. It might amount to trillions of dollars of wealth eventually if they can find a usefulness for it when it's integrated into the economy. It will perhaps facilitate facilitate productivity. Like many ideas do. Very few ideas of that kind floated around and were capitalized at trillions of dollars even though they had an enormous impact on the economy. BLOCK chain should be like one of those. So maybe not quite as much of a crypto skeptic. You could say the Internet by the way the Internet has created enormous value
but it didn't float around Internet units. Which were capitalized and became worth trillions of dollars. And I admire them for not doing that. They deliberately went out of their way to make the Internet and a facilitator and not in a way of amassing money in itself. You like green as a theme. Are there any other themes or trends that you're willing to bet on. I tell you what I think about the future and that is the green will turn out to be just a subset of a bigger more comprehensive issue and that is loosely speaking living within our means. We have simply shot way beyond the long term capacity of the planet to deal with us. And one of the problems is waste. And this is not just climate change and greenhouse gases but of
course plastics. It's also poisons. We generate so many toxic chemicals that there is strong indication that. The planet is really not conducive to life. We are killing off our insect life. We're killing off all manner of animal life. The world can do just fine without her Miss RTX. But it can. It can't deal without insects because of a cascade effect. All the
little critters that insects all the birds that eat insects all the amphibians etc. and they begin to go out of business and then the things that need them and the plants that needed them to. To be fertilized. One thing after another goes out of business and so nature is beginning to fail. And in the end if we don't fix that we begin to fail as well. And we see that in the toxicity numbers. Human fertility is going to hell. We have one third of the sperm count that we have at the end of World War 2.
This is not impressive. Mostly we were over engineered so we get away with that. But in the last 20 years we've gone from young couples needing help. A rounding error to maybe 15 percent of every young couple in the US now needs help. And that say more or less a global problem. So green investing isn't just the way they make money it's an existential necessity. It's an existential necessity. And it's part. Of a bigger problem living beyond our means we use up our resources. We put too much pressure on the natural environment. We poison the natural environment and.
In that sense it's a lot bigger issue than climate change writ small. Thank you again. Very difficult. Yes it's a pleasure. Pleasure's mine.