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GMO's Jeremy Grantham Warns US Stocks Are About to Be Crushed · Merryn Talks Money

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  Speaker 1: up and the links below. Welcome to Meren Talks Money.
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  Speaker 1: The podcast so much people who know the markets explain
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  Speaker 1: the markets. I'm Maren zums that web. This week, we
• 0:55
  Speaker 1: welcome back to the show.
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  Speaker 2: Jeremy Grantham.
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  Speaker 1: Jeremy is the co founder of GMO and a member
• 0:59
  Speaker 1: of GMO's asset Allocation team, serving as the firm's long
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  Speaker 1: term investment strategist.
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  Speaker 2: He's more than.
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  Speaker 1: Five decades of experience in investing and has earned a
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  Speaker 1: reputation as a bubble hunter, quick to point out speculative excess.
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  Speaker 2: On Wall Street and beyond.
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  Speaker 1: So in our conversation we talk about where he sees
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  Speaker 1: bubbles in the markets now, I mean, honestly, where aren't
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  Speaker 1: there bubbles at the moment? Why we haven't seen that
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  Speaker 1: correction in the market he's been predicting for a while,
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  Speaker 1: as have we the green transition, and why he is
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  Speaker 1: so bassionate about addressing population decline. Jeremy, thank you so
• 1:33
  Speaker 1: much for joining us again. We really appreciate it.
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  Speaker 3: It's so pleasure to be here.
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  Speaker 1: I know that there's many things that you and I
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  Speaker 1: would both prefer to talk about, but we're going to
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  Speaker 1: have to start with talking about the American dock market.
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  Speaker 1: Last time you came on, you said, and I absolutely
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  Speaker 1: agreed with you, that everything had run ahead of itself.
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  Speaker 1: Valuations were too high and we should definitely expect although
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  Speaker 1: we can't time when it might happen, a very serious
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  Speaker 1: correction in the US market still hasn't happened. We keep
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  Speaker 1: thinking it's going to happen. Various signs that they're stress
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  Speaker 1: in the market, and for example, when the Deep Sikh
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  Speaker 1: news came out, we looked that and we said that'll
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  Speaker 1: be the end of the AI bubble, but no, it
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  Speaker 1: never seems to end. It just keeps going. Has anything
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  Speaker 1: changed in the way you look at that market.
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  Speaker 4: I've always looked at it from the point of view
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  Speaker 4: that the longer and the bigger, and the higher it goes,
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  Speaker 4: the more exciting and dangerous it will be. And this
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  Speaker 4: has moved up the rank of superbubbles, but it's nowhere
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  Speaker 4: near Japan, the mother and father of all superbubbles in
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  Speaker 4: eighty nine, and it's nowhere near their real Estate bubble
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  Speaker 4: of the same era. They're the two great super bubbles
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  Speaker 4: of history, but a decent way behind. I think this
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  Speaker 4: is in third place, ahead of nineteen twenty nine, just
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  Speaker 4: and ahead of December twenty TI twenty one, which actually
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  Speaker 4: met all the characteristics of a late stage super bowbl
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  Speaker 4: and one really should have expected it to blow up,
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  Speaker 4: and it did. Twenty two was a good blow up
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  Speaker 4: across a lot of asset classes. But AI chat GBT
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  Speaker 4: came to the rescue in November of twenty two, and
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  Speaker 4: initially for ten months, dragged by the mag seven and
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  Speaker 4: the rest of the market going down a little bit.
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  Speaker 4: That kept going for about a year and then in
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  Speaker 4: October November of twenty three, the market said this looks serious,
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  Speaker 4: we better join in, and the breadth became positive and
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  Speaker 4: had a perfectly decent twenty four. And the net result
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  Speaker 4: is that every measure of traditional value, the best of
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  Speaker 4: the common ones being Schiller pe is at a record,
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  Speaker 4: and most of the ordinary ones are in the top
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  Speaker 4: one or two percent. And the best one of all,
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  Speaker 4: which is a variant of of total market cap to
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  Speaker 4: total value added in the economy, that has this one
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  Speaker 4: the highest of any in history.
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  Speaker 2: That's the buffet measure rate.
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  Speaker 4: It's a variant if you take out financials and you
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  Speaker 4: tweak this, and you tweak that. Hussman has a good
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  Speaker 4: variant of that, and they make it clear that this
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  Speaker 4: has overtaken twenty nine and twenty twenty one and moved
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  Speaker 4: into first place on the American record, still way behind
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  Speaker 4: the Japan. And then Ben Inca at GMO and I
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  Speaker 4: twenty five years ago did a behavioral model which says,
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  Speaker 4: forget all the logic about the efficient market or how
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  Speaker 4: it should work, and dividend discount models and all that,
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  Speaker 4: just let's see what actually explains, and what has that
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  Speaker 4: explained since nineteen twenty five and explained very well. Indeed,
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  Speaker 4: is low inflation, the market loves it. High inflation it
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  Speaker 4: hates margins. Of course, the market loves it. Growth rate
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  Speaker 4: has no correlation at all, But stability of GDP growth
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  Speaker 4: the market likes. And that's way in third place. So
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  Speaker 4: the things that make a portfolio manager feel comfortable, that's
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  Speaker 4: what decides what the PE will be. And even on
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  Speaker 4: that model that had a nearly perfect record, the market
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  Speaker 4: could drop fifty percent to get back to the normal
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  Speaker 4: response of flaky human beings. The normal behavioral responses would
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  Speaker 4: have this market at a perfectly respectable eighteen pe on Schiller.
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  Speaker 4: And it's actually just over twice. It's thirty seven.
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  Speaker 1: And the argument that the introduction of AI and the
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  Speaker 1: enormous progress that's been made there and the way that
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  Speaker 1: AI is going to permeate through our economies and change
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  Speaker 1: our lives as we know them, is a justification for
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  Speaker 1: the market staying this high. Evaluations will grow into reality.
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  Speaker 1: Your reality will grow into valuations. Should I say make
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  Speaker 1: this level okay? That that doesn't resonate with you at all.
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  Speaker 4: This is the argument used for every important new technology.
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  Speaker 4: Every really important new technology has had a bubble around it.
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  Speaker 4: A classic example in the old days was the railroads,
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  Speaker 4: where it was so obviously going to change everyone's life,
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  Speaker 4: and it did so that everyone could see it clearly.
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  Speaker 4: Everyone could put their money in it because they knew
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  Speaker 4: it was going to change the world, and so they
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  Speaker 4: started to build and design six railroad lines between Leeds
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  Speaker 4: and Manchester, and of course there was an almighty crash
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  Speaker 4: and everyone lost their shirts. It was one of the
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  Speaker 4: more spectacular bus that didn't say that railroads weren't important,
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  Speaker 4: or railways in Britain.
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  Speaker 3: They were incredibly important.
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  Speaker 4: They did change everyone's life, they did elevate GDP in productivity,
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  Speaker 4: but they were so obvious that in the early stages,
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  Speaker 4: of course they attracted everyone's capital and a bust. And
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  Speaker 4: then you fast forward to the more recent example, and
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  Speaker 4: that is the Internet. The Internet again was obviously going
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  Speaker 4: to change everything, and it sucked in lots of money,
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  Speaker 4: lots of pet dot coms and everything had a spectacular
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  Speaker 4: blow up. And let me just focus on Amazon. Amazon
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  Speaker 4: went up over a couple of years twelve fourteen times.
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  Speaker 4: It was wonderful, and then when the market broke, it
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  Speaker 4: dropped a spectacular ninety two percent. You can check this,
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  Speaker 4: and Amazon went down ninety two percent, and then out
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  Speaker 4: of the wreckage. It was one of the handful that
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  Speaker 4: inherited the earth and gobbled up the retail market as
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  Speaker 4: others gobbled up other things, and all the pet dot
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  Speaker 4: coms got washed away. It's precisely the importance and the
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  Speaker 4: obviousness of the importance. It guarantees a bubble, and very
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  Speaker 4: few have been as obviously important as AI. It will
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  Speaker 4: of course change our world. It is of course impossible
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  Speaker 4: to know in what ways and whether it will be
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  Speaker 4: entirely beneficial or not. And one day one suspects we
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  Speaker 4: will end up with something like a world run by automatons, cyborgs,
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  Speaker 4: whatever we want to call them. It may take three
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  Speaker 4: hundred years, it may take fifty, and I lean towards
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  Speaker 4: the three hundred, as long as civilization hangs together, which
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  Speaker 4: is another big story we could discuss. But when you
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  Speaker 4: get to that point, you have to always remember productivity produces.
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  Speaker 4: It has no offsetting consumption. So the way to think
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  Speaker 4: of that is just skip right to the end. One
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  Speaker 4: hundred percent cyborgs, no workers. What happens to demand? The
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  Speaker 4: answer is, of course, the whole system is totally unbalanced.
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  Speaker 4: There's no demand and therefore there's no need for the
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  Speaker 4: cyborgs production unless you take the value that the cyborgs
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  Speaker 4: are producing and pass it through to the average people.
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  Speaker 4: So you have to have a very decent guaranteed minimum wage,
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  Speaker 4: and as long as you do that, everything balances. And
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  Speaker 4: in the old days, by the way, from nineteen thirty
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  Speaker 4: five to seventy five, the productivity was three percent, and
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  Speaker 4: the rich people got richer by three percent a year,
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  Speaker 4: and the poor people got richer by three percent a year,
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  Speaker 4: and everybody was happy as a clam. And that turns
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  Speaker 4: out to be from economics and social point of view,
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  Speaker 4: the golden era, and then from nineteen seventy five, particularly
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  Speaker 4: in the US, all of that productivity, which dropped from
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  Speaker 4: three percent to say two and a half and then
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  Speaker 4: to two all went to the top ten percent one percent.
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  Speaker 4: The average worker hardly made any progress of all since
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  Speaker 4: nineteen seventy five for an hour worked, and that of
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  Speaker 4: course generates a lot of disgruntlement and complications, which we
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  Speaker 4: see everywhere really including the US. Despite our brilliant stock market,
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  Speaker 4: the underlying frustration is very high, and the same in Europe.
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  Speaker 4: And how that manifests itself is you vote against the
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  Speaker 4: party in power, doesn't matter whether it's right wing like
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  Speaker 4: the Conservatives in the UK, doesn't matter if it's left
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  Speaker 4: wing as in France and so on. You kick them
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  Speaker 4: all out, and you kick them out. It's a manifestation
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  Speaker 4: of the fact there's a very high level of disappointment
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  Speaker 4: amongst the broad band of workers. They're simply not doing
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  Speaker 4: as well as they expected, not doing as well as
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  Speaker 4: their parents did.
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  Speaker 3: Sorry, long answer, It.
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  Speaker 2: Was a long answer, but it was a good one,
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  Speaker 2: thank you.
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  Speaker 1: So that rather suggests that a successful adoption of AI
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  Speaker 1: needs a huge level of government input.
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  Speaker 4: If the government does not smooth out the benefits of AI,
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  Speaker 4: you will have either starvation or revolution.
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  Speaker 1: So it's interesting, isn't it, because we feel like we're
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  Speaker 1: moving into an era, particularly perhaps in the US, where
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  Speaker 1: smaller government is valued over big govern which I would
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  Speaker 1: generally agree with that a smaller government might be better
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  Speaker 1: than an overbearing government. But your suggestion is that as
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  Speaker 1: we move into an AI era, if the government doesn't
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  Speaker 1: take huge steps to well redistribute, it won't work.
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  Speaker 4: And by the way, that doesn't take much government. You
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  Speaker 4: could have a few hundred people tucked away in DC,
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  Speaker 4: making sure that income is redistributed. That's not the part
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  Speaker 4: of government that chows up all the workers. It's pretty straightforward.
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  Speaker 4: You have a high minimum requirement to keep people alive
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  Speaker 4: and to keep people reasonably content away from the barricades
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  Speaker 4: in the high street.
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  Speaker 1: Okay, so let's go back a little bit to the market.
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  Speaker 1: I can feel we're heading off on tangents. We both
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  Speaker 1: want to go down, but we've got to deal with
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  Speaker 1: the core first. Is there any part of the US
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  Speaker 1: market where you would feel safe? Obviously we would agree
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  Speaker 1: that the AI stocks, AI adjacent stocks, tech in general
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  Speaker 1: is very overvalued, but it's not necessarily the case across
• 12:00
  Speaker 1: the board. So if you wanted to stay in the
• 12:02
  Speaker 1: US and on this huge part of the investing community,
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  Speaker 1: they find it very difficult to think at all about
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  Speaker 1: leaving the US market or even rebalancing away from the
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  Speaker 1: US market if they were to stay in it.
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  Speaker 2: Is there any.
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  Speaker 1: Sector, any part of it where you would say you'll
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  Speaker 1: probably be okay if you stick with that.
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  Speaker 3: Yes.
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  Speaker 4: Obviously the future for greening the economy is going to
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  Speaker 4: be a long and bumpy one. But physics cannot be
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  Speaker 4: bullied away into hiding, and four years is only four years.
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  Speaker 4: But the remorseless damage that we have all seen in
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  Speaker 4: the last two years, the escalation of fires, floods, just sensational,
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  Speaker 4: obvious to everybody except one or two percent who are
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  Speaker 4: blinded by political beliefs. I would say that will just
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  Speaker 4: march on if we do not solve that. The civilization
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  Speaker 4: as we know it fails. How long it will take
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  Speaker 4: is almost anybody's get But it's happening pretty fast, pretty remorselessly,
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  Speaker 4: and we have to fix it. I think we probably
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  Speaker 4: will fix it. And to do that to green the
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  Speaker 4: entire global economy is a massive, challenging job that will
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  Speaker 4: take lots of investment, lots of workers.
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  Speaker 3: And it will be done.
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  Speaker 4: I think since the psychology has smashed these stocks down,
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  Speaker 4: and since the logic of the physics is inevitable, unlike
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  Speaker 4: most things in the stock market, I would say that
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  Speaker 4: is an area that we'll have sooner or later a
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  Speaker 4: massive regrouping and a huge outperformance of the rest of
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  Speaker 4: the market.
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  Speaker 3: Secondly, I believe.
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  Speaker 4: That the wider environment that we will get to talk
• 13:44
  Speaker 4: about is much deteriorated, and that we will have to
• 13:49
  Speaker 4: get used to many more short shocks to the system,
• 13:53
  Speaker 4: and many more big shocks to the system than have
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  Speaker 4: characterized the last seventy five years. In that environment, you
• 14:01
  Speaker 4: do not want to be caught with a lot of leverage.
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  Speaker 4: Leverage is going to be light the nineteen thirties. Leverage
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  Speaker 4: is just going to take you out of business. You
• 14:09
  Speaker 4: have to be able to withstand shocks unexpectedly arriving, and
• 14:15
  Speaker 4: to do that you need no little or no debt.
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  Speaker 4: And secondly, if you want to survive, you want to
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  Speaker 4: have decent profit margins to give you some resilience. Marginal
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  Speaker 4: Company's Cheap at Hell in nineteen twenty nine did not
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  Speaker 4: outperform the Coca Colas, who were brutally expensive. The Coca
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  Speaker 4: Colas went down seventy five percent, but the very cheap stocks,
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  Speaker 4: the number seven, eight, nine, automobile companies and so on,
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  Speaker 4: they all went out of business, and the ones that
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  Speaker 4: survived went down ninety six percent. And when you're starting
• 14:47
  Speaker 4: from four out of one hundred, to go back and
• 14:50
  Speaker 4: catch up the Coca Colas, who are still at thirty,
• 14:54
  Speaker 4: you have to go up six or seven times just
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  Speaker 4: to get back in the game. The thirties was a
• 14:58
  Speaker 4: pretty good ultimate room that things are cheap, usually for
• 15:03
  Speaker 4: a pretty good reason, so you have to tread carefully.
• 15:05
  Speaker 4: If you're going to play the cheap game, you've got
• 15:07
  Speaker 4: to make sure it is armor plated with high with
• 15:10
  Speaker 4: as much quality as you can get into it.
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  Speaker 1: Can I take you back to what you were saying
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  Speaker 1: about the green transition and greening the economy, etc. Even
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  Speaker 1: if you put aside the next four years and what
• 15:22
  Speaker 1: might or might happen around your noble energy and climate
• 15:25
  Speaker 1: change during that during the Trump period, it is still
• 15:28
  Speaker 1: the case that the national grid in the UK, across Europe,
• 15:33
  Speaker 1: the electricity grid everywhere and including in the US, still
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  Speaker 1: has to be massively upgraded and massively improved because of AI.
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  Speaker 2: So even if you were to put aside.
• 15:44
  Speaker 1: The discussion about climate change at the moment, it still
• 15:46
  Speaker 1: seems that there's a lot of scope for that build
• 15:50
  Speaker 1: out to be a good area to be invested in.
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  Speaker 4: Yeah, I think AI will improve all the aspects of
• 15:57
  Speaker 4: the economy that you're trying to improve. So it's very
• 16:02
  Speaker 4: helpful for green tech in general. The problem is it
• 16:06
  Speaker 4: helps everybody, and so you have to ask yourself a question,
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  Speaker 4: is this society acting quickly enough in general, or is
• 16:16
  Speaker 4: it heading towards the cliff just simply moving too slowly,
• 16:20
  Speaker 4: protecting its corporate profits too much, and allowing the carbon
• 16:25
  Speaker 4: count and the methane count to just rise too high,
• 16:28
  Speaker 4: and seeing tipping points any minute now as tundrad melts,
• 16:31
  Speaker 4: and so on and so forth. And I think the answer
• 16:34
  Speaker 4: is we're not looking too good. And what AI does
• 16:38
  Speaker 4: is accelerates and makes more efficient the process that you're on.
• 16:42
  Speaker 4: And unless we're lucky, what that will mean is that
• 16:45
  Speaker 4: the system will run quicker and more efficiently towards the
• 16:48
  Speaker 4: cliff edge. And for every one item that you improve,
• 16:54
  Speaker 4: there will be the usual five in the current system
• 16:57
  Speaker 4: that are improving to make more and better useless consumption goods.
• 17:03
  Speaker 4: And we see this, by the way, in the inordinate
• 17:06
  Speaker 4: increase in electric demand and the coal and gas that
• 17:10
  Speaker 4: goes with that around the world in order to fuel AI,
• 17:14
  Speaker 4: along with those other cryptocurrency dangers.
• 17:18
  Speaker 2: We might come to that later.
• 17:20
  Speaker 4: Finally, after decades of moderate, actually flat use of electricity
• 17:27
  Speaker 4: is now not only rising rapidly, but predicted to rise
• 17:31
  Speaker 4: steadily and rapidly into the future because of AI and cryptocurrencies.
• 17:36
  Speaker 1: But it was rising before the whole AI boom electricity
• 17:40
  Speaker 1: demand had started to rise the result of the electrification
• 17:43
  Speaker 1: of various things as a result of the attempt to decarbonizers.
• 17:46
  Speaker 2: It was already happening.
• 17:47
  Speaker 4: Prey hardly, and if you took out cryptocurrency, it was
• 17:52
  Speaker 4: most drifting outwards. And now no one would accuse it
• 17:56
  Speaker 4: of drifting outwards.
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  Speaker 2: No, definitely not drifting.
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  Speaker 1: Let's look if we can about other stock markets, and
• 18:01
  Speaker 1: now I said earlier that the lot of investors find
• 18:03
  Speaker 1: it difficult to imagine moving any waiting out of the US,
• 18:06
  Speaker 1: but there has actually been a shift towards Europe this year,
• 18:09
  Speaker 1: and there's also a growing discussion about the cheapness of
• 18:12
  Speaker 1: China and whether this might finally be the time to
• 18:15
  Speaker 1: invest in the Chinese stock market. Do you have any
• 18:18
  Speaker 1: positive feelings towards any other global like CAREW markets.
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  Speaker 4: I have had no argument with the non US markets.
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  Speaker 4: They've been reasonably priced, perhaps a little overpriced most of them,
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  Speaker 4: but nothing much for a long time, and they still are.
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  Speaker 4: Of course, they are much less dangerous to own, and
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  Speaker 4: they will very likely over five or ten years, crush
• 18:46
  Speaker 4: the US market, as has happened several times.
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  Speaker 3: That's how it happens.
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  Speaker 4: The US market will have a great decade, and then
• 18:53
  Speaker 4: fire markets will have a great decade and close the
• 18:55
  Speaker 4: gap a bit. And that's what will happen this time. Sure, Now,
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  Speaker 4: will they be sympathetic in a major decline in the US,
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  Speaker 4: which I suspect is waiting for us. Yeah, they can
• 19:07
  Speaker 4: be sympathetic. My just to remind you of how untidy
• 19:12
  Speaker 4: the world is, the emerging markets with a volatility one
• 19:16
  Speaker 4: point three times the market. In two the third year
• 19:20
  Speaker 4: of the decline, the S and P went down twenty
• 19:22
  Speaker 4: two percent. This was not pleasant for a third down
• 19:24
  Speaker 4: year in a row, and you might have expected emerging
• 19:27
  Speaker 4: markets to go down thirty but they.
• 19:29
  Speaker 3: Went down two.
• 19:30
  Speaker 4: They were just about flat, and a twenty point out
• 19:33
  Speaker 4: performance like that on the downside is completely a reflection
• 19:37
  Speaker 4: of different values. It does happen, and it probably will happen.
• 19:40
  Speaker 4: They will probably be sympathetic, and there will be periods
• 19:43
  Speaker 4: when they drop quite frighteningly to show sympathy. But in
• 19:48
  Speaker 4: between they will regroup, and they'll regroup faster, and after
• 19:52
  Speaker 4: the passage of a decent time, they will be way ahead.
• 19:57
  Speaker 4: I am very confident putting time on these. As we've
• 20:00
  Speaker 4: always discussed, it's pretty much impossible. But to go back
• 20:04
  Speaker 4: to the main event here, the longer and the higher
• 20:07
  Speaker 4: they climb, the worse it is. And we were hanging
• 20:11
  Speaker 4: out with a zero weight in Japan for three years
• 20:14
  Speaker 4: as it went from forty five times earnings to sixty five.
• 20:18
  Speaker 4: That is a whole lot worse than the US it's today,
• 20:22
  Speaker 4: And what was the price they paid? That was a
• 20:25
  Speaker 4: unique event, and they uniquely suffered for it. They spent
• 20:30
  Speaker 4: twenty years getting to a low, and they became a
• 20:34
  Speaker 4: cheap country. From sixty five times earnings, they became a
• 20:38
  Speaker 4: cheaper one.
• 20:38
  Speaker 1: When twenty years is extraordinary, isn't it. If you were
• 20:41
  Speaker 1: to sit down with any major investor at the moment
• 20:43
  Speaker 1: and say there's a distinct possibility that the US market
• 20:47
  Speaker 1: will fall by that amount and it'll take twenty years
• 20:49
  Speaker 1: for you to be evans, no one will accept.
• 20:52
  Speaker 4: That, absolutely, not than they never have and they never will.
• 20:56
  Speaker 4: Doesn't mean it hasn't happened every time we've had a
• 20:59
  Speaker 4: major bubble light now eighteen twenty nine, even in nineteen
• 21:02
  Speaker 4: seventy two and two thousand and the housing bubble. The
• 21:05
  Speaker 4: housing bubble, by the way, was a bigger bubble than
• 21:07
  Speaker 4: the current US stock market. Statistically, it was very impressive.
• 21:13
  Speaker 4: There'd never been a national bubble like that. Housing used
• 21:17
  Speaker 4: to crash in California while it bubbled in Chicago, but
• 21:21
  Speaker 4: that was the first time it did it, and that
• 21:23
  Speaker 4: made it a real outlier statistically.
• 21:26
  Speaker 1: I remember being told over and over again during that
• 21:28
  Speaker 1: bubble that American house prices had never fallen and they
• 21:31
  Speaker 1: never would.
• 21:33
  Speaker 4: And by the way, Bananke said that, yes, the US
• 21:36
  Speaker 4: house prices had never declined, and to which I wrote
• 21:40
  Speaker 4: in a quarterly letter, but they had never bubbled before,
• 21:44
  Speaker 4: and whenever anything has bubbled, it has always declined, and
• 21:48
  Speaker 4: of course it did. It was very well behaved, the
• 21:51
  Speaker 4: housing bubble. It declined in three years exactly what it
• 21:54
  Speaker 4: had gone up in three years, much to the cost
• 21:56
  Speaker 4: of some poor unfortunates who got sucked into the housing
• 21:59
  Speaker 4: market for the time.
• 22:00
  Speaker 2: Yeah.
• 22:01
  Speaker 1: No, that hurt an awful lot of people, and actually
• 22:03
  Speaker 1: this current bubble may have hurt an awful lot of people.
• 22:06
  Speaker 1: Maybe not in the same way because most people won't
• 22:08
  Speaker 1: be leveraged into it, but nonetheless there's an entire generation
• 22:11
  Speaker 1: of people who now believe in this, as is the
• 22:14
  Speaker 1: case in every bubble, that what they've done is brought
• 22:16
  Speaker 1: into a sure thing.
• 22:17
  Speaker 2: So there is a lot of disappointment.
• 22:19
  Speaker 4: I heard right, Yeah, my cryptocurrency for one, which is
• 22:22
  Speaker 4: now four trillion dollars.
• 22:25
  Speaker 1: When you talk about cryptocurrency, are you talking about bitcoin
• 22:27
  Speaker 1: or are you talking about currencies as a whole, And
• 22:30
  Speaker 1: do you make a division between the two.
• 22:32
  Speaker 4: I was talking about all of them added together. But
• 22:35
  Speaker 4: none of them produce anything, and none of them are
• 22:39
  Speaker 4: a medium of exchange materially, but they are a wonderful
• 22:43
  Speaker 4: speculative medium. And with the stimulus program of Biden and COVID,
• 22:51
  Speaker 4: three trillion dollars to play with in a system that
• 22:54
  Speaker 4: had never had that kind of money locked up at home,
• 22:58
  Speaker 4: nothing to do but learn how to speculate, and learning
• 23:01
  Speaker 4: to speculate, it's pretty darn easy. You just buy what's
• 23:04
  Speaker 4: moving and what everyone is shouting about. And I did
• 23:07
  Speaker 4: that myself as a young man, and made a quick
• 23:09
  Speaker 4: fortune in the two years out of business school, enough
• 23:13
  Speaker 4: to buy a couple of nice houses without a mortgage.
• 23:17
  Speaker 4: I know, but I didn't buy the houses. I bought
• 23:20
  Speaker 4: silly sucks that all blew up. And we went from
• 23:25
  Speaker 4: that equivalent, which today would be two million dollars a
• 23:28
  Speaker 4: million dollar house in the suburbs of Boston.
• 23:31
  Speaker 3: Et cetera.
• 23:32
  Speaker 4: And we went back to twenty thousand and with that
• 23:35
  Speaker 4: nest egg that I had, I had the courage to
• 23:37
  Speaker 4: start a business with a partner in the investment business
• 23:42
  Speaker 4: because I could live on my loot, which I managed
• 23:44
  Speaker 4: to lose so quickly that even before we got our
• 23:48
  Speaker 4: office set up, I had lost it.
• 23:49
  Speaker 2: And you still managed to get some clients. It's a merror.
• 23:52
  Speaker 4: We didn't actually get any clients for quite a while,
• 23:54
  Speaker 4: but it did, of course teach me a very powerful
• 23:58
  Speaker 4: lesson that even in my own account, on the frivolosand
• 24:02
  Speaker 4: speculating and crazy stuff.
• 24:04
  Speaker 3: But it was not a great idea.
• 24:06
  Speaker 4: So I reverted to my Yorkshire roots of waste not,
• 24:08
  Speaker 4: want not and value for money big.
• 24:11
  Speaker 2: Time, and that's worked out pretty well.
• 24:13
  Speaker 4: But to be slapped around the head by the way,
• 24:16
  Speaker 4: dear listener, when you're still young and don't have that
• 24:19
  Speaker 4: much money to lose, is a terrific idea, rather than
• 24:22
  Speaker 4: having it happen to you when you get carried away
• 24:25
  Speaker 4: at safety when you're about to retire, as it can
• 24:27
  Speaker 4: be brutal.
• 24:28
  Speaker 1: Let's let's not get let's not worry too much I
• 24:31
  Speaker 1: can feel myself getting stressed about all the people who
• 24:33
  Speaker 1: may find themselves in a difficult situation as your correction comes.
• 24:37
  Speaker 1: So let's move on to talk about other difficult things.
• 24:40
  Speaker 1: One of the things that I know you think about
• 24:42
  Speaker 1: a lot of we were talking about earlier is population dynamics.
• 24:45
  Speaker 1: And we say in the world of journalism that you
• 24:47
  Speaker 1: must never ever write about demographics. Never, because if you
• 24:51
  Speaker 1: write about demographics, everything becomes clear, and then you can't
• 24:54
  Speaker 1: write any more columns. Once you've written the demographic demographics column,
• 24:57
  Speaker 1: you have the answer, and then you're stuffed after that,
• 24:59
  Speaker 1: you can't write enough column Now you're looking at the
• 25:02
  Speaker 1: way that population is changing around the world, and that's
• 25:06
  Speaker 1: giving you a sense of the future as well.
• 25:08
  Speaker 4: Right, Yeah, First of all, let me say I didn't
• 25:12
  Speaker 4: know that was the watchword in journalism, but certainly my
• 25:18
  Speaker 4: colleague and I have discovered that it's the same in
• 25:21
  Speaker 4: the financial world. I've had a pretty decent following for
• 25:24
  Speaker 4: twenty five years. When I write a quarterly letter, people
• 25:28
  Speaker 4: have tended to refer to it. And this was the
• 25:30
  Speaker 4: first paper we produced very well researched. I thought it
• 25:34
  Speaker 4: took a lot more time and effort and we dropped
• 25:37
  Speaker 4: it into the black hole. Nobody even acknowledged that it
• 25:40
  Speaker 4: had been posted, and for a few months it sent
• 25:44
  Speaker 4: me into a bit of a kind of psychological funk.
• 25:47
  Speaker 4: But what has happened is why you're describing people don't
• 25:49
  Speaker 4: want to hear about certain topics and declining population and
• 25:54
  Speaker 4: their consequences and why the population is declining. These are
• 25:58
  Speaker 4: not topics people want to talk about. It makes them
• 26:01
  Speaker 4: profoundly uneasy, and they wish you'd shut up and write
• 26:03
  Speaker 4: about something else. That's exactly having said that, Yeah, so
• 26:07
  Speaker 4: I see it as the fastest moving potential threat out there.
• 26:12
  Speaker 4: And how we're going to try and make the point
• 26:15
  Speaker 4: felt is try and relate it more to the short
• 26:19
  Speaker 4: term mentality, which is, dudes, you'd better realize that a
• 26:24
  Speaker 4: declining workforce is bad for economics, really bad. And it
• 26:31
  Speaker 4: turns out not just to be bad directly. Fewer hours
• 26:35
  Speaker 4: come straight off GDP. If you're growing at one and
• 26:37
  Speaker 4: a half percent a year, in which they were when
• 26:41
  Speaker 4: I arrived in America in the sixties, and then you
• 26:44
  Speaker 4: go down to minus a half a percent, which they
• 26:48
  Speaker 4: have done in Europe for the last fifteen years. It
• 26:52
  Speaker 4: has averaged a little shy of minus half a percent.
• 26:56
  Speaker 4: That's a two percent drop that comes straight off your
• 26:59
  Speaker 4: GDP growth. But secondly, we stumbled across the thought that
• 27:07
  Speaker 4: those societies with falling workforces will find they're working in
• 27:12
  Speaker 4: a lower productive world. So if you run a correlation
• 27:16
  Speaker 4: which we've just done, with the decline in the workforce
• 27:20
  Speaker 4: on one side and productivity per capita on the other,
• 27:24
  Speaker 4: you find there's a positive correlation between a decline in
• 27:28
  Speaker 4: the one and a decline in the other, and it's
• 27:30
  Speaker 4: aboutzero point three, which means you can see it pretty
• 27:34
  Speaker 4: easily as you plot the countries across the chart, the
• 27:37
  Speaker 4: ones that have the better population have the better productivity.
• 27:40
  Speaker 1: Can I interrupt you briefly there to say that, to me,
• 27:42
  Speaker 1: that's completely counterintuitive because I would have expected in a
• 27:48
  Speaker 1: falling working population there being an imperative for productivity improvement.
• 27:53
  Speaker 1: And as one of the conversations has been had in
• 27:55
  Speaker 1: the UK for some time now, is it the case
• 27:57
  Speaker 1: that because we have so much cheap labor available, or
• 28:00
  Speaker 1: have done over the last couple of decades because of
• 28:03
  Speaker 1: our migration policies. Is it that availability of cheap labor
• 28:06
  Speaker 1: that has meant that our productivity has been so bad,
• 28:09
  Speaker 1: and if we restrict that, or if we make labor
• 28:12
  Speaker 1: more expensive, for example with their rich or Reece's most
• 28:15
  Speaker 1: recent increase in employer nancial insurance, will we see an
• 28:19
  Speaker 1: improvement in productivity if we tighten the labor market. And
• 28:23
  Speaker 1: so I'm surprised that it's that way round, because I
• 28:26
  Speaker 1: would have expected it to be the opposite.
• 28:29
  Speaker 4: Economics being complicated, It may very well be in certain situations,
• 28:33
  Speaker 4: if you tighten the labor market, you will increase the productivity. Okay, granted,
• 28:40
  Speaker 4: the problem here is the reason I believe the productivity
• 28:44
  Speaker 4: drops is mainly what Caines would call animal spirits.
• 28:49
  Speaker 3: If you are.
• 28:52
  Speaker 4: Living in a world where you see children basically becoming
• 28:57
  Speaker 4: scarce behind you, Kindergarten's closing Grammars goals, closing applications to
• 29:02
  Speaker 4: college dropping rapidly you start, it starts to affect you
• 29:06
  Speaker 4: a bit, and as you get into the corporate system,
• 29:10
  Speaker 4: it's not expanding rapidly. Promotions are not anywhere near where
• 29:15
  Speaker 4: they were thirty forty years ago, not as rapid. The
• 29:18
  Speaker 4: thing is constant tinering downwards, and you become less aggressive,
• 29:23
  Speaker 4: less willing to borrow money, less willing to get into
• 29:27
  Speaker 4: a venture capital situation. Why wouldn't you be Why wouldn't
• 29:30
  Speaker 4: you be more dynamically thinking in an economy expanding rapidly
• 29:36
  Speaker 4: than you are when you're and you're not used to it,
• 29:39
  Speaker 4: And managing downwards in an economy is brutally difficult. As
• 29:44
  Speaker 4: you speak to the guys running Detroit sort of thing,
• 29:47
  Speaker 4: or Japan, it's much more difficult. It is falling off
• 29:51
  Speaker 4: a log to manage for growth. Capitalism does it in
• 29:54
  Speaker 4: its sleep, But when you're declining, you have a situation
• 29:58
  Speaker 4: where there are ten shops and four of a shut it.
• 30:01
  Speaker 4: What is it like for the other six any industry
• 30:05
  Speaker 4: where people are going out of business because they're over capacity?
• 30:08
  Speaker 4: What is it like for profit margins to have too
• 30:10
  Speaker 4: much capacity? To have one industry, one major company flailing
• 30:15
  Speaker 4: at the edge to stay alive. It inflicts wounds on everybody.
• 30:19
  Speaker 3: And it's very.
• 30:20
  Speaker 4: Easy to see how managing downwards is a tough business.
• 30:24
  Speaker 4: When you close a railroad station, how do you downsize this,
• 30:28
  Speaker 4: that and the other. This is not a happy go
• 30:30
  Speaker 4: lucky society, and as a consequence, I think people become disappointed.
• 30:35
  Speaker 4: And we've seen in America how easy it is to
• 30:39
  Speaker 4: have a society go from quite a brilliant to an
• 30:41
  Speaker 4: optimistic to disappointed. When you're disappointed, you're disgruntled, and when
• 30:46
  Speaker 4: you're disgruntled, you vote against the party in power. And
• 30:49
  Speaker 4: all over Europe for the last three years we've seen
• 30:52
  Speaker 4: a very consistent, unprecedentedly consistent move against the party in power,
• 30:58
  Speaker 4: doesn't matter whether it's right wing or left wing. Kick
• 31:01
  Speaker 4: the fellows out. And in point of fact, Biden had
• 31:04
  Speaker 4: a smaller swing against the party then by a decent
• 31:08
  Speaker 4: margin than the average European election for the last dozen
• 31:12
  Speaker 4: which is an interesting subtopic in itself. Anyway, So you
• 31:17
  Speaker 4: become discouraged, it's bad for productivity, it's bad for everything.
• 31:22
  Speaker 4: Kane's made the point that you could line up all
• 31:25
  Speaker 4: your economic stimuli, everything a wonderful plan. But if for
• 31:30
  Speaker 4: whatever reason people became pessimistic, they sat on their money
• 31:35
  Speaker 4: and they did not spend. Your toast said, do you
• 31:38
  Speaker 4: very quickly fall into a major recession or a depression,
• 31:41
  Speaker 4: which he experienced.
• 31:43
  Speaker 1: And animal spirits, as you say, disappear completely Okay, So
• 31:46
  Speaker 1: how reversible is this? We can see, as you say,
• 31:50
  Speaker 1: across Europe, population is declining. Fertility rates in particular, fertility
• 31:54
  Speaker 1: rates fully, almost bizarrely fast, and we see that in
• 31:57
  Speaker 1: the UK as well, and you can, of course, you
• 32:00
  Speaker 1: can mitigate that with migration, but is that a long
• 32:03
  Speaker 1: term solution or not. It doesn't appear that the populations
• 32:06
  Speaker 1: of post European countries consider it to be an acceptable
• 32:09
  Speaker 1: long term solution.
• 32:11
  Speaker 4: If you see the long term battle plans to twenty
• 32:13
  Speaker 4: one hundred, which I was looking at yesterday, Europe is
• 32:18
  Speaker 4: not going to be necessarily a basket case on population
• 32:22
  Speaker 4: because it will have a couple of one hundred million
• 32:26
  Speaker 4: immigrants over that time span and its native workforce will
• 32:30
  Speaker 4: drop by a couple of one hundred million. It's not
• 32:32
  Speaker 4: really out of balance, and a couple of one hundred
• 32:35
  Speaker 4: million over seventy five years is not enormous. And the
• 32:39
  Speaker 4: politics I think will shift is the one or two
• 32:42
  Speaker 4: countries that try and hold out with no immigrants start
• 32:46
  Speaker 4: to implode. Will There'll be a lot more talk on
• 32:50
  Speaker 4: this topic, a lot more study articles published. It'll become
• 32:54
  Speaker 4: pretty obvious pretty quickly that you need immigrants. Now where
• 32:59
  Speaker 4: are the immigran is coming from? In about forty five years,
• 33:03
  Speaker 4: at the current rate of drop, African fertility will be
• 33:06
  Speaker 4: about replacement two point one, So you have a window
• 33:11
  Speaker 4: of seventy five years or so if you can handle
• 33:13
  Speaker 4: the politics sensibly where it will be a potential help,
• 33:18
  Speaker 4: and after that not so much.
• 33:21
  Speaker 2: Yeah, that's the other thing.
• 33:22
  Speaker 1: Fertility rates in pretty much every country have persistently consistently
• 33:27
  Speaker 1: fallen faster than expected. Right, So when you give a
• 33:30
  Speaker 1: timeframe for when Africa will be at replacement rate, the
• 33:33
  Speaker 1: way things have worked out so far suggest it'll probably
• 33:37
  Speaker 1: be quite a lot sooner than that. Everything in population
• 33:40
  Speaker 1: seems to be happening faster than we expected.
• 33:42
  Speaker 4: No, Africa actually has been dropping faster than Europe, but
• 33:47
  Speaker 4: people don't notice it because it's dropping from six point
• 33:50
  Speaker 4: five to four point two. But that gap of two
• 33:54
  Speaker 4: point three is faster. And if they maintain that rate,
• 33:58
  Speaker 4: which as you say, we think it's pretty likely, they
• 34:01
  Speaker 4: may very well get there in as little as forty
• 34:04
  Speaker 4: five years. And maybe it will be forty, maybe it
• 34:06
  Speaker 4: will be fifty, but it will be pretty quick, and
• 34:08
  Speaker 4: it will be a lot faster than most people realize.
• 34:11
  Speaker 1: Now, So you need a much longer term solution to
• 34:14
  Speaker 1: population decline because it's at one point all populations will
• 34:18
  Speaker 1: be declining and there won't be the option to move
• 34:21
  Speaker 1: populations around the place to solve one dunts problem. So
• 34:25
  Speaker 1: that's a very temporary solution. And as we always say
• 34:27
  Speaker 1: in the UK, immigrants age two. So it's all very
• 34:31
  Speaker 1: well bringing in lots of people because you have an
• 34:34
  Speaker 1: aging society, but that generation also ages.
• 34:37
  Speaker 2: You haven't solved your problem.
• 34:39
  Speaker 4: No, you bore yourself some time.
• 34:42
  Speaker 1: Yeah, you've put some time, but you still have to
• 34:44
  Speaker 1: find a way as a global population to deal with
• 34:48
  Speaker 1: the dynamics of low fertility and decline.
• 34:52
  Speaker 3: There are two issues.
• 34:54
  Speaker 4: One is we've created a toxic environment, so the fertility
• 34:59
  Speaker 4: rates are going to drop because of that, as they
• 35:02
  Speaker 4: have been doing, particularly for the last fifteen years, and
• 35:06
  Speaker 4: that will continue. There's no reasonable hope that we will
• 35:10
  Speaker 4: clean up the world fast enough to.
• 35:12
  Speaker 3: Stop that for a few decades.
• 35:15
  Speaker 4: Some areas like the EU are doing so well it
• 35:18
  Speaker 4: will eventually act as a break. And the other thing
• 35:22
  Speaker 4: is what I like to call as propaganda toxic capitalism.
• 35:26
  Speaker 4: We've created an anti natal culture and for whatever reason,
• 35:32
  Speaker 4: people quite reasonably have been given incentives not to have children.
• 35:37
  Speaker 4: It's a better life for them individually, often not to
• 35:40
  Speaker 4: have children, to have fewer children, and In the end,
• 35:44
  Speaker 4: we will only change the fertility rate by changing the stimuli.
• 35:48
  Speaker 4: So we have got to end up some time I
• 35:52
  Speaker 4: would guess at least a few decades from now, where
• 35:55
  Speaker 4: the culture has been changed to one of nurturing family
• 36:00
  Speaker 4: and two point one well educated, healthy children.
• 36:04
  Speaker 3: That is a part of the commons.
• 36:06
  Speaker 4: By the way, if you don't have two point one children,
• 36:09
  Speaker 4: humans go out of business pretty dim fast. And I
• 36:11
  Speaker 4: could show you some statistics how quickly it happens, much.
• 36:14
  Speaker 3: Faster than you think. But you need it.
• 36:17
  Speaker 4: Just like clean air, good soil, clean water. You need
• 36:21
  Speaker 4: two point one well educated, healthy children. And you have
• 36:25
  Speaker 4: got to end up with a system that gives you
• 36:27
  Speaker 4: all those four.
• 36:28
  Speaker 1: It feel badine point one short, it feel guilty.
• 36:32
  Speaker 4: Yes, we're point nine long, so okay.
• 36:36
  Speaker 2: I'll get fine, thank you.
• 36:38
  Speaker 1: So we're not already coming up with a solution here
• 36:42
  Speaker 1: already practical actions beyond changing the way we all live.
• 36:48
  Speaker 4: The solution starts always is better than ninety nine percent
• 36:51
  Speaker 4: of the people with communications slash propaganda. You have got
• 36:56
  Speaker 4: to have people understand what the problem is before they
• 36:59
  Speaker 4: can solve it. And they do not understand it, they're
• 37:02
  Speaker 4: not even prepared to listen to it, and yet the
• 37:04
  Speaker 4: clock is ticket. We've got to persuade these people. This
• 37:08
  Speaker 4: is a problem. It is solvable. You have just got
• 37:11
  Speaker 4: to find a way of changing your incentives. Now you
• 37:15
  Speaker 4: can bully them as I'm sure they will pretty quickly
• 37:18
  Speaker 4: in China, so you can't get a house unless you're married, etc.
• 37:21
  Speaker 4: And then you can give them carrots and you can
• 37:23
  Speaker 4: say every child, you get not a silly little six
• 37:27
  Speaker 4: thousand dollars, but you get eighty thousand dollars, and you
• 37:31
  Speaker 4: get subsidized childcare. We look after your education of the children,
• 37:37
  Speaker 4: and we look after their health because everyone's benefit. You
• 37:41
  Speaker 4: can decide to have no children, but you're not going
• 37:43
  Speaker 4: to prosper if the world is cracking up around you
• 37:46
  Speaker 4: for lack of people, the infrastructure is collapsing around you.
• 37:49
  Speaker 4: I think you need a couple of dozen of these
• 37:53
  Speaker 4: cultural shifts that really make people feel that. They say
• 37:58
  Speaker 4: it takes a village, it takes the society to bring
• 38:01
  Speaker 4: up enough good, healthy children, And you've just got them
• 38:05
  Speaker 4: to change the general tone that people appreciate people having children,
• 38:12
  Speaker 4: recognize them as producing a good that they need.
• 38:15
  Speaker 1: Jeremy, do you have any feelings on gold because that
• 38:19
  Speaker 1: looks to us like it might be the other bullmarket
• 38:22
  Speaker 1: of the coming ten years done it.
• 38:25
  Speaker 4: Yes, I've always felt uncomfortable about gold because it doesn't
• 38:30
  Speaker 4: have a dividend, It doesn't produce anything in the end
• 38:33
  Speaker 4: other than it's a wonderful, handsome metal. And it does
• 38:37
  Speaker 4: have a tiny amount of industrial use, but for ninety
• 38:41
  Speaker 4: percent of it, one has to admit it's a speculative medium.
• 38:45
  Speaker 4: Now it has ten thousand years head start over bitcoin,
• 38:51
  Speaker 4: and it's absolutely indestructible. It is there, it's always going
• 38:56
  Speaker 4: to be handsome, it's always going to.
• 38:57
  Speaker 3: Be slightly useful.
• 38:59
  Speaker 4: So I'm comfortable with gold, but it is far better
• 39:02
  Speaker 4: to stack in your mattress than bitcoin.
• 39:07
  Speaker 1: I think I have to agree with you on that
• 39:08
  Speaker 1: as well. There's too much agreement in this conversation. It
• 39:11
  Speaker 1: should be making us uncomfortable. Can I ask you one
• 39:14
  Speaker 1: last question? Is there a book you're reading at the
• 39:16
  Speaker 1: moment that you might recommend to our listeners?
• 39:19
  Speaker 3: Yeah?
• 39:20
  Speaker 4: Actually, James Galbraith, a son of Kenneth Galbraith, the famous
• 39:26
  Speaker 4: economist of the fifties sixty seventies. He has a book
• 39:30
  Speaker 4: that looks at economics more compatibly with the laws of physics,
• 39:36
  Speaker 4: the laws of nature, and entropy. I think it's called
• 39:41
  Speaker 4: entropy economics, or words to that effect.
• 39:44
  Speaker 3: And it's brand.
• 39:45
  Speaker 4: New, and it's only half a few weeks, and it
• 39:48
  Speaker 4: covers disturbingly large chunks of what I'm working on, some
• 39:55
  Speaker 4: of which I thought was come blindingly original until I
• 39:58
  Speaker 4: read it.
• 39:59
  Speaker 3: And it's done.
• 40:01
  Speaker 2: You can now you can just plagiarize that. It'll make
• 40:02
  Speaker 2: it a whole lot easier.
• 40:04
  Speaker 4: Yeah, but it makes the point that economics has been
• 40:08
  Speaker 4: spectacularly incapable of dealing with the real world.
• 40:12
  Speaker 3: It doesn't.
• 40:13
  Speaker 4: It thinks you can do it with capital and labor
• 40:16
  Speaker 4: and productivity. And my ancient joke was, try making a
• 40:21
  Speaker 4: loaf of bread with just a baker and an oven.
• 40:26
  Speaker 4: You need wheat, and you need heat, you need energy,
• 40:30
  Speaker 4: and you need materials, and economics doesn't cover them. It
• 40:34
  Speaker 4: doesn't cover the fact that every material of the past
• 40:40
  Speaker 4: is finite. We mine it, we run out. No, no,
• 40:43
  Speaker 4: we don't. It's just a question of price.
• 40:45
  Speaker 3: They say.
• 40:45
  Speaker 4: It is a totally inadequate system for dealing with a
• 40:49
  Speaker 4: finite world. And you can't have compound growth on a
• 40:52
  Speaker 4: finite planet. Everybody knows that that's the laws of physics.
• 40:55
  Speaker 4: It doesn't work, and they have nothing to do with that.
• 41:00
  Speaker 4: So what we get there is lots of assumptions to
• 41:03
  Speaker 4: deal with the world that is simply not the real world.
• 41:06
  Speaker 4: And I'm very attached to the real world and i
• 41:08
  Speaker 4: don't want to see it get destroyed unnecessarily because of
• 41:12
  Speaker 4: the wrong assumptions by fifty years of economists. And James
• 41:17
  Speaker 4: Galbraith shares that view excellent.
• 41:19
  Speaker 1: I'm going to order that and read it, and it
• 41:21
  Speaker 1: sounds like everyone else should as well. Jeremy, thank you
• 41:23
  Speaker 1: so much for being with us today. I really appreciate it.
• 41:25
  Speaker 3: It was a real pleasure. Thanks for having me.
• 41:32
  Speaker 2: Thanks for listening to this week's Marin Talks Money.
• 41:34
  Speaker 1: If you like our show, rates, review, and subscribe wherever
• 41:36
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• 41:39
  Speaker 1: your comments to Merin.
• 41:40
  Speaker 2: Money at Bloomberg dot net.
• 41:41
  Speaker 1: You can also follow me in John on Twitter or
• 41:44
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• 41:47
  Speaker 1: This episode was hosted by me Maren zumsep Web. The
• 41:50
  Speaker 1: show is designed by Samasadi and Moses and sound designed
• 41:54
  Speaker 1: by Blake Maples. As special thanks to Jeremy Grantham,