A Journey Through Bubble-Land with Jeremy Grantham







Jeremy Grantham has had a lot of firsts in his life; he was among the first to recommend commercial index funds, purportedly the first to create an international stock database, one of the first to call several bubbles—including the Japanese Bubble, the Tech Bubble, and the Great Financial Crisis—and certainly one of the first philanthropists to invest not only his time, but 98% of his fortune to address issues of climate change. In this episode, Greg and Jeremy discuss the breadth of Jeremy’s career from his origins at Shell Oil to the co-founding of Batterymarch and GMO, to the creation of the Grantham Foundation for the Protection of the Environment.

Jeremy shares his insights on today’s market, breaks down the zero-sum investment game and the art of bubble calling, explains how the U.S. is in a unique position to provide innovative greening solutions, and offers his advice to listeners on how they can work to make a difference in the fight against climate change.


Jeremy Grantham

Co-Founder, GMO

Mr. Grantham co-founded GMO in 1977 and is a member of GMO’s Asset Allocation team, serving as the firm’s long-term investment strategist. He is a member of the GMO Board of Directors and has also served on the investment boards of several non-profit organizations. Prior to GMO’s founding, Mr. Grantham was co-founder of Batterymarch Financial Management in 1969 where he recommended commercial indexing in 1971, one of several claims to being first. He began his investment career as an economist with Royal Dutch Shell. Mr. Grantham earned his undergraduate degree from the University of Sheffield (U.K.) and an M.B.A. from Harvard Business School. He is a member of the Academy of Arts and Sciences, holds a CBE from the UK and is a recipient of the Carnegie Medal for Philanthropy.


Greg Dowling

Chief Investment Officer, Head of Research, FEG

Greg Dowling is Chief Investment Officer and Head of Research at FEG. Greg joined FEG in 2004 and focuses on managing the day-to-day activities of the Research department. Greg chairs the Firm’s Investment Policy Committee, which approves all manager recommendations and provides oversight on strategic asset allocations and capital market assumptions. He also is a member of the firm’s Leadership Team and Risk Committee.


Greg Dowling (00:06):

Welcome to the FEG Insight Bridge. This is Greg Dowling, head of research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic, and philanthropic minds to provide insight on how institutional investors can survive and even thrive in the world of markets and finance.

Greg Dowling (00:29):

Today on the Insight Bridge, we do a retrospective journey through Jeremy Grantham's life--from the founding of GMO to his foundation and work on climate change. Jeremy Grantham has had a long and storied investment career. He is best known for co-founding the asset management firm GMO in 1977 and serving as the firm's long-term investment strategist. As its strategist and member of its asset allocation team, he developed a unique knack for calling out market excesses, including famous calls around the Japanese bubble, the tech bubble, and the Great Financial Crisis. Jeremy also cultivated a keen research interest in commodities. This eventually shaped his views on carbon and climate change. Based on those views, in 1997 he founded the Grantham Foundation for the Protection of the Environment. More recently, he doubled down and agreed to give away 98% of his personal wealth to fight climate change. We are excited to have Jeremy today on the Insight Bridge.

Greg Dowling (01:33):

Jeremy, welcome to the FEG Insight Bridge.

Jeremy Grantham (01:36):

Nice to be here.

Greg Dowling (01:37):

All right. So maybe with a little bit of irony, I bet a lot of our listeners did not know that your very first job was as an economist at Royal Dutch Shell. What did you learn being an economist and working at an oil company?

Jeremy Grantham (01:51):

Well, I had a great assignment, which was briefing people heading off to Northern South America. So all I had to do all day was to study the economics and the general social differences of South American countries and the U.S. So that was a pretty easy job, a cushy job, I would say.

Greg Dowling (02:08):

I recall reading that you actually thought at that point in time that coal was a better investment than oil.

Jeremy Grantham (02:14):

I got to go to Harvard Business School on the payroll because I did a rather adventurous thing for a newbie--I wrote a paper that argued that the U.S. really should have been a coal-based economy rather than an oil-based economy. It had 16 years of oil reserves back then, it thought, and it had 400 years of coal supply. That seemed an impressive difference to me at the time.

Greg Dowling (02:37):

After Harvard, after Royal Dutch Shell, you go to Batterymarch. So this would be early 70s when you joined. I hear you were one of the first to do or introduce indexing to your clients. What was the backstory on all of that?

Jeremy Grantham (02:50):

We started at Batterymarch in '69. And in '71, my senior partner, Dean LeBaron, had a buddy, Lee Bodenhamer, who was teaching a class at Harvard Business School, a summer class--actually I think it was an Easter class in the Easter break--for pension fund officers and endowment officers. Not the Yales and the Princetons, but the next group down. The case was: how would they pick between a representative of the establishment, which was Morgan Guaranty Trust in those days, JP Morgan these days. They owned a very big chunk of the pension business. The New York banks owned everything in those days. And the second one was the new guy on the block, T. Rowe Price. Hard to imagine, but they were very new and shocking at the time. And the third one was even more shocking, which was a flaky little startup in Boston that was buying stocks no one had heard of.

Jeremy Grantham (03:41):

You have to remember, this was the Nifty 50 era where Morgan Guaranty Trust was recommending Coca-Cola and IBM, and at Batterymarch we were recommending Great Lakes stock, and Dredge, and Twin Disc clutch. So they studied these three and then tried to make a choice. At the end of the class, as was typical, the professor asked the visitors sitting on the bag who had not been allowed to say a word, for their final comments. My final comment was when I looked at the data of the three managers and the S&P 500, I was surprised that no one had suggested giving their money to the gentleman at Standard and Poors, and it went over like a lead balloon. But as we drove back down into town, I was hammering on to Dean LeBaron that we should offer an index because it was a zero-sum game.

Jeremy Grantham (04:28):

And we did. At the end of the year, Pension and Investments magazine gave us some joke award for being the most talked about product with no business. It was two years before we got one of the Bell Telephone systems and we were off and running. And when we split the business with Wells Fargo... And Wells Fargo was touting the fact that the market was efficient, of course that was nonsense in those days, but if the market had been efficient, then of course indexing is the way you have to go. Our reason was quite different. Our reason was that it was a zero-sum game, that managers in total created no value, that we cost the marketplace 1% or 2% in friction, commissions, and management fees.

Jeremy Grantham (05:06):

And therefore the group of people--I like to think of them sitting at the bar while watching the poker game--they would sum to the market minus a few basis points. The guys at the poker table would have to pay table stakes of 2% per year to play poker. We would shuffle the chips around and some would be big winners and some would be big losers, but one thing would be certain--at the end of the year, the end of the game, if you will, we would be zero-sum minus the table, stakes of 2% a year. And the guys at the bar watching would sum to zeros, so they would be two points ahead of us in indexing. But that is the argument of the zero-sum game, it's as true today as it was then. It means that the very big funds are, in the end, fighting it out around a minus cost of doing business level, and that, over time, wears them down. So the indexing will beat most of the people most of the time.

Greg Dowling (06:00):

That's pretty interesting. So if I remember my financial history, I think Samsonite Pension was probably one of the early pensions, maybe a year or two prior than you are, then a couple years later you have Bogle and Vanguard. So you were probably one of the very few doing that. And probably, not surprisingly, you didn't get many clients, because this was kind of heresy at the time.

Jeremy Grantham (06:21):

Well one of my friends on Wall Street--good friends--he said, "Jeremy, Jeremy, you don't understand. Americans will never settle for mediocrity." And he was right, because if you fast-forward from '71 or '73 when we got our first account, if you fast-forward to 2005, it isn't even 2% of the business. It's only in the last 15 years that it's exploded towards 40%. Why would it take--in the face of absolute logic, why would it take 34 years to get to 2%? It's a testimonial to the vigorous defense of the financial business and the obfuscation we could put out around the topic.

Greg Dowling (07:01):

That's interesting.

Jeremy Grantham (07:02):

By the way, Samsonite went into Wells Fargo and said, "We want an index." It wasn't Wells Fargo who went to them. So although they have the honor of beating us by quite a bit, they don't have the honor of having suggested it. And we, quite separately... We had no idea that Samsonite existed on the planet, in a sense. We came up with it from first principles. And then we shared the business for quite a few years with them.

Greg Dowling (07:27):

For years and years and years there's no interest in indexing, it's very slow, very slow. And then all of a sudden in the last 10, 15 years, it's really exploded. Now, there are different weighting schemes for passive indices. Any thoughts on cap-weighted indices right now, given how expensive the market is? Would you still recommend the classic cap-weighted S&P 500 for investors?

Jeremy Grantham (07:51):

I've always thought that an enterprising money manager--if you will, a good poker player--can impose his trading costs or her trading costs on the other poker players and come out ahead, and we have. Particularly in the early days, it was relatively straightforward; there wasn't the same quantitative competition, there wasn't the same top-level intelligence in the marketplace, so I had the feeling that you showed up for work, you tried hard, and you won. It was pretty encouraging and pretty straightforward. Yes, you could pick the winners and there was plentiful supply of inefficiency, but to get back to the weighting system, the beauty about indexing is you never miss an Amazon or an Apple, and the bad thing about indexing is you never miss having a lot of overpriced stocks into one of the relatively rare bubbles, such as we have now. So it's kind of good news, bad news.

Jeremy Grantham (08:40):

If you can ride out the odd 50% decline--totally unnecessary, of course, on fundamentals, as Shiller pointed out 30 years ago. The market is mildly hysterical from time to time, and it's totally unjustified by the steady stream of dividends and earnings, but it happens. If you want to ride those 50% drops, you know, good luck. It works out very well in the long, long run, but it can take you 20 years to get back in the game. If you get caught in 1929, it works out just fine, but you don't get your money back until 1955. If you get hammered in '74, you don't get your money back until '87, and then when you've gotten it back for a month or two, you give it up again. And the same in 2000. By 2010 you're still losing money. So you have to be willing to ride it out, and some people feel their lives aren't long enough to take the odd 10, 15, 20-year wipeout. So for those who feel they're brave enough and willing to try, I've always thought that sidestepping some of the pain might be a good idea.

Greg Dowling (09:39):

So after Batterymarch, you go on to co-found GMO in 1977. Talk about those early days. How did that form your investment philosophy? Any good stories you can share?

Jeremy Grantham (09:50):

Well, one good story was that when we decided to get into international there was no good data. There was no machine-readable data at all on the planet. So we got a publication that was just changing hands--it was called Morgan Stanley and then it moved to Capital International. And we got every month and we hand-entered all the data to see if we could run on a new computer some of the things we were doing in the U.S. We were a hard-nose value manager so we wanted to know price-to-book, yield, price-to-sales, etc. We ran them and we found it worked even better in the international markets than it did in the U.S., and it had worked very nicely in the U.S. and we had already had quite a few successful years. The eight years at Batterymarch where Mayo and I ran the portfolio, we had won by six points a year. The first nine years at GMO we won by eight points a year without any down years. So we were very eager to see if the same value approach would work.

Jeremy Grantham (10:57):

And there we are looking at the data and it works even better. And that was... The first machine readable international database was there. Can you imagine? This little firm in Boston and we were running on a computer stuff that did not exist anywhere else. And to get there, we had to hand-enter the damn stuff. And then when we went to our clients, because we were doing so well, they were very receptive and they signed up. We made 23 presentations for 24 accounts--that's another story--but that's the way to get into a new market. So we had these 24 international accounts, and we sold all the hot shots their first international portfolio, including Harvard, Yale, Princeton, Stanford. The first dedicated international portfolios that they ever had were our portfolios.

Greg Dowling (11:49):

Wow. That's back in the days when alternative investing were things like estate and international stocks.

Jeremy Grantham (11:56):

They had not been heard of in those days. I think actually they had a tradition of a bit of real estate, but we're talking 1981, '80, '81, '82. And then we closed when we had our 24 accounts--or was it 23? We closed the book of business for quite a few years because we figured that that was enough money to do... It was about $550 million. It was enough money to get our teeth into.

Greg Dowling (12:21):

One of the first indexes, one of the first using international databases hand-put in yourself. Those are some pretty good firsts. I don't know if you were the first, but you certainly received a lot of accolades as being one of the earlier people to call several bubbles. So you've called the Japanese bubble, the tech bubble, and the GFC. Is there a template to help uncover bubbles? And maybe, how were those bubbles different and how were they the same?

Jeremy Grantham (12:48):

I think they're perfectly straightforward. They're intellectually easy and psychologically disastrously difficult. They're easy because in most cases they're so extreme. It's like how you notice the Himalayas when you're standing in Northern India. I mean, they come out of the plane and they soar up, you can't miss these things. 1928, '29 was just such a massive rally. So the sheer price rise you can't miss. Secondly, just to make it easier, the great bubbles have always tended to rise faster and faster towards the end, and that's a kind of defining feature also. And then thirdly, they have all been accompanied by massive, public, obvious crazy behavior where the headlines migrate from the financial page to the front page, where they migrate to the opening few sentences of the evening news on the radio or the television.

Jeremy Grantham (13:43):

They talk about market new highs, and they talk about what the Bitcoins of the era have done--I know it's not a stock, but it's a speculative instrument--and the GameStops of the world. And back in 2000, most of you will be old enough to remember the pet.coms and the after craziness of that era. The same was true of 1929. The same was true of Japan. We had a group from Solomon Brothers, a leading American brokerage house of the era, who came around in '88, '89, when Japan was moving to 60 times earnings, and explaining that their yields, etc., and their interest rates, etc., they really should have been selling at a hundred times and they were cheap and you should buy them. It didn't stop the Japanese market breaking the following year. It has not recovered the high of 31 years ago yet.

Greg Dowling (14:29):

So it's one thing to call a bubble, timing it is another thing. And maybe even foresight is a curse. Talk to me a little bit about the business pressures of being early or calling a bubble, especially in a time of exuberance.

Jeremy Grantham (14:44):

What we found in '98, '99 was that it was far more commercially dangerous to be early getting out of a bull market than it was to make mistakes in a bear market. But in a bear market, all the clients became mildly catatonic and some severely catatonic. When the market's going down fast and a lot, they kind of freeze and wait until it's all over, and then they sort through the wreckage and decide what to do. In a bull market it's quite the opposite. They are jumping around full of energy, playing golf with their fellow pension fund officers who are hitting the ball out of the ballpark. What the hell are they doing with these conservatives at GMO who are up 16% when the market's up 22%? Fred, that they have just heard about, is running a company that's up 41%. "I'll have more of the 41 please, and less of the 16."

Jeremy Grantham (15:35):

And so you get fired much more quickly in a bubble phase than you do in any other phase. Furthermore, we noticed in '98, '99, for the first time, you get fired with a certain amount of venom, they treated us as if we were deliberately trying to stop them getting rich. I'm not kidding you. And these were, of course, some of the best communities, or the most talented committees full of movers and shakers in the investment business on these great endowments, the Metropolitan Museum and so on. And yet, almost invariably, several people on the committees had bought into the new golden era that Alan Greenspan was talking about, permanent hire, this, that, and the other. And they felt the market was justifiably heading towards 35 times earnings when it had never sold over 21 before, and that was in 1929.

Jeremy Grantham (16:26):

So that was pretty painful. It taught us, in a sense, a powerful lesson about how human behavior works. But it also explained to us why the big firms couldn't play that game. It is simply not a commercial proposition to get out of a bull market, because every now and then they run further and faster than you expected. Japan went on and on and on--way beyond people's expectations--2000 beat the record. There's a lot of difference between 35 times earnings and 21--the previous record. So sometimes they break out to an astonishing degree. Now the bad news is, that changes nothing, they go back even more and longer. They go back where they came from. And the higher they go, the harder and longer they fall. But it changes everything when you're there, because the clients' patience, which was normally 3 or 4 years... if you're a good manager and you talk to them nicely and you keep them informed, the standard patience is 3 years--and if you've done a great job, it may be 4. But we got fired by 60% of our book of business in '99 in 2 and a quarter years. At the end of 97, we had good numbers going back 5, 10 years, and sometimes very good numbers. But in 2 and a quarter years of lagging, we were getting positive returns but we were way behind the market. We were getting fired at a rate I'd never seen before or since.

Greg Dowling (17:50):

Foresight sometimes may be a curse, but it's so behavioral when you get into these situations. It's funny how history repeats itself. You mentioned some of the comments and quotes by Alan Greenspan, but I believe it was Irving Fisher in the late '20s who said, "We've reached this permanent plateau." Fast-forward to today. We've been mostly talking about stocks. It feels we're in this environment now where we're in this everything bubble where it's not only stocks, but it's bonds. So if we're in a bubble, what's an asset allocator or investor to do?

Jeremy Grantham (18:17):

And by the way--this is not a direction, but it's not answering your question. When you're having a bubble, it's really advisable to have the bubble be in one focused area. In 2000, for example, it was U.S. growth stocks. It was not global. Real estate was really cheap, as in cheaper than the cost of building the building you could buy real estate for. Bonds were really cheap; inflation-protected bonds had just come out and they yielded 4.2%, 4.3%. Can you believe it? Real return guaranteed against inflation? Even within the market, the value stocks were not too bad, and the small stocks were not too bad. And small value was actually cheap enough that when the S&P had gone down 50%, it hadn't gone down at all. It was, I think, +3, I mean, amazing. And the REITs, all of the real estate, they were up 30% as the S&P hit -50.

Jeremy Grantham (19:11):

That was a bubble that was paradise for an asset allocator because there were so many alternatives. What you want to avoid is what Japan did in '89. Japan had the biggest bubble in history, I believe, bigger than the South Sea bubble. And that was in land and real estate. The old story was that the land under the emperor's palace was worth more than the whole state of California. We spent two days actually asking and digging, and it was. It literally was. First of all, it's a big palace with great palace grounds. And secondly, downtown Tokyo all around it was selling for four, five, or six times downtown Manhattan. And the numbers worked out, just amazing. Simultaneously, they had the biggest equity bubble of any important market. There are some flaky, tiny markets that don't count, but of any major market, that's the biggest bubble of all time. At the time, we were told it had gone for 65 times earnings.

Jeremy Grantham (20:04):

There's always historical revisionism in the data, so you have to be a little careful. But at the time it was clear, everybody agreed 65 times earnings, which is pretty remarkable. And it had never sold at over 25 times before. So that's the thing that makes every value manager wake up sweating in the middle of the night, is Japanese stocks. Anyway, they managed to do both of these at the same time. And 31 years later, the land is not back, real estate's not back, and stocks are not back to where they were. This was a loss of perceived wealth so profound that you have to congratulate the Japanese for not going into a depression. People talk about a lost decade, but hell that was a lost decade where they actually inched forward. They actually did not go even backwards for the decade. When you're taking that kind of loss of wealth, you're in trouble.

Jeremy Grantham (20:52):

Now, in the so-called Great Financial Crash, which irritates me as a title because I think it was a housing bust, the housing market had this perfect three-sigma, one in a hundred-year outlier bubble. It had been very stable historically, so to get into that level it only had to go up--"'Only,' he says"--about 40% or so in 2 to 3 years, which it did. And then it gave it all back. But the trouble with the 2007 housing bubble is it took the stock market with it. The stock market was not sensationally overpriced, but it was a big, overpriced bull market. It was not in itself a bubble, but the housing market was a bubble, a beautiful, magnificent bubble. If you look at it, it's perfectly round. It goes up for 3 years, it goes down for three years at exactly the same speed, and it goes all the way back where it came from.

Jeremy Grantham (21:41):

The housing bubble inflicted about $10 trillion of loss of perceived value. So one minute you thought your house was worth $400,000, 3 years later you were told it was worth $550,000, 3 years later you were told it was $400,000, and 2 years after that $350,000. To hell with that. So you had lost an enormous asset. And the housing market is much more dangerous because more people own them. The middle class in particular owns very little stock but owns a lot of housing. And it really... When you lose that value, you skip the trip to Portugal and you realize you can't send your second son to a private school. It really flows through the system. Don't do it. So what do we have this time? Of the 4 major asset classes on the planet, we have 3.5 in bubble land. We have, as Jim Graham would say, "The most overpriced fund market and the lowest rates in the history of man." Go back 4,000 years. There was never a time when so much had a negative return where you pay the government to take your money.

Jeremy Grantham (22:45):

So that's number one. Number two, we're a contender for the highest-priced U.S. equity market in history. I would say a majority of bubble experts think this is now slightly higher than 2000, which was epic. Some people do not, but at least we can all agree it's a contender. And then we have real estate. Real estate was kind of off-screen until a few minutes ago, and suddenly on some of the databases it has risen 20% in the last 12 months. The Shiller series, which is a little more conservative, lags quite a bit. I think it's only up 13%. But the other series, perfectly seriously done, up 20% is the sharpest rise--sharper than the '70s with inflation and sharper than the housing bubble of 2005.

Jeremy Grantham (23:31):

And what that means is... The metric we hero worship is multiple family income. How much does the median house, the one in the middle, how many multiples of the median family income is? It's a nice, stable, fair metric. It used to be in America that we'd sell at three times family income, and in the bubble we kind of went to four and a half or so and then back. We are now at the multiple of family income that we were at in '06, the very peak of the housing bubble. We're back. Now the rates are very low, so all being well you can "afford it." What you can't afford to do, if you're a beginner, is buy it in the first place.

Jeremy Grantham (24:15):

Which brings up another topic we should address sooner or later, and that is how painful for most people high asset prices are. They're kind of fun when you own them, and they're great for retirees who have nothing to do but liquidate their pile of assets, but for people who don't have it, and for society in general, it's a disaster. Because what has happened over the last 25 years is that the yield on assets has dropped as the price rose. I studied forestry and farmland, and that, around the world, used to have, let's say, a 6% yield. Now it has a 3%. At 6% you can reinvest and double your money in 12 years, at 3 it takes 24 years. So in 48 years, you have a quarter of the wealth--ignoring taxes for a second--a quarter of the wealth that you would have had in the world, on average, of the 20th century. This is terrible. And the same with a house, you're getting half the house that you used to get for your income.

Jeremy Grantham (25:11):

It's a disaster for people who don't have assets. And the whole society is compounding it as well, much more slowly. It's such a simple arithmetic point, but nobody seems to get it. It is slowing our wealth creation down and giving us the illusion that we're all getting rich. And of course, if you have a house, you know that the house hasn't changed. The house was the same house at $300,000 as it was at $450,000 and back to $300,000. It's the same darned house. It doesn't hold off the rain any better in a housing bubble like today. It's the same with stocks, by the way. They're the same old stocks, only in stocks you get the fantasy of pretending that somehow their earnings have gone stratospheric and you can expand the storytelling to fit the available price. That's why bubbles in the stock market are so dangerous.

Jeremy Grantham (25:59):

But when you look back, you find there was no dramatic shift in long-term earning power in 2008, it was just a game we all played. It wasn't even... In Japan, there was a fairly modest upswing in profit margins, and profit margins are, as I like to say, the most provably mean-reverting series in economics, so if you pay up for rising profit margins, that is absolutely the wrong thing to do. You should pay up for crushed profit margins because they always bounce. You should pay down for heroic profit margins because they always move downwards. Anyway. So here we are, we have the trifecta for the first time in American history, the real estate market, the bond market, and the stock market. And then coming up on the rails, as they say in horse racing, are commodities.

Jeremy Grantham (26:48):

If you take the Goldman Sachs index for non-energy, they have a ludicrous total index. It's so dominated by oil that when they break out oil, non-oil, and the total index, you can't tell the difference, really, between the total index and the energy part. But if you look at the non-energy part, which is all the metals, all the critically important foods, plus one or two other things like cotton, it's back to the all-time high of 2011. It's back to that epic move in commodities. Who knew that? Only a nerd like me who looks at the data. But the broad base of commodities, a lot of them that count, are back to the all-time high. And the UN global index of food prices is not far off its 2011 high.

Jeremy Grantham (27:32):

And then there's the more complicated story of energy, because energy in terms of fossil fuels is in the end-game, and that is incredibly complicated and difficult to predict. You know for sure that in the end that little fossil fields will be used in 50 years, but who knows what the flight path of the price will be. All we know is that the industry is liquidated. And when you look back, by the way, you have an amazing testimonial to the stock market, because we haven't--you haven't been able to read in the headlines that the oil industry was going to implode in the last 20 years, but in 1982, at the top of the oil crisis surge, the oil industry was 23% of the S&P 500. Ten years ago it was 13% or 14%, and today it's about 3%. So somehow, in its own dopey, slow, meandering way, the market has marked down the oil industry more--get this--than any other major sector of the S&P since the S&P started in 1925.

Greg Dowling (28:32):

Wow. What does an investor do if we have three and a half bubbles? Is it have more ex-U.S. assets? Is it have a value tilt and then just a little bit of cash and ride out the storm? What do you do if you need to be pretty much fully invested?

Jeremy Grantham (28:46):

Well the interesting irony here is that real estate is everywhere. Vancouver is more expensive than where I am today in San Francisco by a lot. As a multiple of family income it's so high it doesn't seem to compute. The same is true across Canada, Toronto. It's in Sydney, Australia and New Zealand. It's in Paris, London, and Hong Kong. The overpriced real estate is pretty well global. The lower return on farms and forests and what you might call "other assets" is pretty well global. The lower return on bonds, absolutely global. The paradox or the slight irony here--I suppose is better--is in the stock market where it really is focused most on the U.S. Although the developed countries are "overpriced," it's fairly business as usual. There are some countries--the UK, for example, some would value Japan--that are not particularly expensive.

Jeremy Grantham (29:45):

And emerging markets seem to be perfectly ordinary, which means against the bubble U.S., they're at one of the two or three lowest relative points in history. And from those other points they have done very, very well. Indeed, as recently, as 2008, emerging markets sold at a PE premium to the S&P and now it sells at half, and that's a pretty decent discount. The other thing of course is value. The higher yielding value stocks are more sensitive to the discount rate shift. So as the interest rates go down, they tend to underperform and growth stocks outperform. And if we're looking at a period where interest rates slowly... When they're way back--at least in the direction of the trend of the entire 20th century--what happens is the reverse.

Greg Dowling (30:32):

One thing that in my life I've noticed is that for most of my existence I could buy a gallon of gas cheaper than I could buy a gallon of milk. So did we systematically underprice carbon given its risk?

Jeremy Grantham (30:50):

If we had somehow worked out as we can today what the societal cost of a ton of carbon is and priced it back into oil--as we should have done of course. In a perfect world, we would have had a stunning tax on all fossil fuels like the Europeans have on gasoline, and we would have had it as they did on gasoline four years ago. We'd be living in a different world because it would have summoned up all of the ingenuity that we're capable of. We would have found a way to invent efficient electric cars and so on 20 years ahead of today. All of the interesting inventions have been underfunded and, certainly on the part of the government, enormously under-researched. And these are the areas that government research has done so well from time to time. Of course the classic example would be developing a nuclear bomb in 3.5 years instead of 35 years, but nuclear power, internet, early days of solar, and even Tesla got a big government grant. Yes, of course you have lots of failures, but these are the industries that changed the world.

Jeremy Grantham (32:04):

Incidentally, this is the one area where the U.S. is still absolutely exceptional. Americans love to think of themselves as exceptional in everything, and this has sadly not been very accurate for the last 40, 50 years, we seem to be sliding down almost every list that counts. Math, the effectiveness of students, the number of people in prison, murders--you name it. We have not been doing too well. But in venture capital, in new industries, we have been the top dog for the entire 55 years I've been in America. If you look at the FANGs, the FANGs are what separate us from the rest of the world. Earnings progress and the market progress of the ex-FANGs U.S. is not that different from the rest of the developed world, but the earnings of the FANGs have been exceptional, and the price, therefore, has also been exceptional.

Jeremy Grantham (32:56):

If you look at them, they're all venture capital firms. They're not outcroppings of the old Coca-Colas and IBMs. These are firms that I consider pretty new. When we first started in GMO, we hired away what would have been employee number 26 at Microsoft and Apple was about the same age. I just don't consider that very long ago. And, of course, the rest of the FANGs are 15, 20, 25 years from the day they started in the garage, as it were. So this has been remarkable. It is a great strength and we should play to it. And the government should really encourage basic research.

Jeremy Grantham (33:29):

We are in the process, sadly, in the last 10 years or so of ceding all the new industries of the future to the Chinese. They make over 80% of the solar panels. They produce over 50% of the electric cars. They make 400,000 electric buses, and we make 1,000. I mean, get alive. They're shipping them in the hundreds and hundreds to the cities of South America and so on. Here, there, and everywhere and driving the cost down. They have more fast trains than the rest of the world added together. And so it goes on. They put in more wind last year... They put in 75% as much wind last year as we have ever put in cumulatively. So we can sit back and be anti-Chinese, or we can say, "To hell with that. We don't want them to dominate these industries of the future, the greening of the global economy." We have to get behind it with our government as they do, and we have to encourage capitalism and venture capitalism to do their best.

Jeremy Grantham (34:32):

They're well-positioned to do it, they just need more money. You can afford failures. If you look back at 2000, how these great surges work is you wipe out 19 out of each 20 new companies, but somewhere in there is the Amazon. And if you do it at that scale, as we did then, we're the guys--in the U.S.--who end up with the Amazons and the new technologies, not the more conservative Germans, shall we say, who are very good at manufacturing. But when there's a new breakout, it plays to our strength and we should get behind it.

Greg Dowling (35:08):

Creative disruption. One of the great economists of the world talks about creative destruction. From the ashes these things come up and it's important to invest. We're going to talk here in a second about your foundation and all the great work that it's doing, but you're talking about predicting bubbles and the tops of markets. You've made some dire predictions around climate and climate change. I believe you've said, "Hey look, we've got about a 50/50 shot here of it not having a major impact in our daily lives." In a concise way, why don't you share your feelings about the risks that we have right now?

Jeremy Grantham (35:41):

Well, I was asked that question about 5 or 6 years ago and I said 50/50. Since then, I thought the odds moved again, drifted down. We were not winning. Let me just point out that the particles of CO2 that went up into the atmosphere were more last year than ever before, so we haven't even started to win at the second derivative.

Greg Dowling (36:02):

Even with COVID and the slowdown, we still pumped in more carbon than ever before?

Jeremy Grantham (36:08):

More particles than ever before. Now we have got to get our CO2 production down to zero. We have actually got to get into the business of sucking it out of the air one way or the other--biologically, chemically, or physically. And to get there, of course, we have to first see the rate of growth go negative, and it has not. It's not just that it's growing, it's growing at an accelerating rate still. That applies to the melting of the ice, in particular. The ocean level warming, in particular. It is warming in the last 15 years at 3 times the rate it was 40 years earlier. This is just a terrifying rate of increase. And the water levels are rising at an accelerating rate. And every time there's a serious even conservative estimate, it edges up over the one 5 or 10 years earlier. So this is, at the moment, something we're not winning.

Jeremy Grantham (36:59):

Now, there was a recent meeting of the G7 which everyone has to process where they came out with a really surprising, dramatic agreement that they would downgrade fossil fuels across the board and pretty well kill coal. And if they can nag, cajole, bribe the G--whatever it is, 21 or 23, what is it? But 20-odd, which includes China critically--then we're really moving. Because China and Japan were the ones who were funding coal, and China is in the G7 and then shocked everybody by agreeing to stop it. Now we want to persuade, cajole, shame, whatever China into doing the same, and maybe they'll volunteer to stop for propaganda reasons--or for PR reasons would be more polite. So that is a terrific late developing piece of news, and that may take us back to the 50/50.

Jeremy Grantham (37:50):

We frame this as the race of our lives because we have our nose rubbed in on one end to the spectacular technologies that are going on in the VC world that can change the world. And on the other hand, we have our nose rubbed in to the data, which has been deteriorating at an accelerated rate. So we know more of the bad news than the technologists and more of the good news than the environmentalists, which is an interesting place to be. It really is a race, and we can win. And on paper, if we lived up to our capabilities, we would win.

Greg Dowling (38:24):

One thing I appreciate is that you have put your money where your mouth is. You put in more than a majority--almost the entirety of your wealth--into your Grantham Foundation for the Protection of the Environment. Talk a little bit about the mission of that foundation.

Jeremy Grantham (38:42):

The mission of the foundation is to be like the shock troops, to find those areas that are the most important and the most difficult to fund, whether they're investments or grants that are politically incorrect, they are badly understood, they are too new, they're too risky, and yet they're potentially critical. So we look to find the cutting edge of the grant-making world, the people with the most fire in their belly with with beautifully designed programs that will count and then can be leveraged and will set a good example. Then in the investment side, we're willing to deploy up to half of our total foundation in early-stage green VC for heaven's sake. Maybe one day we will go beyond that, but that is so far out of our reach. We're probably up towards 10% or 12%, 13%.

Greg Dowling (39:34):

I think that's interesting. Because a lot of foundations will have an asset allocation that supports their mission. You're doing that, but you're also having your assets support your mission.

Jeremy Grantham (39:45):

Yes. And too few people who are well-intentioned in the foundation business use their assets to drive the mission. They talk a good game, but when you get down to it, they're not really in that business. They're not taking any extra risks. Let me point out, this is the only case of having your cake and eat it that I have ever come across in my life. It goes like this. When we invest in a dynamic early-stage VC with an idea that if it worked could change the world, I think, on average, a portfolio of those ideas is driving the cause towards decarbonization successfully. It's driving it as well as any dollar we could make in a grant. It's just the most effective dollars that we can spend are on these new, brilliant ideas. And secondly, now that the governments are getting behind us, now that people are really appreciating the dangers we're in and what a race it is, I think they are candidates to be the best money-making portfolio that we could make. Now how often in life does that happen? If you love chocolates, it makes you fat. We have this exciting job description. My God, these investments are exciting. They are absolutely vital. They are exactly what we should be doing. And they might make us more money than any other foundation, which would be really cool, because that in turn drives up the grants we make.

Greg Dowling (41:13):

For larger institutions, they can do early-stage venture. If you're a smaller foundation, can you still do this? It seems like you want to be more on the private side than the public side. Talking about bubbles, there are certainly some very overpriced EVs out there, and battery technology and everything else. Should you just--if you're smaller and can't do the venture side, should you just stick to your knitting?

Jeremy Grantham (41:39):

You can be fairly small and still invest in a professional green pool of venture capital. They're coming out of the woodwork. Some of them from firms with great records in more diversified VC, some of them are brand new startups. We know some of the players, so we are happily investing in these guys. And I think, on average, they'll work out well. Do prices get ahead of themselves these days? In some cases, yes they do. You know, the SPACs are coming out with lots of green-looking things. The SPACs are, I think, a ludicrously speculative instrument in general and they badly need to be controlled, which happily the new administration seems to agree with. But the good news looking back is they will have raised a lot more money probably than without them. Yes, they end up ripping off the ordinary ambassador and giving huge rewards for the people with the willingness to propose them and run them who take 20%. They don't take 20% of the winnings like they do in venture capital, they take 20% of your money.

Greg Dowling (42:45):

You've had some luck with SPACs, right? You had a big private go public. Quantum Scope, is that correct?

Jeremy Grantham (42:51):


Greg Dowling (42:51):


Jeremy Grantham (42:51):

One has to say, it is a brilliant enterprise which has covered an enormous amount of ground but is still a number of years away from having revenues and profits, maybe three or four years. Still making very nice progress and has very plausible people like VW and Bill Gates backing it. But you might well argue that this should be better served by a group of venture capitalists sitting around the table than having it enter a bubbly environment. So this thing came at 10, which was okay, that's what we were carrying it at about. That's 4 times what we paid 7 years ago. And then it went to 132, and suddenly the few percentage points that were in my name had ballooned to an amazing level. It was $625 million, it was the biggest investment we had ever made.

Jeremy Grantham (43:44):

On Monday we came off our 6-month lockup and the stock, sadly, was down to 25. And you can say, "Well, 25 is lovely, it's 10 times our investment." Or you can say, "Oh, that 132, I could taste it." And we could've used all the money. On Monday morning, 75% of QuantumScape was transferred to the public trust and the family foundation, which takes my rather large share of the total back down where it belongs. But we will see how this plays out. We're going to hold quite a bit for the 4 years to see if we pull off this rabbit. It's half the weight of a traditional battery, half the volume, so you can get 2 days in your telephone instead of a day, you can have 500 or 600 miles of range in your car, or you can have a lighter battery.

Jeremy Grantham (44:36):

If you halve the battery size, it saves 500 pounds of weight in a Tesla. And then you save the cooling equipment because the new technology doesn't overheat and blow up. So that's probably 800 pounds of weight that a Tesla equivalent machine would save with this battery. And it charges in 10 minutes, plus or minus a couple. So you get a cup of coffee. And the mayor of the city says that every gas station has to install an equivalent number of electric charging. It's no skin off their nose, because you find a way of financing the pumps, that is, the charging stations, because they make all their money at the little shop selling coffee and newspapers and this and that. These guys will still be taking 10 minutes instead of 5 minutes--they would like that.

Greg Dowling (45:25):

That sounds like a great investment, and congrats on having such a big win. We're kind of getting later into the podcast, maybe just highlight one technology that you're invested in that you're really excited about if you can.

Jeremy Grantham (45:35):

I have to back and fill for just a second here, because one of the things we still own in the foundation is we own some publicly tradable securities. I'm happy to say that GMO has been now running a climate change fund for three or four years and has a very nice track record and looks at the question: How is the world going to change with decarbonizing the economy? How do we get ahead? How do we understand it better? And how do we make money from the greening process? We do that in the tradable market, so it's more accessible than building a portfolio of VC.

Jeremy Grantham (46:12):

The most exciting--there are many exciting VCs, but I'm going to tell you about one called GreenLight in Boston. They had a breakthrough in producing RNA. We've all suddenly become familiar with RNA because of Moderna and Pfizer, both of whom are brilliantly successful vaccines based on RNA. A lot of people as recently as 3, 4 years ago, didn't trust RNA as far as they could spit. They thought it was an expensive dead end. It absolutely has proven not to be, of course, but RNA is very, very expensive to do research with. It was $100,000 a gram, and then it was $10,000 a gram, and then it was $1,000 dollars a gram, and now it's less than $1.

Jeremy Grantham (46:58):

The cheapest of all processes is owned by GreenLight in Boston. And what they found before COVID was the potential to turn this into insect control, where you instruct the insect to behave differently. You modify its DNA by having this messenger RNA instruct it. You tell the Colorado beetle that it can no longer process carbohydrates, so it eats the potato and dies. I'm not sure whether it dies of starvation or constipation, but in any case, it dies.

Jeremy Grantham (47:33):

It's very much less intrusive into nature, it doesn't affect even a cousin beetle, and it's much cheaper. So this could be applied, one imagines, to farming, length and breadth. And we are very worried separately about the toxicity of the environment. It's killing off all the insects. The insect mass is down at least 50% and probably 70% in the last 100 years, and no one knows what the consequences will be of this cascade as you lose your insects, your birds that eat the insects, your amphibians that eat the insects, and so on. And it rolls through nature with, as we often find, unknowable, unintended consequences. It could be... E.O. Wilson, the famous ant man says, "You know, we can really do easily without humans, but we can't do without insects, the whole ecosystem collapses." Anyway, so that's one of the spectacular ones, and there are plenty. Lightweight vehicles that could be made for a couple thousand dollars. And so on.

Greg Dowling (48:40):

That's really exciting. I really appreciate you sharing some of those ideas, the new technologies, and also just sharing how not only a big institution can invest, but also even smaller institutions--that there are funds, there are ways to get some of that mission-related investing so you can have your cake and eat it too. So you're calling markets, you're saving the world. What are you doing in your free time? Any hobbies?

Jeremy Grantham (49:03):

Yeah, no, I like to play tennis. I've had tennis elbow for about 40 years, so it makes for an interesting game. I have to do a wicked under-the-hands backhand underhand serve, which creeps over the net. And then hopefully it doesn't bounce too hard. But that's a hobby. We recycle. We've been spending the last year down in the countryside, so that's handy. But my real hobby, I suppose, these days is the foundation work, which, who would have guessed it would be so entertaining? And the grant-making is interesting enough, you meet very good people and it's quite a challenge, but the investing has been just a bonanza. So we have built up a team. We have 6 people who do direct VC investing ourselves. Yes, we invest in professional pools, but in addition, we do it ourselves and we have built that up to about $50 million, a few percent of our total, and it's growing rather rapidly. But it's absolutely exciting and it keeps us very well plugged into what is going on.

Greg Dowling (50:06):

Tennis is great, cycling is great, but saving the planet and focusing on environmental concerns is an absolute great hobby to have.

Jeremy Grantham (50:15):

Let me just say that... You know, they say, "Have you any advice for the younger people?" And of course, it's obvious from what I've said is: Get into venture capital, ideally green venture capital. Start a new firm. If you can't do those, then at least do what you can to help the world in its race to greening everything. Work or help an NGO. Give to the best NGOs. Influence your company. That counts for a lot more than people would imagine, just the workers pushing for better, greener behavior really helps. And my advice to everybody is just remember that time passes a lot quicker than you expect. You too will be sitting on the bed chatting when you're 82 next Wednesday. Trust me, it's quick. The message is: Don't hang around. Don't compromise any more than you have to. Take a little more risk. I wonder how many people actually sit on their deathbed and look back and say they took too much risk? Yeah, a few. But for every one of those, there's 10 or 20 others that took too less risk. I would certainly take more if I could do it again. Move quicker, take fewer prisoners, just try and make a difference.

Greg Dowling (51:24):

For those younger folks, give us one book recommendation on the environment and then maybe your favorite book on investing.

Jeremy Grantham (51:30):

My favorite book on investing is chapter 12 of the General Theory by Kames. It's beautifully polished and unlike the rest of the book. It is completely unrelated to the rest of the book, so you don't have to be even slightly interested in all the contortions of interest rates and money that economists waste their time on. Chapter 12 is about real life, common sense--brilliance even--and how the market works. You have to read it. You can probably get it online without much trouble. And the one I'm reading now about the American woman who not this year but last year she had got the Nobel Prize for chemistry,

Greg Dowling (52:09):

Code Breaker. That's going to be our--at FEG in the research team, that's going to be our summer book club, Code Breaker

Jeremy Grantham (52:16):

Code Breaker. I'm on chapter three and it's fascinating. It's always remarkable when a woman makes it through the scientific world, because, boy, do they have to deal with a lot of put down from the men. It hasn't been a fair fight. Even more admirable than one might imagine.

Greg Dowling (52:34):

Well, this has been great. Thanks for educating us on so much in so many aspects of the market, the environment, sharing all your great work with the foundation. And happy early birthday, Jeremy. Thank you, Jeremy.

Jeremy Grantham (52:47):

Well, it was a pleasure.

Greg Dowling (52:50):

If you are interested in more information on the topic, please go to our website where we will have a list of relevant FEG publications. And don't forget to subscribe to our communications at www.feg.com/subscribe so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client; therefore, nobody should consider these FEG recommendations. This podcast was prepared by FEG. Neither the information nor opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views or opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of FEG.

This was prepared by FEG (also known as Fund Evaluation Group, LLC), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directly to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202, Attention: Compliance Department. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it. Past performance is not an indicator or guarantee of future results. Diversification or Asset Allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss. The views or opinions expressed by guest speakers are solely their own and do not represent the views or opinions of Fund Evaluation Group, LLC.


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