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Are we living through another stock market bubble? It's a question that comes up in almost every meeting I have these days with executives and financiers. The S&P 500 index of leading US stocks is reaching ever greater heights. SpaceX, Elon Musk's rockets to artificial intelligence firm is planning a record-breaking stock market listing and fund managers are tripping over themselves to buy in.
There are two basic ways of approaching this question. The first states that it's impossible to time the market no matter how expensive stocks look. It's better to stay invested and ride the cycle. The second takes the opposite view. Stock market valuations fluctuate around a long-term average and the best way to generate good returns is to buy when shares are cheap and sell when they are expensive.
My guest today is a committed advocate of the second approach. Jeremy Grantham is the legendary investor and co-founder of the investment firm GMO. He was a pioneer of index vesting and an early user of computers in investment analysis, but he's best known for spotting and betting against some of the biggest investment mania of the age. The Japanese bubble of the late 1980s, the dotcom boom of the late 1990s, and the frenzy that preceded the great financial crisis of 2007 and 2008.
Jeremy has synthesized a lifetime of investing into a memoir. It's called The Making of a Perma Bear: The Perils of Long-Term Investing in a Short-Term World. The book, which he wrote with Edward Chancellor, the financial historian and Breaking Views columnist, is full of zingers. Here, for example, is what he has to say about so-called buy and hold investors. Quote, "These are the same people who watch the locomotive coming down the tracks and in the name of discipline get run down."
So this week on the big view, we're going to talk about bubbles. It's what we do at Reuters Breaking Views. We tap our best sources around the world for fresh insights into the biggest questions in global finance and business and economics. I'm your host, Peter Faren, and I caught up with Jeremy at his office in Boston, Massachusetts.
>> Jeremy Grantham, welcome to the Big View.
very nice to be here.
>> Um so so thank you very much for joining us. Um you there's so much to talk about but you you're obviously a great student of uh of investment bubbles. I think in the book you say you talk about having identified and studied 27 different episodes where the the market got markets got carried away. Um so two questions really to begin with is is really how do you define a bubble and um and the crucial question that everybody is asking at the moment is are we in one at the moment
>> starting at the end yes we are in one and have been for some time. We realized back in 99 1999 that we had to define the bubble because it kept coming up. And so u being slightly nerdy we looked around for a a statistical way of defining it. And very conveniently there was this concept of two sigma, two standard deviations. And uh a standard deviation just tells you how rare an outlier is in a in a field of data. And it turns out that it's every 44 years on an annual basis. A two sigma event u upside and downside is every 44 years. um you get an outlier and in the stock market in real life uh you get one every 36 years which I was surprised how close that was to 44. You know, I'm a great believer that the market is totally inefficient and the fact that it would almost obey a statistical rule that applies to a random series uh as if the market were efficient uh surprised me. But um 36 years seems like for most people a pretty workable definition of an outlier, an extreme event, doesn't it?
>> Mhm. And uh for most people that's won in your investment career. And uh there's some indication that more recently after Alan Greenspan and his troops, they've uh initiated a style of Federal Reserve policy that would make them a little more often. But in any case, they're outrageously easy uh to measure. You have a trend, you have a data series, and you look for the outliers. And uh we we have had a splendid bubble in 98 99 2000. We had uh an a a really splendid housing bubble which went way over two sigma to three sigma one every hundred years or longer. Uh the US housing market basically had never bubbled like that. It it took Greenspan and Bernani working hard to create that situation and very well behaved. Incidentally, it went up for 3 years and then down for three years. that look perfect and uh and then we had the great financial crash which uh also became deep into um I'm sorry of course the housing bust and the great financial crash are the same one and luckily we focused on the housing side of it which was the best behaved of everything. the stock market was not um a interesting bubble. It didn't quite make it. Uh it was the housing market that caused all the damage and and was was really the bubble. And then we've had other bubbles. The most important and impressive was really Japan. Um and um that um had never sold over 21 times earnings. And then it started to rise and rise and ended up at 65. So 65 times earnings. I I like to say that's the example that should make any value manager wake up screaming in the middle of the night because however bad you think the current situation is or the tech bubble of 2000 was, it never came close to the Japanese bubble. The Japanese bubble, I believe, was far and away the most important and uh outrageous outlier of of any developed market in modern times. And their real estate market, believe it or not, was even more impressive.
>> They used to say that the land under the emperor's palace was equivalent to the whole of Manhattan. And as far as we could work out, it it did or was very very close. So that was that was the most most amazing bubble of all time. So we know when it's a bubble and we we're pretty confident in saying this is a bubble. It's perfectly ordinary factual event. And we entered bubble territory quite a long time ago. Um this time four or five years ago uh and it it bubbled nicely u to the end of 2021. the end of 2021, it it checked off every indicator of what you might call super bubble coming to the end. And uh I wrote a quarterly letter on January the 15th, 22 saying, "Let the wild rumpus begin." In other words, very rare for me, the timing is now. The market should go down if it's listening to history.
>> But and and we can get into those indicators that made me so confident. Anyway, the market crashed down. The S&P went down 25, the growth stocks 35, the MAG 7%. And the bond market had the worst day in modern history. Uh, and then late October, they very inconveniently for me introduced Chat Chat GBT. and chat set off an amazing rally in the in the mag 7 plus or minus a few other companies. And secondly, the AI investment became so strong that it dragged an economy back from sliding into a recession. I think in a non-hat world what would what would have happened is the market would have continued to go down
>> and in in 2022 we would have slipped into a mild recession. The market would have gone down uh and maybe another 25% uh and u finished it all and taken it back to tren.
>> Yeah. So that's interesting because then so so essentially what you say because if if you think about everything that's happened since then I mean the other thing that happened in 2022 was Russia invaded Ukraine. We had a whole you know another bout of inflation uh that that sort of set off um uh you know, central banks were um uh raising interest rates then since then we've had obviously um you know, now more recently the um uh the the energy shock in in Iran. But so essentially what you're saying is what's happening is is that the AI investment boom is so powerful that it's sort of it's managed to overcome all those those headwinds. Is that the way to think about it?
>> Yes. And and if you look at the capex you'll see that 2023 is a per compared to 2024 25 26. It's just >> escalated. So it stayed strong enough to kind of shock the system and make it feel like it was uh unexpectedly strong with the corporate profits from the mag 7 unexpectedly strong again and that's a powerful influence on the market and uh now the question is how much of that is permanent how much of their PE move is justified but I think Most importantly, how long can they maintain their profit margins? I have a very strong feeling on that. History says that uh two things are going on here, but the the first one is the the Mag 7 used to represent really strong monopolies in seven different areas. They each control their field. Microsoft, Apple, Google, and so on. And and now they're all bracing to be the top dog in the same field. This is utterly different. The way to do really well for a long time, make fat profits, is to be a price setter, which is to say have a monopoly. They were enormously helped, by the way, in the Justice Department's attitude and the administration's attitude to monopolies. They they weren't interested. So, they were not stepping in like Teddy Roosevelt to break up uh the great standard oil. So, these were not just local monopolies. They were often grand global monopolies. And very nice it was too. And now suddenly they're all stripping for action and they're going to all pile in the in the ring together like some event on on President Trump's lawn. And uh the these seven uh firms are not your average firms. They are ultimately aggressive. We have actually learned to develop a very sharpedged form of capitalism, not unlike the late 19th century where uh Standard Oil and so on went for the throat and and and bullied the railroads into increasing increasing the freight rates on their competitors and so on. I mean, really dirty pull and and we've gotten pretty sharp sharp edged and these guys are the winners. They they go for the throat and and they they've learned to be the winner who takes all. and uh and here they are looking at each other now and saying it's going to be vastly important to be the biggest and the best at AI to be the first one to get the next generation breakthrough in in uh in AI and it doesn't matter if it takes me 200 billion in caps this year I'm going to do it and uh in a sense they're kind of beating their chest like gorillas and and letting each other know that it's to the death. This could be so unlike the last 10 years as to be shocking.
>> So, but just to explore that point a bit. So, so cuz cuz what you're saying is they were all sort of in their own lanes and now they're sort of they're all competing over the same sort of prize and so what so the implication is that they will invest very heavily
>> having monopolies
>> you have an an unmon monopoly you have a uh fight to the death capitalism
>> read in tooth and claw you know this is going to be it lots of blood and um that is not the world that we have in getting used to. Nor is it the world I see. Even though that argument seems so simple and straightforward, I don't see it anywhere. People think all seven of them are going to make obscene profits. Well, that would be new. When has that ever happened in any market ever? Now they had a little go around on the cloud but there were only three and they handled it very carefully and they either intuited that the others were you know take it easy on me I'll take it easy on you and they they shared the market a very well- behaved oligopoly but this is not you didn't hear the cloud people screaming at each other but you hear the AI people doing that.
>> No, you definitely do. So, that's interesting because because obviously one of the the key concepts that I took away from the book is this is this idea of regression to the mean. I mean, you talked about the standard deviations and and obviously the the implicit idea there is that is that um uh you know, kind of the outliers come they come back onto the trend. Um and and I think you talk you talk a bit at a certain point about how you know if that if that doesn't happen then then the system is broken somehow right that then then you're not the capitalism is not attract is not working properly but it's because so so what you seem to be saying is actually if they all invest like mad uh the tech firms all compete with each other like crazy and and and presumably in the process drive down their returns That would sort of be that would be the capitalist process sort of re reasserting itself.
>> Absolutely.
>> Yeah. No, you could say that the capitalist system was about as broken as it gets. And in the period from 2000 to 2025, every industry had an increase in uh monopolistic tendencies. There were fewer big players. the number of firms uh competing seriously shrunk every industry. Sum it didn't matter that much and sum it was a very big deal and uh that in a way that's a bit disappointing. Monopolies are great for corporate profits and the market cap but but slightly bad for GDP growth. So you should have expected to see the GDP slow down a bit and that's what happened. Everyone is so thrilled with the US doing unexpectedly well, but it hasn't done as well as it was. The last 20 years has underperformed the previous 20 years and that underperformed the prior 20 years. There's quite a few reasons for that, but uh sloppy capitalism is one of them and uh it's taken a while to mean revert. From 2000 onwards, you've had a kind of kink in the history. mean reversion worked beautifully for the hund the hundred years prior and and it hasn't worked that well for the last 25 years and and monopoly has been one of them the biggest reason by far and I think sufficient to more or less explain everything and of course monopoly has along with slowing down the GDP it it transfers a lot of money from uh ordinary people uh to the corporations and we've seen their share of GDP go up and it doesn't take much to u disgruntle the ordinary worker and uh if you look at that by the way which we've looked at pretty seriously from 1935 to 75 you you have kind of 40 despite the depression 40 glorious years in terms of of of productivity It's about 3 12% which is a hell of a lot for a big chunk of time and uh everybody got rich but the distinctive feature of that 40 years thanks to FDR and the war and so on is that the poorest quarter got slightly more of the pie than they had and so they didn't grow at 3 and a half% they grew at four or 4 and a half and the super rich instead of growing at 3 and a half grew at three or 2 and a half But that's enough. Everybody was happy and uh everything in the system worked very nicely. From 75 onwards for the 50 years, there's hardly an increase at all in the hourly rate adjusted for inflation. Uh for the typical worker, the guy in the middle has made five or 10% progress. The people at the top have have doubled their money. That was a massive uh difference. huge tr transfer of of wealth from ordinary people to to the rich and um they get very easily disgruntled and the same has happened to a lesser degree in Europe and uh what that results in is pretty tricky um politics and the best way of of seeing that is that they vote against the party in power doesn't matter if they're rightwing like the conservative kick the rascals out. Left wing in in France kick the radascals out. And ironic ironically the shift from Biden to Trump much analyzed by everybody was less than the seven prior elections in Europe,
>> right? Yeah. No, that's definitely true. So, so then um just thinking about the the sort of the period we're in now. um uh you if you you've been a student of of of many of these periods of history, what is the what is the what is the best or most useful period of history you think to to study to sort of get some sense of a comparison or maybe look for some patterns? I think the most useful straightforward comparison is with between the tech bubble and uh the first half of this bubble we're in now. Up to the end of 2021 and even into the break of 2022, it felt very much like the uh internet bubble uh forming and breaking. And a lot of the nuances that we could discuss were were similar and uh made me very confident that in late 2021 uh the market would break and it did. And uh the introduction of chat has also made this uh incomparable. There's no history for this. Here you have a new really powerful, obviously important, life-changing technology AI with unprecedented capex coming into the um middle of the decline of a perfectly ordinary techtype bubble. And now we have after half a decline another inflation of a even slightly bigger bubble and driven by a more definitive new technology uh even than the internet. I think the only one that compares to this is the railroads and
>> and people think a a bubble is a kind of faking out. Uh not at all. A bubble is associated with really powerful real ideas. And uh the more obviously powerful the idea is, the more likely it is to be a bubble. It is precisely the fact that people looked at the railroads and said, "Oh my god, this is going to change life in every way. It's going to increase the power of the economy." They were right completely. But everyone, as as my colleague Edward Chancellor says, you know, everyone built a new railroad. So we had multiple lines from leads to Manchester and everybody lost money and out of that wreckage of of of money however there were lots of lines built and and uh it changed the world and the same in the internet. It's not that the internet didn't have enormous promise. Uh Amazon had just gone up five or six times in uh in 99. But uh they attracted too much money. Um they were too obvious a good idea, a lifecher. And in the decline of 20201, 2002, a rare three-year bare market, Amazon went down 92%. You should check this. It's such a ridiculous number. And then out of that wreckage, it inherited the world as the internet delivered slowly but surely the benefits that people had seen. It's just that they were overeager and pushed in too much money both for the railroads and the internet. And that is exactly as you can see, dear listener, you can see that happening uh in spades almost um today
>> at the moment. No one can just wait and put more money into AI.
>> Yeah. No, that's absolutely true. Um uh well, and that was Yeah. And then we've got the, you know, I was talking to someone the other day about some bankers about the SpaceX IPO and and the the sort of the the extent to which people are falling over themselves to put money into that IPO regardless of the valuation, regardless of the the governance, you know, issues or whatever. Um, it's just it just sort of confirms that confirms that whole point. Um,
>> by the way, the vulnerability, the vulnerability of these people to a technological uh breakthrough of some other kind, you know, a new a new type of of chip, a new type of technology. Um, there doesn't seem to be uh to me a death grip on on this technology the way people are assuming. Just as an aside, um you you were a bit of a pioneer in terms of quantitive investing and using computers uh in in the investing process. You talk at a certain stage about spending a large part of your budget on a on a on a computer. I just wonder sort of if you were um you were starting out again today, how would you be using AI in the investment process?
>> I'd be using it. Yeah. as much as I could pushing the boundary to see if there was an advantage to be had. And the point that I've been making recently is how quickly a leading edge advantage becomes doing business as usual, a cost of doing business. And when we finished paying for our computer, which we choked on, we had we it helped us have a an advantage in calculating everything for a couple of years, particularly over uh smaller firms like ours. And um and then everyone had a computer. It it was just a cost of doing business. All you should expect to make in that situation is a modest return on the capital involved. And and we probably did. Other than that, there was no upward pressure on on profit margins at all. Why why will that not be the same in AI? If you look out 10 years and then turn around and look back, everyone will have AI. Everyone will be buying the service they can afford and the com competitive advantage will have been competed mostly away. It will be something you have to do. If you don't have an expert on on your staff, you better get one. And uh everyone will have their expert. Everyone will be buying the best service and uh or two and uh it it won't be a material advantage. It certainly will be no pressure on profit margins. Everyone thinks that just because we might have a breakthrough in productivity that equates with a with an enormous breakthrough. We will have a breakthrough in productivity. But that doesn't mean you have a breakthrough in profitability. If everybody has a brilliant new machine, everyone will be productive. No one will make particular particularly good money. I think that will be the case in AI. We'll be extremely productive with a whole list of advantages and disadvantages coming out of that. But it will not it's not conducive for high profits and and people misunderstand this completely. Now of course AI has other problems. Uh the increase in productivity throws a lot of people out of work. There may be redeployment opportunities for them that are respectable and decent paying but there may not be. And uh if they if the productivity is faster than we can absorb the new jobs, you will get a lot of social unrest and a lot of push back and a lot of strange things that we haven't any real experience with. By the way, not novelty is uh from a predicting point of view, novelty is uh difficult.
>> Yes, exactly. Um, one thing I just uh I just wanted to get your views on a bit is again sort of interesting idea in the book is is this concept of career risk. This idea that you know that that that many people particular I guess particularly fund managers in this example you know have to sort of follow the herd because if they stray for too long they eventually they get fired. I mean you had some you you sort of stood out from the from the pack for for for quite long periods. How did you how did you manage to resist that? How did you manage to to avoid the uh the sort of the consequences of being an outlier?
>> Yeah, we were a private firm and if we chose to lose half our business quickly that that which we did that was our business. Now
>> right
>> after that experience it became gloriously obvious that no big commercial firm could do that.
>> It uh even though we won by the way and much more business came back than we lost and
>> we went
>> this is after the this is after 99 2000. Yeah. Yeah. Yeah. the the the tech bubble. In the tech bubble, we went from uh 30 billion to u 20. When everyone else was going from 30 to 50 or 60, we went to 20, which is nearly impossible. It was it took talent to go backwards so so rapidly. And then in the break when they went back from 50 to 35 or 30, we went from 20 to 22. So we closed the gap a bit. And then in the following four years we went from 22 to 165. So uh we enormously profited from it. But if you're if you're a Goldman Sachs or a JP Morgan, you you can't afford to play that game.
>> And and the problem incidentally is the uncertainty of long-term market moves. It's greater than the client's patience. That's it. Once you once you've got that one line in your head, you know, uh, if you're a big company, you're never going to tell your clients to get out of the market. You're always going to be bullish and therefore the general individual investor and the institution will never receive serious bare market advice from either the from any of the institutions. They never have. They never will. It's simply terrible business that they can't afford. Only only a an independent firm with a willingness to be u exposed to the possibility of a semi- disastrous drop in business. You know, we were only wrong for two and a quarter years. We had done pretty well through 97. All we did was under We didn't even lose money. Of course, we were making 6 or 7 or 8% a year, just much less than than uh the hot shots and much less than the market. 6% a year, um less than the market. And that was enough in two and a quarter years to lose half our clients, none of whom came back. Um so, who who wants to play that game? Um everyone wants the quiet life. I I strongly recommend you don't do it. Um but if you could stand your ground, I think history will say it's been a winning strategy.
>> Yeah. Yeah. Um I want to just want to uh talk a bit about um your your whole stance on on environmental issues. Um, you know, you you devote a fair chunk of the book to it and you you described the way you were sort of you kind of, you know, you had a a sort of the way you you were convinced that that this was um this was this was an important kind of a critical uh issue. Um, you've given very generously to environmental causes. You've you've you've tried to influence debates. Um, I guess the probably the feeling is at the moment that there's a bit of a the consensus has moved away from from from that position. I just wonder how you how you think about that and and does it change the way you think about the problem, the challenge.
>> Yeah, that's desperately complicated question really.
>> It is. Uh I I yes I I suppose I have to think of myself as a fanatic on on climate change because I I consider it uh life-threatening for for our species. I think uh in as little as 40 50 years we could be in a very bad place and it really behooves us to shape up and and try a little harder. And in terms of of giving, basically the great the great majority, well over 90% of everything I have has gone into into our foundation for the protection of the environment. And um and and we try and operate there as kind of shock troops. We we want to be making aggressive new investments, helping new groups get going, whether they're profit or nonprofit, uh helping to pioneer the research and um and helping new enterprises get off the ground that can play a big role. technology is perhaps the last best hope because it doesn't appear that we're sensible enough as a species to want to actually sacrifice to do the right thing for our grandchildren. Screw our grandchildren, you know. Anyway, so the technology is is dynamite. Wind, solar, storage have all made much more progress by the way than we thought. When I first started to write some papers 15 years ago, we we never expected storage in particular to be oh it perhaps three times the current price would not have surprised me. It it's come down to less than a tenth since I wrote my first paper. Less and it's still falling like a rock. So you you invest in it, it'll get cheaper and cheaper. And you do um you invest in fossil fuels, it'll get more and more expensive. Not to mention, as has been stuck up our nose recently, the political exposure, the dangers of being dependent on oil, the this oil crisis. People don't realize we've been floating along uh on on the reserves that were built into the system and the lags. It took weeks and weeks for the last oil tankers to just finish their journey and unload in Japan. You know, all of these things borders borders time and our reserves were pretty good depending on which country and and now we're coming to the end of that.
>> Yeah. Well, and maybe that's a it it gives a jolt again there. sort of a maybe there's a sort of green new deal there in terms of terms of stimulating once again some of these um these these sort of more environmentally friendly
>> the story was the story was that Trump should be considered for the great uh environmental prize that they give every year because no one has ever done this much good for long-term green planning. Anybody who hasn't taken on board the vulnerability of oil and gas compared to the security of of solar, wind, and storage is brain dead. They all have and they're all planning accordingly. And um sales of EVs in in Europe are up 40% year-over-year. Now, they're not up that much in the US. The US is displaying a almost unique uh ability to miss the obvious and be self-destructive.
>> Yeah, just I just want to just just on this topic and and just maybe just to finish up um and forgive me this is a bit of a conceptual question but I'm just sort of interested. It just seems to me this whole issue is is um is one where it requires a completely different uh sort of analytical approach from the way you might study financial markets. We talked about you know multiple standard deviations and and and regression to the mean. This is something where you're looking at the future and saying the future is going to be completely unlike the past and uh but nonetheless we must we must prepare for it. I just want to sort of analytically what how do you sort of convince yourself that you're that you're right about this?
>> I would say the similarities are that they're both datadriven. You you look at the data and you try and make the logical conclusion. There there is data on CO2 particles in the atmosphere. Um and uh they've climbed remorselessly from 280 parts per million to 430. And uh we think if we really try a bit harder and the technology stays good and improves uh we'll be lucky to peak out at 550 parts per million. And uh incidentally we have to get that back to 300 or the ocean levels continue to rise slowly all the time into the dim dim dimistant future hundreds and hundreds of years. So you have data you know the effect and they've known the effect for over a hundred years that CO2 has as creating a blanket to trap the heat. The same with methane and nitrous oxide. they know precisely uh reasonably precisely uh what is going on. So you can work out if we keep doing this then this will happen. And now what are the consequences of a steady rise in temperature the air carries more water vapor? That's just physics. We carry about 15% more water vapor than we used. What are the consequences of that? Well, one of them is more heavy downpours which we can see in the last two or three years. last couple of years, we reckon it's cost the global GDP about half a percent. We used to worry about it 20 years ago, but it didn't actually cost any serious money and now it does.
>> Preventing
>> preventing all these natural disasters, fires, floods, and droughts, it's uh and occasional ocean floods costs a lot of money. And then rebuilding when you've had the disaster, and it's not surprising. Oh, and and insurance costs. And insurance are like the canary and the coal mine. They're beginning to chirp or drop dead depending on your interpretation of the canary. I don't know whether they chirped before they dropped dead.
>> That's Yeah, that's something we'll have to check. Um Jeremy, we have to uh we could talk for much longer, but we have to we have to leave it there. So, um but I want to say thank you very much for uh for taking the time to to join us. was fascinating
>> and yes it was a lot of fun but you have to let me end with one sentence really and that is
>> of course
>> what one what kind of what have I learned over my career I have learned actually quite long ago that the market is a coincident indicator it is not a predictor of long-term streams of dividends and earnings discounted back that's all complete nonsense what the market does is if you're nice to me today I multiply you by a high PE. If you're nasty today, like 1974 with an oil crisis and inflation, I'll multiply the the depressed earnings by a depressed PE, double counting. And people say, how is it possible that we've had a war and the market went up 5%. Since we've bombed Iraq, everyone can see that that's nonsense. My response is, "Nah, if you view it through my coincident eyes, you just say, "And what about earnings? Oh, they're rising nicely. That's why the market's up 5%." End of discussion.
>> Yeah, indeed. Thank you. Anyway, on that on that note, we'll leave it there. Appreciate it. Thank you very much.
>> That's all we have time for this week. Thanks to Jeremy for that terrific conversation. And as always, thanks to you for tuning in. The show was produced by Oliver Tazich with the help of Mike Copeland and John Hodgej in the studio in London. You can check out a new episode of The Big View every Tuesday. Don't forget to tune into our sister show views room every Thursday and all the other great podcasts from the Reuters team to get in touch with feedback and suggestions for future shows. Email us on Breakingviewtr.com. That's Breakingviewtr.com. If you like what you heard, please rate the show and leave us a review. Breaking View subscribers can read all our views on big global stories at breakingviews.com or you can read a sample of some of our columnist work every day at reuters.com.