Jeremy Grantham on global economy



Jeremy thank you very much for joining me it's a real pleasure to have you with us and as I just mentioned want to start with some of the the broader macro points and when you see people make the argument that just simply because of where we are in the current market expansion a decade on from the low that that should mean would you have pullback but what do you say to that thought process I was really hoping that the Magnificent bubble ending to this as there had been to the three great recent experiences which were the housing bust mm tech bust and Japan they were all classic they ended with euphoria and a rapidly accelerating stock market there easy you know they'll be followed by an abject decline this one I was hoping that would happen doesn't look like it will and therefore you're going to have a decline of a different nature I wrote a paper three years ago called not with a bang but a whimper mm-hmm which I suggested that this the trendline PA that used to be 15 and has jumped for 20 years to 20 or 21 which is a a lot higher is probably not going to go back the way the value managers would love it to in a hurry it may move back slowly and steadily and I think it will move back perhaps two-thirds of the way but it will take 20 years not the usual five six or seven years and so this will be limping along three steps down two steps back it's not a typical experience but it looks increasingly likely to me and when we see that the Fed has pivoted and become relatively speaking more easy once again and the ECB has done that too today does that make you think that US equities are attractive for the next couple of years again no I'm afraid not deep you can't get blood out of a stone they're these prices even the the Bears the Bulls and everyone in between a GMO agree that over a long horizon like 20 years us market will be delivering two or three percent real and for the last hundred years we're used to it delivering perhaps six percent real so this is a fairly painful it's not the end of the world but it's going to break a lot of hearts when we're right three percent a year is going to seem terribly disappointing now if you stay away from the US which I absolutely would in emerging markets I suspect you can do even better than six maybe seven or eight if you tilt it towards value and will come to emerging markets moment just back to the US so that's your sort of 20-year forecasts your five or six year forecast is for for actual declines in US equities is that right I I would think declines are more likely than the other and if the market is up it's highly unlikely to be up a lot anything that's the key thought and the main reason what valuations of those stocks valuations and the fact that the economic cycle will clearly not be in our favor the reason we've done so well for ten years as we had an enormous pool of unemployed this is not trendline growth this is taking 1% a year almost out of the unemployed pool and sticking it into the marketplace and that is boosted our apparent growth rate by almost a point a year this economy does not have a trendline growth of 2.8 or 2.5 it has a trendline growth of about 1.5 and we've been boosting it on a cyclical basis and people if you keep anything up for 10 years in the stock market people think it's the trend line but it isn't and so on that topic of the economy rather than the markets in in the US do you theory session and there any signs you see that suggest one is in on the horizon in the next year or so I think people have been worried about recessions for two or three years I've taken the view that there was enough labor hiding in the participation rate we had frightened people away out of the workforce but on the numbers they were there lurking around somewhere and in the last two or three years we have quite effectively drawn back about one and a half percent people who were dismayed and weren't bothering now have registered and and show up in the employed or the unemployed and that game may still have a point and a half left and a point and a half could keep us going for another couple of years or it could stop tomorrow the point is what we cannot do is we cannot grow at the speed we've grown for the last ten years because the labor pool is simply not available and and the underlying productivity has not been there for a long time and what about the global growth outlook clearly fears about that had surfaced in the second half of last year do you feel like they're adequately priced in now or is there one of my problems is I always like to think longer term apparently than anybody else but can be served you very well can be inconvenient but the growth rate of the population of the developed world is have gone to hell and and the population eventually will start to decline in the next couple of decades everywhere in the developed world you need two point one percent fertility rate to replace and the u.s. just announced one point seven six fifteen percent below that it's below in every developed country this really has an effect on on the top-line numbers and there's no way around that it's not going to change ever I I would guess so we have lower workforce growth we have an aging population which doesn't help and the growth rate of the of the whole developed world is settling down maybe one and a half in the u.s. maybe one in Europe much lower than people seem to get their brain around and outside Europe I think the population growth is I am certain the population growth rate is also slowing and so generally speaking we can look at a world where the secular growth is getting slower that's the long-term picture over the next two or three years I suppose the honest statement is your guess is as good as mine fair enough and let's dive into Europe but a little bit more as as we were discussing the ECB has downgraded its growth forecasts from one point seven to one point one percent is there a bigger problem bubbling under the surface there could they face another existential crisis like they did in 2010 to 12 anytime soon the downgrading by the way is getting awfully close to what I think is their long-term growth rate about one no one else believes that but I'm pretty confident they will eventually so they're going to have to learn to live with a low growth rate they have of course other problems of immigration which has been rattling the cage so viciously for the last three or four years politically and that is highly unlikely to go away Africa is the only place on the planet where the growth rate in population is still prodigious and the UN says they're going to produce an extra three billion people and the rest of the world will be declining now there won't be three billion eggs for Africans but there may well be one one and a half or two billion and there will be immigration waves that make the recent experience look tribute and that's going to stress out the European politics and I think that will be the biggest factor and as they get stressed out it produces opportunities for the big players Russia or China to misbehave or behave about it but it increases uncertainty on the topic of brexit soon after the 2616 referendum result you wrote in a in an op-ed or a comment piece that you thought there was a roughly one in three chance that the UK might end up turning over its decision somehow or someway what would you say the chances of that it's not amazing that that one in three has kind of seemed about 1 in 3 right up until today right I mean how is that possible why haven't they made it 1 or 0 by now mm-hmm it's everyday seems to be a replay of the day before it's Groundhog Day writ large raised it but I would guess yes it's a one in three chance that they'll have a revote and change their mind and and they wish it were two and three and and the we were just talking about this you're in fact going back to London and will likely be there for the 29th to March do you think that it gets delayed either ways the chance of that higher even still I'm not an expert at this so you tell me but to a layman it looks highly likely two and three that it will be delayed and and and maybe then when it is delayed the odds of a revote and a change of mine might rise a little bit from the one and three let's switch to something that I know you're optimistic about and that is emerging markets your view what we talked about that your expectation of a US equity market decline over the next five years what about for emerging markets yeah I think emerging markets is the future they have the people and faster growth and increasingly they direct their efforts in a very intelligent way in China in particular has is cranking out their percentage of people taking engineering and hard science so they're now in total and much bigger country but in total massively out producing the u.s. in the number of engineers and scientists and as that goes on it makes it difficult for them not to take the lead in in one area after another in science and they are dedicating their resources to artificial intelligence they've already dominated the the green energy wind and solar in terms of manufacturing and installation so they're becoming formidable competition in India to the fastest growing country in the world that's now taking up the mantle of China the developed world with its miserable growth rates has to have to compare with India growing at over six percent a year and on the topic of China given those huge leaps as you mention it's made in science and innovation is it now inevitable that it will one day be bigger than the US economy completely inevitable but what I should add about emerging is in the end after all these conversations it always comes down to price and they are much they're always on average on average they're a bit cheaper they are much cheaper than normal and their currencies are also cheaper than normal I'm a great believer in the crude the economists judge of inflation and the Big Mac index it's comparing quite effectively it was a joke to start with but 40 years later it has 40 years of data and 60 80 countries and I think it's a pretty decent general idea of inflation and and the currency comparative value and we had very fancy currency comparisons in our firm and a thousand other firms too but I wouldn't hold my breath I think I think the Big Mac index the cost of buying the Big Mac and and French fries in all the countries of the world I wouldn't bet against that right beating us and what that says is it's always been 20-25 percent cheaper to buy a Big Mac in an emerging country but now it's half price and that movement back from 50 cents to 75 percent is 50% more and you mentioned that it's inevitable you think that the Chinese economy will be bigger than the US one day what therefore one day in the very near future house how soon it's a matter of a handful of years and that's why you're measuring and how you measure and and so what therefore do you think is the motivation for the current US trade war with China and will it be successful I have to take the Fifth Amendment on this or something like that it's impossible to anticipate to guess what the motive side of the current administration which is what you're asking well what would the effectiveness it won't be won't derail Chinese growth it won't alter the balance of power which is in irritate them and dislocate a quarter or two in the long term of course this will all be forgotten and it's insignificant that's the good news I'm interested that you're quite so bullish on China in this way because you were mentioning how important you think demographics are and China's demographics aren't now as attractive as somewhere like India's is that a concern for you well it depends what you mean by a concern I have I consider a slow growth in population our last best hope I think if you want to have it end up as a sustainable world where you protect what's left of your biodiversity you can't march irresistibly into the future with the growing population each of us eating more and using up more plastic toys it simply does not compute and so I welcome declining populations and India too will be declining in 50 years let's talk about that while you're saying then it's because you're so passionate about climate change in the environment if there was that there are a lot of unbelievers out there on this topic today more so than perhaps there was a decade ago if there's one statistic or story you point to to convince people of their wrong position on that topic what is it first of all there aren't more today the last since the election of Trump and particularly the last half of last year there's been a big move in the recognition of the problems in the u.s. so that's a huge change it's like a log jam that's broken plenty of hard-hitting reports finally the scientists are saying what they actually believe and and the recognition of all of the fires and the terrible change in the weather and the climate and people are picking that up it's now 73 percent of Americans up from 63 in a few years recognized that the climate is an important issue and that it's warming and that it's dangerous and and how do you affect real change I know that you've donated over 90 percent of your wealth to the Grantham foundation for the protection and environment GMOs also launched a climate change fund to effect real change does there need to be innovation that ultimately is also profitable in the long term rather than just goodwill yes I don't think goodwill will get this done sadly Homo sapiens is not rising to the occasion and and maybe never would have done long term issues and not what we do that well so we need innovation luckily there is a massive amount of innovation that there's die on climate change on green energy on battery storage electric cars electric planes in the not-too-distant future and and we will be able to to change for the better almost every area cement steel petrochemicals the question is only can we do it fast enough to prevent damage and the answer is no we've already got a lot of damage we will undoubtedly have a lot more damage the question is can we protect enough of our agreeable planet to for our grandchildren to have a decent life and that I think is about a 50/50 bet seen through my eyes and and do you feel like enough industries are doing all that they can when you see the financial industry moving nobody I just took a damn plane to Chile and I have a guilty conscience and I'm struggling with my wife as to whether we can take that many more jet flights and yes we plant forests all over the place but still it's a really tough ask of human beings to to be as green as they could and should be so what is the one thing that that everyone could be doing more is it donating some more of their you've got to have government this is a big scale big problem you've got to have Rd you've got to have government the best thing that we can do as individuals is lobby our politicians to be more sensible let them be aware that the weight of our concern and that's happening particularly in Europe with that wonderful young Swedish girl but people are responding more now than they were and that's what we have to do we have to get our our senators on our congressman and Lobby them in the hallways you were you mentioned you took a flight and you felt guilty about that you drive a tester though so you don't need to feel guilty when you're in the other not very guilty do you like test the stock or is it oh is it no I have nothing to do with Tesla stock and never did it's an extreme demonstration of growth and I'm not saying it won't do well there are stocks like Amazon that always gross toxin have done splendidly well but I'm a value specialist so it's not my kind of stock but it is my kind of car is it's a extremely entertaining to drive just to round off on on the climate change issue you mentioned you felt they've been big progress in the u.s. in terms of people's understanding and backing of the course what do you think specifically about the the latest development in the the green new deal and do you fear that there is now a left versus right politicization of an issue that you believe is a political there's certainly been a left-right division in the US for the last 15 years which is really sad because most of the good environmental work was done by by Republican presidents like Teddy Roosevelt and so on and it's a real shame that that has happened and unnecessary because conserving a beautiful planet would seem to be pretty conservative and it hasn't played out that way for complicated and perhaps random reasons and I've forgotten the rest of the question as in has it become too political to an it to an extent that it will damage the cause the the new the new proposals are to a to extreme to expect it to actually translate into any chance of implementation however when you have been drifting to the right for 50 years it needs a good slap in the face to wake people up and begin the pendulum move back and one way to state it is to take a big jump so this is really drawing attention to the fact that we've had a remarkable drift we we end up in a world where the Environmental Protection Agency is run by coal lobbyists I mean it's 10 years ago you couldn't written a novel aware things like that would have happened it's so intrinsically unbelievable horrific some other progressive policies and announcements of recent weeks have seen in different forms a call for more taxes to be paid by the wealthy where do you stand on that do you think that that that is a is something that should be done even if the exact mechanics of it uncertain well I arrived in 1964 in America was a fairly equal place with fairly rapid mobility between socio-economic classes and it's basically since 1975 gotten stickier and now it's worse than the UK I mean who would have imagined that in 1964 and we have one of the most unequal countries in the developed world we're not far short of the Brazil's and Chile's and closing the gap so we have a dreadfully unequal society where the average worker for an average hours work has not made much increase in real income since the mid 1970s for heaven's sake and if you don't give the average worker a decent wage where is your growth going to come from this is you know you could quote Henry Ford how are they going to buy my cars unless I pay him a decent wage well we're falling foul of that so if you need to distribute the income more evenly and and the concentration of income and wealth in particular in the top point oh one and point one and one percent has just alarmingly increased it is amazingly economically ineffective rich people don't spend their marginal dollars poor people spend them instantly you get a healthier economy if more of the pool goes to the to the poor then does today so yes you have to tax the better off particularly the super rancher one of the other philanthropic areas you're passionate about is is a sort of truth issue journalism and communication and you've donated in that direction as well how worried to you is the trend of of misinformation or fake news whatever you want to call it is that as as big a crisis as that is the environmental one in your mind at the moment no I think the environment will want transcends everything but but I got to be an environmentalist the hard way by looking at the data and having it beat me on the head I spent most of my life in them in America I'm a Brit but I I spent 30 years notionally as a kind of centrist the old liberal Republicans that went out of business long ago and I'd vote for anybody with a green policy mm-hmm but the data has become so extreme that just looking at the data has dragged me into tax the rich move the income in a more efficient way so that the poor people have money to spend for a healthy economy and for heaven's sake tax carbon so that we can start the entrepreneurs working on changes they're all itching but they have no resources and no one will fund them because it's not clear how they're going to make money but once you have a tax on carbon and a credit for saving carbon the ingenuity that will spring out of the American venture capital industry will be prodigious American capitalism I think is in a rather bad spot it's a bit lethargic and monopolistic and entrepreneurial compared to the old days but the great exception is venture capital American venture capital is vigorous it dominates the planet along with Israel oddly but there's a lot of a lot of Hope if you can release the entrepreneurial and and inventive spirit and a carbon tax would do that to work bring it back to the macro in the markets Jeremy as we as we round things off is there one emerging market that stands out ahead of the rest for you and on a five to ten year I I don't I really don't do that but obviously India has fast growth and it's a fairly stable Society so if you take a long ten 20 year view it's easy to imagine that will be hard to beat and and very few developed countries would do that how China will play out it's always hard to say they have many advantages and and they can address redirect capital in an area where they want to be but with the slowing population their GDP growth will perhaps start to tail off and and who knows what will happen with their kind of government I don't and and a final question on the US we've gone through your your outlook of US equities even where you see value is a value investor the most famed value investor do you still think that those value stocks within the S&P 500 will also underperform it in the next five years I think they'll do less badly but they're not cheap enough to do well and you have to be very careful these days what you mean by value the old crude measures of value that used to work pre the year 2000 won't necessarily work there too many programmed into the computer models and what edge they used to have which was decent has probably gone away so you have to be very careful how you you have to have a broad and complicated an accurate measure of value and that that's not easily done it used to be you showed up for work you bought the high yields on the low Pease and you want life was good and now now you can't do that Jeremy it's been a real pleasure sitting down with you today same for me a treat for us true for our viewers thank you very much thank you you you




Comments
  1. He contradicts himself on demographics as he claims the same set of circumstances will lead to a negative outcome in the West, yet does not take the same into account when assessing his predictions for the East.

  2. I guess he didnt read the data on no warming in 20 years, increasing polar ice volume, no change in rate of sea level rise since 1860s…. Foh

  3. Loses credibility as a climate-change alarmist and population-bomb alarmist. But at least he's right about the coming long-term decline of the U.S. stock market.

  4. Idiots have been saying the emerging markets are better than the US markets and they've been wrong time and time again with few exceptions. Emerging markets in third and second world countries are by definition unstable. saying China will overtake the US is laughable as a dictatorship or near dictatorship never produces anything. as evidence of this look at China's and Russia's continued thievery of intellectual property and military secrets as they cannot invent anything on their own but merely try to steal it to stay competitive. Command economies never succeed overtime therefore China with a declining population will be in trouble over the Long haul.

    I have been right every time of the last decade and make far more than any stock market pundit with my real estate portfolio with much lower risk. The Stock market is a corrupt rigged game whereby fund managers take 60% of the investment and the investor only gets 40%. Just do a compounding cost calculation on this and you'll see what I mean.

  5. I respect Grantham for giving 90% of his wealth away even though he could give away 99% and still be fine; whereas Buffet and Gates cling to their wealth.

  6. I upped the playback speed so I could listen to everything. He's surprisingly knowledgeable and straightforward. He's honest about needing to tax the rich and help the poor. He's right about climate change. Greenland had some rain over the winter, Siberian permafrost is starting to release vast amounts of methane, these are the feedback loops climate watchers have feared. Feedback means warmth causes more warmth, melting causes more melting.

  7. The stock market isn't going to grow 2-3% annually in the next 20 years, it's going to fall sharply. During the 14 year period 1968-1982, stocks fell 60%, and it will happen again because we're in a bubble again.

  8. I am sorry he was so misled to give up his money for a non-problem, global warming or climate change, whereas we have lots of real problems right now as basic sanity of poor people… Climate change has not been a problem since earth started and it is not now that it is getting any worse, for science's sake!

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