A History of Stock Market Bubbles w/ Legend Investor Jeremy Grantham (TIP650)

In this episode, investor Jeremy Grantham discusses the historical patterns of market bubbles, emphasizing the dangers of high valuation multiples predicting economic downturns rather than prosperity. Reflecting on past market cycles, he highlights the irrationality of markets, citing examples like the 1929 crash and the Japanese bubble of the late 1980s. Grantham also explores the current market landscape, noting the impact of AI and the concentration of gains among a few tech giants. He warns about environmental challenges, advocating for urgent action on climate change and toxicity, while expressing optimism about technological advancements in green energy.

• The speaker began their professional investment career in 1968, transitioning from a consulting background.
• Initial experiences in the stock market involved a "Super Bubble" in micro-cap stocks, which were volatile but offered significant short-term gains.
• A key lesson from this period was the importance of timing and the risks of being too early in market trends.

"1968 was when I got into the business in terms of a professional career. I'd done quite a bit of investing as an amateur before that."

• The speaker transitioned to investing from consulting, seeking a more dynamic and engaging career.

"There was a Super Bubble in micro cap... the little stocks were doubling, quadrupling, and then blowing up fairly regular intervals."

• The micro-cap bubble offered high returns but was extremely volatile, teaching the speaker about market cycles and risk.

"I scrambled out at 40 down from 100 and went into a similar brilliant idea, Market monitored Data Systems... it was just about 15 to 20 years too early."

• Early investment in innovative ideas like Market monitored Data Systems highlighted the risk of being ahead of market readiness.

• The speaker discusses their interest in market history and the patterns of market behavior over time.
• Emphasizes the market's poor track record in predicting future economic conditions, often being overly optimistic before downturns.

"If you look at the broad sweep of History, you have to be impressed with how incredibly bad the marketplace is as a judge of the future."

• Historical analysis reveals the market's consistent failure to accurately predict economic downturns.

"In 1929, it's the highest PE on trailing earnings up till then in history... it was projecting the worst 10 years in American economic history."

• The 1929 market peak was followed by the Great Depression, illustrating the disconnect between market valuations and future realities.

"Japanese Market had never sold over 25 times earnings until it did in '87, by '89 it was... 65 times earnings."

• The late 1980s Japanese market bubble showed extreme valuations that preceded a prolonged economic stagnation.

• The speaker addresses the recent rally in US stocks, particularly since the fall of 2022, driven by advancements in AI technologies.
• Highlights the concentrated growth in the "Magnificent Seven" stocks, which have heavily invested in AI.

"Chat GBT comes out and yes to the Insiders that was spiking for a couple of years... AI was everywhere and the Magnificent Seven kind of sprang to life."

• The introduction of ChatGPT and AI technologies spurred a significant market rally, particularly in tech stocks.

"AI is serious... it will change the nature of warfare completely... it will be an alarming tool for governments."

• AI is recognized as a transformative technology with significant implications for various sectors, including defense and governance.

"It's clear that that produced the oomph to take this Market that was dwindling down and produced some fairly spectacular performance particularly of seven stocks."

• The AI-driven enthusiasm revitalized the market, leading to substantial gains in specific sectors.

• Discussion on the impact of interest rate changes and the potential for a recession.
• The relationship between unemployment rates and recession likelihood is emphasized.

"One of the best indicators of recession is a modest upturn in unemployment... when it ticks up 0.6%, it is followed 100% of the time historically with the recession."

• Historical data suggests that rising unemployment is a strong predictor of impending recessions.

"Today it's 0.7%... nicely above the level that historically has always predicted a recession."

• Current unemployment trends suggest a heightened risk of recession, according to historical patterns.

• Historical trends indicate that certain economic indicators, such as the gap between short-term and long-term bonds, consistently precede recessions.
• The speaker emphasizes the inevitability of recessions following specific economic conditions based on historical patterns.

"You've always had a recession in these conditions... this isn't one or two times this is eight or nine times out of eight or nine you have always had a recession in modern times."

• The quote highlights the speaker's confidence in historical patterns predicting economic downturns, suggesting that current conditions are not an exception.

• The unprecedented level of government stimulus in recent years, particularly during the COVID-19 pandemic, has distorted traditional economic indicators.
• The Federal Reserve's policies and government deficits have created a complex economic environment that may resemble historical economic bubbles.

"The government policy of being stimulatory has gotten more and more intense with the passage of time... once you break out of any historical reference point it's hard to know what will happen."

• The quote underscores the uncertainty introduced by modern government interventions, making it difficult to predict economic outcomes based on past experiences.

• There is a weak correlation between low interest rates and economic growth, as demonstrated by historical experiments.
• Increased debt levels, facilitated by low interest rates, have not necessarily led to higher GDP growth.

"Increasing the level of debt did not apparently stimulate the economy it slowed considerably."

• The quote illustrates the speaker's argument that higher debt levels, encouraged by low interest rates, have not resulted in the expected economic growth.

• Market declines often occur after the first interest rate cut, contrary to the optimistic expectations of many investors.
• Historical patterns show that optimism following rate cuts is often misplaced.

"Most of a market decline occurs after the First Rate decrease... we get enthusiastic about the First Rate cut and then we're back to the rate races."

• This quote emphasizes the recurrent mistake of investor optimism following initial rate cuts, which historically precedes further market declines.

• The speaker shares personal experiences with market timing, highlighting the challenges of predicting market peaks and troughs.
• Historical examples, such as the Japanese market and the tech bubble, illustrate the difficulties of early market exit strategies.

"I was three years early in Japan... and Japan was like a monster it just wouldn't stop growing in the stock market."

• The quote reflects the speaker's experience with early market exits, acknowledging the difficulties of timing and the eventual validation of their caution.

• The modern market is characterized by significant monopolistic power concentrated in a few large companies, particularly in technology.
• This concentration of power has led to higher average price-to-earnings (PE) ratios compared to historical norms.

"The Magnificent Seven really are international monopolies they have kind of Death Grips on their programs on their telephones you name it."

• The quote highlights the dominance of a few companies in the modern market, which influences market dynamics and valuation metrics.

• There is potential for regulatory intervention to increase market competition, similar to historical actions against monopolies.
• The future of market dynamics could vary significantly based on regulatory decisions.

"We may however allow the big corporations to kind of run the Run the game... or we may interfere and require a greater level of competition."

• This quote outlines the possible regulatory paths that could alter the competitive landscape of the market, affecting future market behavior.

• Every major bull market has been accompanied by claims of fundamental changes in the economy, often leading to excessive optimism.
• Historical innovations have frequently been cited as justifications for market exuberance.

"Every great bull market was accompanied by claims that it was entirely different... the internet would change everything drive away the dark clouds."

• The quote reflects the recurring theme of perceived economic transformation driving market optimism, often leading to speculative bubbles.

• The discussion highlights the cyclical nature of markets, particularly focusing on how successful companies like Amazon experienced massive growth followed by significant declines.
• Historical patterns of financial bubbles, such as those around canal building and railroads, are compared to modern technological advancements like the internet and AI.
• The conversation suggests that new, brilliant ideas often lead to financial bubbles, followed by a bust, before stabilizing and contributing to serious progress.

"Amazon went up multiple times in 99... then declines 92% before rising from the dead again and inheriting the world that is the nature of the Beast."

• This quote exemplifies the extreme volatility that can accompany high-growth companies during market bubbles.

"If you go back in history you find there was a huge bubble around the canal building in Europe... it changed the economy it changed the world."

• Historical examples are used to illustrate how significant innovations initially cause financial bubbles but eventually lead to long-term economic benefits.

• AI is seen as a serious and transformative idea that is likely to follow the historical pattern of initial hype, a financial bubble, and then a bust before maturing.
• The potential for financial loss in AI investments is acknowledged, with a cautionary note on the speculative nature of such investments.

"To have AI be serious and it is serious anyone can see that it's a very serious idea... but if it doesn't have a glorious bubble up front and then bust and then regroup and be serious it will be the first such event in history."

• The cyclical nature of innovation-driven markets is highlighted, suggesting that AI will likely follow a similar pattern of boom and bust.

• The conversation challenges the assumption of perpetual compounded economic growth, pointing out the limitations imposed by finite planetary resources.
• The unsustainable nature of current growth patterns, particularly in the use of fossil fuels and rare metals, is discussed.

"You cannot have sustained compound growth on a finite planet... we're compounding the use of fossil fuels, we're compounding the use of fuels all the way up to lithium copper Cobalt."

• This quote emphasizes the environmental and resource-based constraints on continuous economic growth.

"In the last 10 years we've produced as many chemicals as the previous 100... you generate enormous waste enormous stress you drive out nature."

• The rapid increase in chemical production is used as an example of unsustainable growth practices.

• The decline in insect biomass and the dominance of human and domestic animal biomass over wild mammals are discussed as indicators of environmental degradation.
• The potential consequences of biodiversity loss on human survival and ecosystem functionality are highlighted.

"The biomass of insects is down somewhere between 50 and 75%... they pollinate 70% of what we eat."

• The critical role of insects in ecosystems and agriculture is underscored, with a warning about the impact of their decline.

"96% of all mammal life is humans and their pets and 4% is all the wild animals."

• The disproportionate biomass of humans and domestic animals compared to wild mammals is presented as a stark indicator of environmental imbalance.

• The impact of chemical exposure, particularly plastics and pesticides, on human fertility is examined.
• The decline in sperm counts and the potential acceleration of this trend are discussed as significant concerns for future population growth.

"Plastics in our brains Plastics in the bloodstream... interfere with fertility."

• The pervasive presence of plastics and their unintended effects on human health and fertility are highlighted.

"The sperm count in the developed world since hunter gatherers is down about 60%... the decline is accelerating."

• This quote points to a worrying trend in declining fertility rates, attributed in part to chemical exposure.

• The discussion explores the cultural and economic factors influencing decisions not to have children, alongside the biological challenges posed by declining fertility.
• The potential demographic impacts of these trends, including aging populations and declining birth rates, are considered.

"The population for many reasons is going to bust... nothing to do with toxicity where women are deciding not to have children."

• The multifaceted reasons behind declining birth rates, including lifestyle choices and economic considerations, are acknowledged.

"Every developed country in the world has a declining cohort of babies except Israel."

• The global nature of declining birth rates and its implications for future demographic patterns are discussed.

• The potential for innovation and human ingenuity to address climate change is acknowledged, alongside the need for policy interventions like carbon taxes.
• The race between technological progress and environmental degradation is framed as a critical challenge of our time.

"My God we're inventive... the progress in Wind the progress in solar... far more profound progress than anyone ever guessed."

• The surprising advancements in renewable energy technologies are highlighted as a source of hope.

"We phrase this as the race of Our Lives because both sides are racing... we produced more in the last three years more increments of particles of CO2."

• The urgent need to balance technological advancements with environmental sustainability is emphasized.

• The urgency of addressing climate change is emphasized due to increasing environmental damage and observable changes in weather patterns.
• Rising temperatures are leading to more extreme weather events, including floods, droughts, and forest fires.
• The increase in CO2 and other greenhouse gases is trapping heat at a significant rate, contributing to global warming.

"Hotter air will carry and Carries 5% more water vapor than it used to, so you will get more serious downpours, and we are seeing it everywhere."

• This quote highlights how increased temperatures are leading to more severe weather conditions.

"We are trapping it at the rate of an old Hiroshima nuclear bomb every few seconds."

• This illustrates the alarming rate at which heat is being trapped due to greenhouse gases.

• Capitalism is efficient in many areas but lacks mechanisms to address environmental issues like climate change and pollution.
• Profit maximization often leads to environmental degradation as companies are not incentivized to reduce pollution without regulation.
• The need for regulatory frameworks to address the "tragedies of the commons" is emphasized.

"Capitalism does everything almost everything better than any other system... but it can't spell the word altruism."

• This quote underscores the limitations of capitalism in addressing environmental sustainability.

"You cannot expect a corporation to volunteer to lower its profits just in order to save Homo sapiens in the long run."

• Highlights the inherent conflict between profit motives and long-term environmental sustainability.

• The transition to renewable energy sources like wind and solar is becoming economically viable as costs continue to drop.
• Technological advancements in solar and wind energy are making these sources more competitive.
• Geothermal energy and fusion are potential future game-changers in the energy sector.

"The progress of wind and solar is just spectacular."

• Indicates the rapid advancements and cost reductions in renewable energy technologies.

"If we could take that Ingenuity and persistence and Engineering competence and move it to geothermal... it will be a GameChanger."

• Suggests the potential of geothermal energy as a sustainable energy source.

• Toxic chemicals pose a significant threat to the environment and human health.
• The chemical industry often conceals the harmful effects of their products for profit.
• Detoxifying the planet is crucial for long-term sustainability and survival.

"We have to if we don't clean up toxic chemicals out of the system in the next few Generations we definitely cease to exist."

• Emphasizes the critical need to address chemical pollution for future survival.

"Chemical producers have never met a chemical like DDT that they didn't love and was good for us and we should be eating for breakfast."

• Critiques the chemical industry's disregard for the harmful effects of their products.

• A declining population could have significant economic impacts, potentially hindering efforts to address climate change.
• A balanced population decline over several generations is suggested to maintain economic stability while addressing environmental issues.

"If it falls too fast it will shock the economic system... we will feel too poor to have the resources to solve for climate change."

• Warns of the economic consequences of a rapid population decline.

• China is a dominant force in the production of green technologies, including solar panels and electric vehicles.
• The rapid advancement of China's scientific and technological capabilities is notable and poses a challenge to other countries.

"They produce 80% of the solar panels... more EVS than the rest of the world added together."

• Highlights China's significant role in the global green technology market.

"In 2003, China wasn't 1% of the peer-reviewed articles... now China is slightly ahead."

• Demonstrates China's rapid progress in scientific research and innovation.

• Quality stocks, akin to AAA bonds, have historically outperformed and are considered a "free good" in the market.
• The importance of understanding market inefficiencies and investing in quality stocks is emphasized.

"Quality stocks have been a free good... they have outperformed by somewhere between a half a percent and a percent a year."

• Suggests the value of investing in quality stocks for long-term gains.