Summary List Placement
Jeremy Grantham is the type of investor who knows how to identify market bubbles with his eyes shut, but he also knows that there is nothing he can do to change crazy investor behaviors and attitudes.
As a young man, he speculated on the stock market in a somewhat similar way to investors who are flocking into the likes of joke token Dogecoin these days.
“I just bought them always for a few weeks or a couple of months and hoped to find someone willing to pay more,” the co-founder of Boston-based fund manager GMO said in an interview. “And for a while, it worked brilliantly until it didn’t, and I lost everything that I had gained.”
The experience of making and losing money like that for a few years has given Grantham a real insight into the psychology of frenzied speculative investors.
“It’s very exciting, it’s almost irresistible,” he recalled. “As I like to say, nothing is more supremely irritating than watching your neighbors get rich, it drives you crazy. After a while, even Isaac Newton kind of lost his cool and threw his money into the South Sea bubble.”
Grantham’s philosophy is that investing in bubbly assets is not a question of intelligence but of psychology, which can be a powerful driver for irrational exuberance. “Been there done that, I am sympathetic,” he said. “I know that there’s nothing I can say that will change their attitude.”
But the 10,470% ascent of the cryptocurrency Dogecoin this year should shed light on just how far market euphoria has strayed from economic reality. Grantham, who is “thrilled” with his Model 3, said investors could easily confuse the “crazy pricing” of Tesla’s stock with the beautiful cars it makes, but the revealing aspect of the Dogecoin craze and GameStop frenzy is that there is really nothing there.
“You can really see this is just a short-term game,” he said. “People are having fun and they’ll lose everything in the end, and I’m sorry for them because I’m sure they can’t afford to lose everything.”
Where investors can scoop up cheap assets
For investors who can check their short-term impulses at the door, Grantham said there are still areas where cheap assets can generate sustainable long-term returns.
“If you’re willing to put your money away for 10 to 20 years, which is the other end of the spectrum from Dogecoin, which is one day, one hour, one week,” he said, “yes, there are some places where it seems highly likely you would do okay and make a decent amount of money.”
In his view, that area is emerging markets, which, as a whole, is “about as cheap relative to the S&P as it has ever been.” GMO, which is known for its seven-year forecasts of major asset classes, has also recently predicted that emerging value is poised to outperform US stocks by over 11 percentage points per year for the next seven years.
“Those countries include China, Brazil, Russia, and so on,” he said. “They do represent almost the certainty of higher GDP growth over a 10- or 20-year window and they start cheaper, which is a good combination.”
Grantham recalls that in 2008, emerging market stocks had a higher price-to-earnings ratio than the S&P, now it has shifted to half or less than half the price as it was back then, which is the cheapest it’s ever been.
“I think that’s not a bad story and you are very likely to end up with decently more money in 10 years if you buy that,” he said. “And if you, in addition, avoid the growth stocks which have had an incredible run on a global basis for a few years, you’ll do even better.”
‘We will have an inflationary problem’
Growth stocks have trounced value stocks for more than a decade because the lower interest rate environment has supercharged growth stocks, which are expected to generate more of their earnings out into the distant future.
However, as the rotation to value and cyclical stocks charges ahead, Grantham believes that “we will have an inflationary problem” now more than any time in the last 15 to 20 years because of the massive fiscal stimulus, supply chain shortages, and soaring commodity prices.
“We’ve got all these little dislocations here, there, and everywhere, which are turning out to be even more inflationary than we might have guessed,” he said. “Because when you can’t build a car for want of a small part, you don’t mind paying two or three times as much for the small part. These things echo through the systems all the way from super high-priced chips to timber.”
He adds that the resources bottleneck will lead to “guaranteed short-term inflation” and likely long-term problems, which could be further exacerbated by the labor shortage problem.
“Possibly 5% of our workforce has just temporarily disappeared,” he said. “Firms are putting out ads for workers and for the first time in their 30 years of existence, they’re getting no reply. And we know how you deal with that when you’re desperate, you have to pay more.”
Against this backdrop, there is also the longer-term issue of declining workforce growth rates in the developed world and China, whose population is growing at its slowest pace in decades. These forces all point to a shift from a 20-year deflationary period to an inflationary environment where asset prices could head lower.
Ever the iconoclast and maverick, Grantham thinks that lower asset prices are long-term healthy and good for the economy.
His theory is that high asset prices have allowed investors to compound their wealth at a lower rate, so now the retirees, who are not accumulating, have to sell off their homes or assets at much higher prices. As a result, the people who do not own homes or stocks are being asked to put in twice as much or more money to purchase half the home or portfolio that people used to.
“This is not an attractive proposition for the young and it’s not an attractive proposition for society,” he said. “So we will thrive in the long run much better on a steady basis if we have lower asset prices and decent returns. That is obvious, but in a bubble, you forget those simple truths.”