I fully anticipated feeling depressed after interviewing Jeremy Grantham for Morningstar’s The Long View podcast. What I didn’t expect was for the investing legend, passionate environmentalist, and native Englishman to compare a stock market bubble to the “helmet catch” from the 2008 Super Bowl. “Perma-bear” is how Grantham is often characterized, though he prefers the term “contrarian.” When my colleague Christine Benz asked him about his pessimism, he said, “You ain’t heard nothing yet.”
At 86 years old, Grantham doesn’t seem anywhere close to “losing the plot” (his words). He serves as a long-term strategist at his namesake firm GMO and sits on its asset-allocation committee.
Here are three of my key investment takeaways from our conversation.
Artificial Intelligence Has Caused a Market Bubble
“AI is serious,” admitted Grantham. “It will change everything. And therefore, it’s not surprising the market took it seriously. The bigger the new idea, the bigger the new invention, the more the market becomes overpriced, the more it attracts euphoria.”
As a market historian who has studied bubbles and invested through several, Grantham sees AI as following a familiar pattern. “When you have these great developments,” he said, “they overdo themselves in the short term, they crash in the intermediate term, and then they come out of the wreckage and change the world in the long term.” He offered canals, railroads, and the internet as examples.
Grantham believes AI fueled a new stock market bubble after the launch of ChatGPT in late 2022, benefiting many of the same “Magnificent Seven” companies—Alphabet GOOGL, Amazon.com AMZN, Apple AAPL, Meta Platforms META, Microsoft MSFT, Nvidia NVDA, and Tesla TSLA—that had been leading the market before they crashed amid rising interest rates in early 2022. The Morningstar US Market Index has gained more than 65% since its mid-October 2022 low. On the formation of a new bubble so soon after the popping of a previous one, Grantham said: “Every now and then, something really weird happens, and a guy catches the football on the back of his helmet.”
Bubble-spotting is a Grantham specialty. He is famous for exiting the Japanese equity market before its bubble burst in the early 1990s, sidestepping the dot-com crash of 2000, and predicting the global financial crisis of 2007-09. Grantham reminded us that he called the bottom of the market in 2009 in a missive called Reinvesting When Terrified. He also foresaw an “unprecedented rally in both the stock and bond market” in 1982.
While Grantham views recent US equity returns as unsustainable, opportunity beckons elsewhere. When I asked him if he expects non-US stocks to outperform US stocks over the next 10 years, he replied “Yes, historically, they’ve tended to rotate.” That would be quite a turnaround considering that the Morningstar Global Markets ex-US Index is up only 82% during the past 10 years, compared with 238% for US equities as of this writing. Grantham’s firm GMO does see value in segments of the US market, however. It recently called US deep-value stocks “our highest conviction long-only investment idea.” Considering that the growth side of the market has trounced the value side over the past decade-plus, that’s pretty contrarian.
Government Action Could Catalyze Market Rotation
So, what could prompt a change in asset-class leadership? Grantham believes global governments could move against “the current group of superhero monopolies,” referring to members of the Magnificent Seven that have powered so much of the US equity market’s gain. “What we’re talking about is the dramatic emergence in the last 10 years or so of what you might call great global monopolies, almost instant in some cases, where the winner takes all.”
These dynamics have contributed to equity market concentration. The top 10 constituents of the Morningstar US Market Index, several of them worth more than $1 trillion, represent more than 30% of its value. That share has more than doubled over the past 10 years.
Said Grantham:
“The role of government, one might argue, is to try and maintain a world where they don’t become too powerful, where it isn’t licensed to charge any price because you have a monopoly. And there is no question that the governments’ actions against monopoly have basically been soundly asleep for about 20 years until very recently. And now in the US and Europe, they come out of their deep sleep, and they start to poke around some of the great new monopolies.”
Recent antitrust action against Google is clearly on Grantham’s mind. Morningstar equity analyst Malik Ahmed Khan enumerates “a plethora of regulatory headwinds” in What the Election Could Mean for Big Tech Stocks. Grantham also speculated about the changes to government policies that have favored big business over small and capital over labor.
Don’t Neglect the Environment or China
Grantham is deeply concerned about environmental issues—not just climate change, but also toxicity. Grantham has called climate change “the greatest challenge humanity has ever faced.” At the 2018 Morningstar Investment Conference, he delivered a chilling presentation called Race of Our Lives. On toxicity, which he blamed for plummeting sperm counts and population decline, he said: “If we do not move against it, we are going out of business.” Through the Grantham Foundation for the Protection of the Environment, significant capital is deployed into climate solutions, largely through venture capital.
When I asked Grantham what he suggests for investors looking to make their portfolios more environmentally friendly or align with the climate transition, he replied: “My personal attitude is to try and look out 10 years and try and imagine what the world will be like and dissociate myself from the things that are involved there, fossil fuels, and so on.” “So on” includes chemical companies, whose risks have been highlighted by litigation over the health impacts of Roundup.
Grantham acknowledged that oil and gas investments will go through cycles where they outperform. The energy sector has, in a deep irony, thrived under the Biden administration (as I recently discussed). But avoiding one sector of the market ultimately has a small impact on long-term portfolio returns, according to Grantham’s research.
Natural-resources-related equities remain a high-conviction investment idea for Grantham. “Green metals” like lithium, cobalt, and nickel will be necessary for the clean energy transition. “Not only are raw materials finite—believe it or not!—getting scarcer, and therefore certain to rise in price,” writes Grantham, but “at longer horizons (10 years), resources are the only sector of the stock market to be negatively correlated with the broad stock market.”
China, which Grantham called “a major cog in the global economic system,” was a recurring theme of our conversation, especially in relation to the environment. “It was super polluted. Now it’s just heavily polluted, but they’re improving very rapidly.” Grantham pointed out China’s “death grip” on green metals, its production of solar panels and electric vehicles, and its efforts to develop nuclear power. He expects China to move soon and fast on toxicity, too.
Grantham marveled at how China’s global prominence has grown over the past 20 years. He cited Chinese involvement in peer-reviewed academic articles rivaling that of the US. Despite challenges—in its housing market and beyond—China will remain a major player, in Grantham’s view. In fact, beyond the venture capital industry, especially green venture, China was the area where contrarian Grantham was most bullish.
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