The Last Bubble? Finding Value in a World on Fire | Jeremy Grantham & Edward Chancellor

In Episode 461 https://hiddenforces.io/podcasts/the-last-bubble-value-investing-making-of-a-permabear-jeremy-grantham-amp-edward-chancellor of Hidden Forces, Demetri Kofinas speaks with co-founder and chief investment strategist of GMO, Jeremy Grantham, and financial historian, journalist, and investment strategist Edward Chancellor. Together, they have collaborated on Jeremy's autobiography, titled "The Making of a Permabear," which chronicles Grantham's evolution as a value investor and the valuable lessons that can be learned from his six-decade career in investment management. They spend the first hour of their conversation discussing the collaboration behind the book, Grantham's formative experiences in finance, the principles that have guided his investment philosophy, the role of mean reversion in asset markets, and why they both believe that US equities are more overvalued today than at almost any point in history—with important implications for where returns will come from over the next decade. The second hour is devoted to a conversation about the mechanics of financial bubbles, the relationship between ultra-low interest rates and asset price inflation, Jeremy's framework for navigating overvalued markets by shifting capital to international and emerging market equities, the challenges of selecting investment managers, and Grantham's deep concerns about existential risks to human civilization—including climate change, resource scarcity, and the toxic assault on human fertility that he believes poses an underappreciated threat to our species' long-term survival. Subscribe to our premium content—including our premium feed, episode transcripts, and Intelligence Reports—by visiting HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you'd like to join the conversation and become a member of the Hidden Forces Genius community—with benefits like Q&A calls with guests, exclusive research and analysis, in-person events, and dinners—you can also sign up on our subscriber page at HiddenForces.io/subscribe https://hiddenforces.io/subscribe. If you enjoyed today's episode of Hidden Forces, please support the show by: Subscribing on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334, YouTube https://www.youtube.com/channel/UC8URhgYos5fjHqFSO4RSIEg, Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP, Stitcher https://www.stitcher.com/podcast/demetri-kofinas/hidden-forces, SoundCloud https://soundcloud.com/hiddenforces, CastBox https://castbox.fm/channel/2629539, or via our RSS Feed http://hiddenforces.libsyn.com/rss Writing us a review on Apple Podcasts https://podcasts.apple.com/us/podcast/hidden-forces/id1205359334 & Spotify https://open.spotify.com/show/0TK6u251zGSlMgJKH6cOaP Join our mailing list at https://hiddenforces.io/newsletter/ Producer & Host: Demetri Kofinas Editor & Engineer: Stylianos Nicolaou Subscribe and support the podcast at https://hiddenforces.io https://hiddenforces.io/. Join the conversation on Facebook https://www.facebook.com/hiddenforcespod/, Instagram https://www.instagram.com/hiddenforcespod/, and Twitter https://twitter.com/hiddenforcespod at @hiddenforcespod Follow Demetri on Twitter at @Kofinas https://twitter.com/kofinas Episode Recorded on 01/28/2026

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Demetri Kofinas?

  What's up everybody? My name is Demetri Kofinas and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guests in this episode of Hidden Forces are co-founder and chief investment strategist of asset management firm GMO Jeremy Grantham and financial historian, journalist, and investment strategist Edward Chancellor. Together, they have collaborated on Jeremy's autobiography titled "The Making of a Perma Bear," which chronicles Grantham's evolution as a value investor and the valuable lessons that can be learned from his six-decade career in

• 0:44Demetri Kofinas?

  investment management. We spend the first hour of our conversation discussing the collaboration behind the book, Jeremy's formative experiences in finance, the principles that have guided his investment philosophy, the role of mean reversion in asset markets, and why they both believe that US equities are more overvalued today than at almost any point in history, with critically important implications for where returns will come from over the next decade. The second hour is devoted to a conversation about the mechanics of financial bubbles, the relationship between ultra-low interest rates and asset price inflation, Jeremy's framework for navigating overvalued markets by shifting capital to international and emerging market equities, the challenges of selecting investment managers, and Jeremy's

• 1:29Demetri Kofinas?

  deep concerns about existential risks to humanity, including climate change, resource scarcity, and the toxic assault on human fertility that he believes poses an underappreciated threat to our species' long-term survival. If you want access to all of this conversation, go to hiddenforces.io/subscribe and join our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, discounted access to third-party research and analysis, and in-person events like our intimate dinners

• 2:11Demetri Kofinas?

  and weekend retreats, you can also do that on our subscriber page. If you still have questions, feel free to send an email to [email protected] and I or someone from our team will get right back to you. Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this incredibly thoughtful and valuable conversation with two of the most brilliant and seasoned minds in finance, Jeremy Grantham and Edward Chancellor.

• 2:57Demetri Kofinas?

  Jeremy Grantham and Edward Chancellor, welcome to Hidden Forces.

• 3:03Speaker 01

  Nice to see you, Dimitri.

• 3:04Speaker 02

  Hi.

• 3:05Demetri Kofinas?

  So you both collaborated in the writing of Jeremy's biography or autobiography. What was the nature of that collaboration? How did it begin? And Jeremy, more to the point, what led you to want to write this book and to tell your life story to begin with?

• 3:21Speaker 02

  I'm a lazy bum and I pretty well knew I'd never get the book written, even though I was full of grandiose plans for at least half a dozen in my life. And I knew Edward was a real professional. He wrote to deadlines and he'd written a couple of excellent books. So if we wanted to get a book written, he was a natural candidate to ride herd on me and keep me under control, all of which he did.

• 3:54Demetri Kofinas?

  What was it in Edward's style that resonated with you?

• 3:58Speaker 02

  Actually, Edward has a different style and much more elegant, elaborate. Mine is unusual in the sense is I write exactly the way I speak and it's best described as hopefully high-quality bullshit. And Edward is a professional writer, so it's a very different style and puts a real challenge for Edward to try and... Manage that difference.

• 4:24Speaker 01

  So where I see it is, as Jeremy says, he was never going to quite get round to writing the book himself. My view was that Jeremy, as you're aware, had this big volume of investment letters, of investment letters, going back to 2000, some of which were, you know, really to my mind, and anyone who read about the investment in the last 25 years thought they were first rate. So my view was anyhow that there was a lot of material there that deserved to be preserved in book form, leaving aside, you know, the ups and downs of Jeremy's career. With regard to my own role, I have thought about it. I thought for a while perhaps I

• 5:06Speaker 01

  was like one of these surrogate mothers, which actually is a sort of unpleasant metaphor. But then actually, I

• 5:13Speaker 02

  That mother, I think.

• 5:16Speaker 01

  Then, then actually, Jeremy, the way I see it now is that I'm more of a tailor, is that Jeremy provides both the model, the figure, and he also actually provided me with the material, the cloth. And my job really was to cut the cloth to fit the model and to have, because Jeremy and my voices are so different, it's actually have as little of my voice in there as possible. And when Jeremy was going through the drafts, whenever he saw my voice creep in, it would come his red pen and it would go, which is how I think it should be.

• 5:54Speaker 02

  On the other hand, because Edward was the boss, he determined what, in the end, what would go in and what would go out. And so he molded the presentation. So there are, like most people, there are several aspects to everybody. We all have different currents running inside. And Edward decided which of those would be presented to the public, which would be useful for GMO, my firm, and which would be kind of expansive side tracks, for which I'm infamous. And the financial world doesn't really need to hear too much

• 6:39Speaker 02

  about climate change and toxicity and the deficiencies of capitalism. Ironically, the things for which I became well-known, they want to hear About the stock market. And we know this to be a case because we've had some amazing controlled experiments. Where we did half an hour on the stock market bubble and half an hour on investing in climate change or something like that. And the title would be as good as it could get, Investing in Climate Change. And then the results would come in on YouTube. And it would be, you know, a record 180,000 views for the stock market and not even 10%

• 7:24Speaker 02

  for the climate change version.

• 7:26Speaker 01

  Yeah, and that book in a way, actually, it's true. I decided what went in and Jeremy, actually Jeremy decided what went out. And how I composed the book was to give really 80% weighting to the investment financial side and the 20% to Jeremy's green activities, ideas and philanthropy. That's the balance. And I think it's fair enough. It sort of roughly matches the decades that Jeremy, the proportion of his career he spent in those different.

• 7:58Speaker 02

  And has the virtue of being at least as much as the financial people can stand. And I get that now more than I did at the time.

• 8:07Demetri Kofinas?

  So before we get into the book, where I'm going to put you on the hot seat, Jeremy, I'm going to put you on the hot seat for a second here, Edward, and ask you, what was it that made you say yes to this project? And how did you go about thinking about Jeremy's life, what was interesting and how to mold and balance what it was that maybe he thought was important with what you thought was both more objectively interesting that audiences as an author and a historian would find interesting and would sell books?

• 8:38Speaker 01

  First of all, you know, I'd finished that big book, The Price of Time, that took me, you know, six years to do. And my batteries were a bit low, so I didn't really want to embark on another six year project immediately when one of.

• 8:54Speaker 01

  Jeremy's, you know, one of our former colleagues, Peg McGetrick, wrote me a, you know, who's director of GMO, said, you know, they were thinking about this project and would I be prepared to do it. As I said earlier, I thought there's enough of Jeremy's material from his letters and so on that were preserving. Jeremy also, Jeremy offered me a job and I worked several years with Jeremy. So obviously I know, you know, I sort of know the ins and outs of how Jeremy thinks as well as anyone. And so I thought I was probably in a good position to do it. And frankly, you know, because Jeremy offered me work, I was able to save more and go back to a life of writing. So I felt I owed Jeremy one anyhow.

• 9:35Speaker 01

  So those are sort of various reasons for doing it. I certainly would not do this project. I would not dream of doing it for anyone else, for sure.

• 9:46Speaker 02

  You're a financial world historian and my 60 years goes back to the Neanderthals. I mean, there was no financial investment management industry back in the day. When I started, there was very little talent, very few ideas, not even an options model. I mean, there were the failed younger sons of rich families who would hold hands at lunch for Morgan guarantee trust and buy their client an occasional few shares of Coca-Cola or Exxon. That was it. That was the investment.

• 10:26Demetri Kofinas?

  So let's get into the book. The title of the book is The Making of a Perma Bear. I'm curious about the thought process that went into this title because I've never really thought of you as a perma bear. And I'm kind of curious, what was the thinking behind the titling of this book? Was it meant to be somewhat tongue in cheek?

• 10:43Speaker 02

  I voted for having inverted commas around perma bear to make it clear, but I was outvoted by.

• 10:51Speaker 01

  To me, my, I didn't know, in the first chapter and talking about Jeremy's thought processes, he mentions the way he's always approached thinking of the investment world, which is to say, what is going on here? And I think that was the way when I was talking to Jeremy and putting together the book. I thought that that was really the mark of the way Jeremy approached things is that if you go into the world, investment world or any world for that matter, and say to yourself, it doesn't matter what conventional view is, what do I think with fresh eyes is going on here, is I think a very interesting way of looking at the world. Anyhow, so that was

• 11:34Speaker 01

  my preferred title, but the publisher was adamant against it, that title. And so somewhere or other it came around to the making of a perma bear, which as you say, is tongue in cheek, because you know, as is made pretty clear, Jeremy's reputation of a perma bear is really formed during those periods when the markets are at extremely high valuation levels compared to their history. So yes, I think perma bear is tongue in cheek.

• 12:06Speaker 02

  But let me just add, one of the things I think we agree on is that the world is ludicrously optimistic. Homo sapiens is ludicrously optimistic, hates bad news, very good at putting the head in the sand. This is revealed just as much in climate change, toxicity and all the bad things. We just don't want to deal with them. We want to have happy thoughts. And if you're a contrarian, and if you're trying to see reality, that means that the mainstream is overwhelmingly, in terms of time, on the wrong side of fair value. They're all going to be believing that

• 12:45Speaker 02

  the market is going up all the time. And any value-based contrarian is going to think they're overdoing it the great majority of the time. And if you end, as we do, at the end of the longest bull market run in history, or nearly so, then you are going to look like a perma bear. If you merely make the point that reasonable value is what it is, that is going to seem awfully pessimistic. And in the late stages of a bull market, people develop something close to a hatred for bears. Anything that interferes with the rising market and their rapidly growing portfolio's value, they loathe.

• 13:31Demetri Kofinas?

  So I suppose your experience of maybe falling out of favor is a topping signal in and of itself. We'll have a chance to dig more into your investment philosophy throughout the course of this conversation, Jeremy, but I'd like to ask you a question first about the book's dedication. The book was dedicated to your grandfather, Joseph Cook, who you write had an outsized impact on your life. He was, in some real sense, a father figure to you. Can you tell me a little bit more about him and why he was so important in your life?

• 13:58Speaker 02

  Yes, he was as important as most father figures are. And he was the man in the family. He was kind, thoughtful. We would sit on his knee and he would declaim poetry in the way that old grandfathers born in the 19th century tended to do. Tennyson and how heroic the British Empire was and other things. And brought up a Quaker as he was. He was thoroughly brainwashed by Quaker principles and never said a bad thing about anybody, never did a bad thing as far as we can construe history. And it was easy to admire him, and I did.

• 14:42Demetri Kofinas?

  Well, in the book, you say that even to this day, when you go to a restaurant, which I find somewhat hard to believe, but I take it at face value, that you still look for what is a bargain on the menu before you decide what to order. Is that really true?

• 14:54Speaker 02

  It's not only is it true, but I am shocked that you find it hard to believe. There are quite a few of us who do that, by the way. And it doesn't matter whether we're in the money or out of the money. It is a reflex and it has more to do with waste. I don't approve of spending large sums of money on superficial things like eating and drinking.

• 15:17Demetri Kofinas?

  All right, so you eventually, you made your way to the United States and you began to apply your skills to the world of finance. And in the book, you highlight a few of the important formative experiences you had as an investor, notably investments in American Waysways and Market Monitor. What made you choose these examples to highlight? And how did they, these experiences, inform your evolution as a value investor?

• 15:41Speaker 02

  Because I had this rather brief... Eighteen month window into how much more optimistic other people can be. I was deep into momentum and wishful thinking and kind of to the moon, to the moon. And we didn't really pretend that they had serious value. We bought them because we thought they'd go up a lot in a hurry. We would make money. And for a long time they did, for a while they did. And they went up rapidly. You know, they'd double in three months, that kind of thing, as the equivalent does today. And then they blew up. So we, we paid quite a price in terms of lifestyle postponed.

• 16:24Speaker 02

  You know, living as cheaply as we could to save money to go back to England or Germany. And then I blew it all in about six months. And that was a wonderful lesson that you can be cynical, you can be doing it because you're confident you're going to get out quicker than the enemy. And then you can still be surprised by the sheer speed with which they implode when they go. That was the thing. It wasn't that they went. I knew in a way they'd go sooner or later, but I didn't think they'd just blow up and in a few weeks go to nothing.

• 16:59Demetri Kofinas?

  Edward, when you were interviewing Jeremy for this book and you were exploring this particular period of his life, and I imagine there are just hours and hours of interviews that you'd done. What made you want to focus on these formative experiences? And more generally speaking, how important is the role of personal experience, especially the experience of loss in the course of financial speculation to one's development as an investor in your view?

• 17:25Speaker 01

  Jeremy's descriptions of losing money in market monitor and American raceways. These are the sort of go-go stocks of the 1960s. And that's, you know, it's not a very well-known period of speculative euphoria compared to say the, you know, the dot com boom of the late 90s or even the meme stock boom of 2020, 21. But yeah, it's a nice episode. I think, you know, Jeremy somewhere says that in investment, there are some things that you really have to learn through personal experience. You know, someone can tell you to keep away from. From super specs, or they might tell you to keep away from, you know,

• 18:10Speaker 01

  stock tips from your friends or whatever, but it does actually help to, yeah, it helps to lose money. I often think, as you know, Dimitri, if you work for an investment firm, they often, when you're pitching to clients, they always put the years of experience underneath. I used to think this was a bit ridiculous. Some might have a lot of experience and many years, but not may learn much from it. But I think the point is that Jeremy, you know, got very severely burnt very early on. And at that moment, would seem to have turned you more or less overnight into what we'd call a conventional value investor. So I think probably, as I say, it's good to get those lessons out of the way quite quickly in your career.

• 18:56Demetri Kofinas?

  Well, reflections on mean reversion. I think reflections on mean reversion and also career risk, and that comes up quite a bit in the book. But at what point, Jeremy, in your career, did you come to the firm conclusion that everything in markets is mean reverting? And what led to this realization?

• 19:10Speaker 02

  I guess I've always thought it was intuitively obvious that history counted. And anything that had happened pretty consistently for a hundred years or so was probably happening for some reason. And the other thing was, mean reversion has this idea of replacement cost. That something is substantially worth what it costs to replace. And brand image plays a role in changing that a bit. But how much would it cost to replace Coca-Cola's brand? It's hard to calculate, maybe impossible. But that idea that the brand replacement,

• 19:53Speaker 02

  which took scores and scores of years, as a measure of value, is a pretty good one. And so you look at assets, which include intangibles, and you think that's the replacement cost. And you would imagine that prices optimistically would move upwards from there and pessimistically downwards from there, but they would be sucked back to the real value or the cost of replacing it.

• 20:22Demetri Kofinas?

  So you say in the book that price to book is junk, I think is the term you use to describe it, as a heuristic for determining value. Why is that not a great way to determine whether a company is a bargain or not?

• 20:33Speaker 02

  What I say is that it's the market's vote on what are the least valuable assets at book value per dollar. And that's exactly what it is. So you have to beware that when you're paying 20 cents on book, that the real replacement value of that asset has probably really shrunk, and it has. That's all that that thought tries to get at.

• 21:01Speaker 01

  Can I interject something about Jeremy's early work on mean reversion? Because if you remember the book, what Jeremy does in the early 1970s, and you have to bear in mind, this is a period without any, when there's no historical electronic data on performance of, of share of different factors or strategies, as you might call them. And what Jeremy does, as we describe in the book, is he gets, works out by hand, taking the data from 1926 to 1970, and works out by hand the performance of an equally weighted

• 21:43Speaker 01

  index relative to a market weighted index to show, and what he discovers from that, and this is an empirical discovery rather than a sort of theoretical idea on the nature of mean reversion. What he discovers from that is the ebb and flow of small cap relative to the broader market. And I think it's this, what they used to call ebb and flow, what we would call cyclical movements. And that is this ebb and flow that you see Jeremy applying to small cap, later to value, later to international stocks, later to emerging markets, and then to the broader markets themselves, to the broader stock markets,

• 22:26Speaker 01

  to see the ebb and flow around valuations. Now, in a way, we all take that pretty much for granted now, but in the era when...

• 22:38Speaker 01

  When there was no data readily accessible, everything had to be calculated by hand. I think that the discovery of the ebb and flow of and the mean reverting nature of the market is actually pretty significant.

• 22:51Speaker 02

  We looked at the rate of regression to the mean of return on equity. We took samples, big companies, little companies, high return, low return. And we worked out, did they in fact regress? And if so, how much? And the answer came back, you bet they regress, they regress faster than we imagined. Fifteen percent of the gap between normal or average and their return would disappear in a single year. So if you were four percent and the average was twelve, fifteen percent of that eight points would go in a single year. And if you're only earning four points, that's enough to give you a real kicker on earnings.

• 23:34Speaker 02

  And make it very difficult to work out whether the four percent returning companies would have stronger earnings growth than the twenty percent earnings companies. And in fact, it was very difficult. And they weren't nearly as different as you thought. Because the guys earning a preposterous forty percent return would be so busy regressing that they would regress by, you know, five or six percentage points in a single year. And that would knock fifteen or twenty percent off their potential earnings. On the other hand, of course, they would be retaining such a large amount that that would be offset. So the war of attrition between a tendency for poor returning companies to regress upwards

• 24:17Speaker 02

  and for large returning companies to have an enormous amount to reinvest each year was a very closely run battle. Some years, the high return guys would win, and some years, the low return people regressing would win. And value would win two out of three years for a hundred years ending in two thousand. But the twentieth century, value beat the socks off growth stocks. Low return companies beat the socks off high return companies. Why? Because the rate of regression was underestimated. And it persistently and reliably regressed. And as we know, that's a a pattern became much less clear after about two thousand.

• 24:58Demetri Kofinas?

  So in natural systems, ecological, geological, climate, et cetera, there are certain generally recognized dynamics or attractors like gravity, the ratio of predators to prey, the carrying capacity of the land, that we can point to as clear drivers of mean reversion. What have you identified or what would you point to as the equivalent primary drivers in financial markets?

• 25:23Speaker 02

  Not so much in financial markets, by the way. When I arrived, it was what does it in a typical capitalist enterprise? In an industrial company, making chemicals, making machines. What drives it is very, very simple. If you make abnormally high profits, you suck in competition. If you make 4% return, you frighten competition far away. And after a while, having had no new capital flow into that industry, there's a capital shortage and the returns begin to move upwards. Hence regression. So it's a very, very straightforward enterprise. And if regression doesn't work, I would say,

• 26:05Speaker 02

  cast some doubt on how healthy capitalism is. If obscenely high returns do not drown you in competition, there is something wrong. And since about 2000, that something wrong has been increasingly obvious to everybody. And that is a growing element of monopoly and protection for these high-return companies.

• 26:27Demetri Kofinas?

  So I feel like since the 08 crisis, there have been a few periods where one would have expected prices to mean revert, were it not for policymakers extending the window. The most recent obvious example is the COVID-19 pandemic. If you think that valuations are high, but policymakers can intervene to keep them higher for longer, how does one balance the empirical time series of mean regression with the objective evidence that governments have the power and incentive to keep the game going every time that it looks like it's going to stop?

• 26:58Speaker 02

  I think it falls clearly into the category of this time is different.

• 27:05Speaker 02

  If you had very little political interference, commercial interference into the laws of the land and so on, in the 20th century, you might expect capitalism to work more effectively and quicker. And as you get into the 21st century, I think, for lack of a better description, the rich and powerful have more influence. Rich companies start to outpoint poorer companies. Big companies outpoint smaller companies. And the gap in all of these is concentrated. So the concentration by industry has gone up in every industry. In some, it's quite small.

• 27:49Speaker 02

  In some, it's monstrous, and the average is quite a lot. So the monopoly factor, which was always around, has steadily grown. And the monopoly factor tallied with what a GMO we view quality. Quality is high, stable return with no debt. And it's a high return because it's monopoly. It's stable because they're price fixing. And they have no debt because they don't need any debt. They're making so much money. So our definition of quality is basically a workable definition of monopoly. And high-quality companies in America have won. The AAA stock

• 28:34Speaker 02

  has not underperformed by a point like the AAA bond has. Everyone knows the AAA bond, you pay a price for security. But they don't pay a price, you don't pay a price, for a AAA stock. For the last 100 years, the last 20 years, the last year, high-quality companies have slightly outperformed the S and P. They should not do that. They should have underperformed by a point a year according to financial logic, according to capitalist logic. But in fact, they've outperformed over the last 100 years by about a half a point a year. This is, of course, the biggest and longest loophole in the efficient market hypothesis, which, when it started out back in the 70s, didn't breathe a word about.

• 29:19Speaker 02

  Quality and what an exception to that general rule it was that you'd be able to buy stable higher return companies and make extra money. That is not efficient by any definition of efficiency. They missed it and at the time we knew it and we modeled it in simple ways, even back in the seventies.

• 29:38Demetri Kofinas?

  So Edward, your most recent book, as you mentioned earlier, is The Price of Time. How do interest rates and the price of time factor into this issue of mean reversion and the long extended sort of Indian summer of this bull run?

• 29:53Speaker 01

  Well, I, um, obviously in The Price of Time being a history of interest and as some people say, a polemic against the ultra-low interest rates and the post-crisis period. One of the things I did in that book was to reexamine the history of the great speculative manias, not from the perspective of behavioral madness of crowds type stuff, but just looking at the monetary environments of the great manias, starting with the tulip mania in Holland

• 30:31Speaker 01

  in the 1630s. And what one finds is that, I think, in every case, there's a conflict between easy money and the boom. It's not necessarily the only factor at play, but it's a consistent factor. And obviously, I'm not the first person to make that point. It tends to get pushed aside, I think. And I was just trying to bring it back to the fore. And I think we had, you know, in the last five years, pretty good demonstration of that, of that thesis, because, you know, you had the world falling to pieces as the pandemic rolled out and as these economies closed down, locked down.

• 31:17Speaker 01

  Stock market took a tremendous hit and, you know, as we all know, the Fed and the other central banks came out and they expanded their balance sheets by eight trillion dollars and the governments went out and spent, you know, eight trillion dollars of deficits thereabouts. And the market came back in the most speculative manner. We were talking earlier about, you know, Jeremy's go-go stocks, the sixties, but they're pretty, you know, nothing compared to the flaky nonsense that was trading, you know, sky-high prices in twenty twenty twenty one. Then twenty-two, interest rates start to rise, the first time since the financial crisis and you get a decent bear market

• 32:01Speaker 01

  and a big crash in the bond market. And by this time, the meme stocks are, you know, down, you know, ninety percent or so. And then you get a sudden recovery and recovery of the stock market linked to AI, which I'm sure we'll talk about later. But if you then look at the monetary background to even this resurgence of the stock market over the last three years, it would seem there was a lot of liquidity left over from the pandemic period and that even interest rates themselves, while being high, you know, obviously compared to zero, they remain loose in real terms after inflation and historic relative to, say, nominal GDP growth.

• 32:45Speaker 01

  So I think even this period now, you know, we often, you know, often hear about, you know, we live in a period of high interest rates, but in fact, actually, historically, the monetary background, even of the current market, is relatively loose. I mean, it's looser than, for instance, it was at the end of the dot-com bubble.

• 33:04Speaker 02

  I share completely Edward's view that the regime of low interest rates is a bad idea. And going back twenty years, I've been fond of telling this story that Greenspan and his two acolytes, I give Powell a pass on this one, incidentally, but Bernanke and Yellen. And Greenspan were all pretty much of a package. And they made it pretty clear that there was an asymmetric statement going on here that is, if you run into trouble, I will do my best to bail you out. And if you run into good times, I'll leave you on your own. And that's an asymmetric undertaking from the Fed that would guarantee

• 33:48Speaker 02

  a slow but steady increase in speculation. But they conducted an experiment. If you start with Greenspan, you look back at the debt to GDP, all manners of debt, corporate included. And you see that it's rising very slowly with the introduction of new financial instruments. It's creeping across the page. And then, under late Greenspan, it makes a 45-degree turn and starts to charge up across the page, and it triples. So you triple the debt to GDP ratio in 40 years. In the biggest country in the world, in terms of economy,

• 34:30Speaker 02

  and substantially the biggest stock market, et cetera, et cetera. And you ask a question. What was the virtue of that increased debt? And what is the virtue of low interest rates? The virtue of low interest rates economically is it allows you to borrow more. So it's the debt that makes the difference. So the assumption here is that if you have more debt in the system, you will have more rapid growth. So a wonderful experiment, 45 years, biggest economy, triple the debt, not tickling it around the edges. And what happens to GDP? It kinks almost at the same time and starts to grow substantially less fast than it did prior to that.

• 35:15Speaker 02

  So in the lower debt era, it was growing at a substantial 3.5% a year. And post that, it starts at 2.5, it goes to 2. It's now about one and three quarters on its way to one and a half, on its way to one and a quarter, in my opinion. There are some pretty cast down reasons for that. Productivity is slowing and entries to the workforce is slowing. Population growth is slowing.

• 35:41Demetri Kofinas?

  Does that point to financial repression and more government intervention into the economy if we reach this type of asymptotic diminishing returns on the debt?

• 35:51Speaker 02

  That's clearly a possibility, is that the intrinsic growth rate goes down, the authorities refuse to accept it. And I, in one podcast, I said it's, Bernanke thinks he's got a racehorse, but he's got a donkey. And he's going to keep whipping that donkey until it either turns into a racehorse or drops dead. And that was the problem. And you know, Bernanke was not as smart as he's meant to be. He studied 1929 and drew all the wrong conclusions. And there he was in the housing bubble. Some of the best data statistics in economic history. The US housing market had been incredibly stable, famously

• 36:35Speaker 02

  stable throughout history. It had never bubbled. And he said the US housing market had never declined. He was absolutely right. It had never declined because it had never gone up. And then, under the remorseless pressure of Greenspan and Bernanke, every market, for the first time in American history, every regional real estate market goes up. The historical tradition was you bubble in Florida while you bust in California or Chicago. And now, you're all going up. And so, just looking at the data, you have a three sigma, over less than one in a hundred years, in a random series, would that occur? It's a real, serious outlier, an out peak on the page. Three years steadily going up.

• 37:20Speaker 02

  And he said, right at the top. Oh, the US real estate market merely reflects a strong US economy. I mean, where were his advisers? How can a serious economist miss a three sigma market? And where it sucked in, it sucked in two to three percent of extra people who had never had a history of buying houses into buying a house. And they were all squeezed out. If you look at the housing bubble, it's three years up, peaking oh six, and then three years down, and then some overcorrection for a few years. It was a magnificently, a well behaved regression to the mean bubble in housing prices. Explain to me how Benanki could miss it.

• 38:05Speaker 02

  Explain to me how Benanki's reputation seemed to stay more or less intact. I don't get it.

• 38:12Speaker 01

  Dimitri, can I just add a couple of comments about the US housing bubble? Because I think it's pretty important for understanding bubbles. First of all, go back to, you know, this discussion we were having earlier about the role of interest rates, you know, the Greenspan Fed cut interest rates, the Fed funds rate down to 1% in 2002, kept them low. Huge amount of money going into securitized mortgage debt, creation of this investment grade paper, satisfying a yield for hunger that throws more money into the housing market. So you see a clear relationship between interest rates, credit growth, and asset price inflation in real estate. But the other thing, this goes back to mean reversion,

• 38:56Speaker 01

  is that you also see a massive pickup in building, in real estate development, in new home building in the States. And it's this new home building that creates this overhang that then brings about the collapse, the very sharp collapse in US house prices. Whereas we have these other cases like of housing markets in different countries, like the UK and Australia, both have very inflated house prices in similar levels of valuation as US, but no supply response.

• 39:38Speaker 01

  And because of the lack of a supply response, the house price is actually, even after The financial crisis remained very elevated. And then you look at these other housing markets like, you know, Spain and Ireland. Again, huge supply response, huge amount of overbuilding and collapse. So this, you know, in all markets, the degree of investment, as you know, I've written a couple of books about the so-called capital cycle, but the capital cycle itself plays to my mind a very key role in mean reversion. And if one's to ask you, why has the US been so, why has US stock market been so elevated for such a long period of time?

• 40:23Speaker 01

  It's partly, I think, because after the financial crisis, investment remained in the States relatively low. You had a large number or a growing number of monopolies and a large number of of tech monopolies that turned into the mag seven. And up until recently, we get on to it later, up until recently, investment remained relatively constrained. So the way I look at it, and this is what I used to try and persuade my colleagues in asset allocation at GMO is let's not just look at valuation alone, let's look at valuation and the underlying investment in both the companies and the and sectors and the markets

• 41:08Speaker 01

  as a whole to try and see where we think mean reversion is going to be happening and when it's not.

• 41:15Speaker 02

  Edward, I don't think it affects whether there will eventually be mean reversion. If you make it much more expensive to own a mortgage, the house price will come down. What the overbuilding does is it determines the timing. If you overbuild, that combination will guarantee it's fast. If you don't overbuild, then you have to wait maybe. Even decades for the effect of the high-priced mortgages to grind it down. You might expect now, twenty years later, that the prices in the UK would be drifting down.

• 41:48Speaker 01

  Which they are. And actually, we have a really nice real-time experiment.

• 41:53Speaker 02

  We do.

• 41:54Speaker 01

  In the United States this time, because we've had, as I was saying earlier, we've had interest rates normalized to some extent, and mortgage costs have gone up, and yet the housing market hasn't cracked. And I think one of the reasons it hasn't cracked, if you bothered to read anything about US housing statistics, is that the amount of new building over the last decade or so has been remarkably low. So there is actually very little sense.

• 42:21Speaker 02

  But the other reason, and I think the most powerful reason, applies to one of the people in our team at the Grantham Foundation, who lives in Washington, and he has a mortgage of 2.7. And if he wants to move, he has a mortgage of 6.9 in Boston. And that is so brutal, he can't move. And so the house doesn't go on the market. And that's what happens all over America. It froze the market. And the proof of that pudding is that the turnover rate of houses has dropped way down off the historical chart.

• 42:55Demetri Kofinas?

  So I have one more question before I move us to the subscriber-only portion of this conversation. And it has to do with, well, it kind of builds off of this question that I asked earlier about financial repression. So what I learned as a younger man was that when you thought assets were overvalued, you did your best to raise cash and look for a buying opportunity, and you had to contend with the uncertainty of how long it would take and the FOMO that arose, and also the self-doubt that crept in the longer it took. But if you're also worried about the debasement of your currency holdings, if you're worried about the prospects of inflation reigniting or some other existential risk to your capital, how do you position yourself to be a buyer when the time comes,

• 43:38Demetri Kofinas?

  but also to protect yourself from those kinds of risks to your capital that exist today?

• 43:45Speaker 01

  I was going to say, instead of keeping your money in cash, you could keep it in your spare, your dry powder in cash, you could keep it in gold. The trouble is that gold has itself formed rather sort of bubble-like proclivities in over the last couple of years. Yeah, I think your point, this question of financial repression of keeping of the authorities keeping interest rates below the rate of inflation in order to encourage people not to keep too much cash on reserve. This is not new. I mean, anyone who's been investing, you know, since since the turn of the century has been faced with constant periods of negative real interest rates. And often during those periods of negative real interest rates, very strong stock market

• 44:30Speaker 01

  performance. So it's made it very expensive to sit on cash. And if you look, I think you look at the moment, you see Americans have, you know, record low levels of cash holdings. So I have certain amount of sympathy for that. I think that if one's going to go through a period, a prolonged period of financial repression and occasionally periods of relatively high inflation, it will wipe out your cash reserves. And so, you know, one, well, I think probably the answer to do that is to, you know, try and invest.

• 45:06Speaker 02

  Let me, let me just kind of wrap up my thoughts on the stock market, and that is, by a decent margin, this is the highest price market there has ever been. And that is using the techniques that have the best predictive record over the last hundred years, from nineteen twenty five, where the data starts to be pretty good. So we have a super overpriced market in the US. The point is, you don't have to own cash or the US equity market. And what we've been recommending for quite a long time is Our quarrel is with the US market. The rest of the world is nowhere near as expensive as it's ever been.

• 45:48Speaker 02

  And the gap between the value of the US market and the rest of the world a year ago was as wide as it has ever been. And for the record, yes, last year, the US market did a whole lot better than one might have guessed, but it didn't do nearly as well. Our GMO, the International Value Fund, was up 45 for the year and has opened this year with a bang too. Emerging markets was up 35, and you know what it's up in January, nearly 10%. Because January is for the flakies and emerging, for good or bad, gets classified as the small-cap volatile stock.

• 46:30Speaker 02

  But the non-US equity market doubled the US last year in round numbers and has more than doubled the S and P in January. So that point tends to get lost in the bearishness around the S and P. You don't have to own cash. You don't have to own gold, which did brilliantly. The more, the safer bet was to own diversified non-US equities, and it still is.

• 46:55Speaker 01

  The other thing, Dimitri, is the, if the debt, the main debt burden is in the advanced economies, the US and certain European countries, outside of China, the emerging market debt markets are less going through such a severe debt cycle at the moment. Our, my former colleague, Jeremy's colleague, Tina Van der Stee, runs the local currency emerging debt fund at GMO. I actually think the local currency emerging debt is a potential nice balance to the equities in your portfolio, and those equities, as Jeremy says, being mostly outside the US with the odd exception.

• 47:36Speaker 02

  Half the cash is parked in cash reserves. Liquidity reserves are parked in emerging debt in my family accounts. And A, it was up 22% last year, but the most shocking thing is that over 32 years since inception, it's up 12% a year.

• 47:54Demetri Kofinas?

  So I'm going to move us to the second hour of this conversation, guys. I'd love to dig into this a bit more, as well as some of the allusions to political risk that I was making, and existential risks. Questions about demography, climate, this is something that preoccupies a substantial portion of the book, so I'm looking forward to talking about that as well. For anyone who is new to the program, Hidden Forces is listener-supported. We don't accept advertisers or commercial sponsors. The entire show is funded from top to bottom by listeners like you. If you want access to the second part of today's conversation with Jeremy and Edward, head over to hiddenforces.io/subscribe and join one of our three content tiers. All subscribers gain access to our premium feed, which you can use to listen to the rest of today's conversation on your mobile device, using your favorite podcast app,

• 48:39Demetri Kofinas?

  just like you're listening to this episode right now. Guys, stick around, we're going to move the rest of our conversation onto the premium feed. If you want to listen in on the rest of today's conversation, head over to hiddenforces.io/subscribe and join our premium feed. If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, you can also do that through our subscriber page. Today's episode was produced by me and edited by Stylianos Nicolaou. For more episodes, you can check out our website at hiddenforces.io. You can follow me on Twitter @Kofinas, and you can email me at [email protected]. As always, thanks for listening.

• 49:24Demetri Kofinas?

  We'll see you next time.