Pod Insights Invest Like the Best with Patrick O'Shaughnessy Jeremy Grantham – An Uncertain Crisis - [Invest Like the Best, EP.177] About this episode My guest today is Jeremy Grantham. Jeremy is the co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo (aka GMO). GMO, which manages more than $60B for clients, was a firm that helped educate me early in my investing career. They’ve long published thought-provoking research, most of which came from Grantham himself. He is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, but is particularly noted for his prediction of various bubbles. In this conversation we discuss the current crisis, which he calls the fourth major event of his long and storied career as an investor. As he says, this one is the most uncertain. We also discuss unique topics like commodity-based companies, and how opportunity often lies between fields of expertise. Please enjoy our conversation.
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub.
Follow Patrick on Twitter at @patrick_oshag
Show Notes
(1:37) – (First question) – What keeps him going in investing
(2:54) – Changing approaches to managing money over the decades
(7:27) – Their investment forecast for major allocations and how that has evolved
(10:06) – How to markets compete with FAANG stocks
(16:06) – More opportunity for active investors and where
(30:55) – How he talks to clients about major stock market events
(34:09) – His interest in natural resources/commodities
(47:07) – Long term argument for the three natural resources: oil, metals, and food
(47:10) – An Investment Only A Mother Could Love: The Tactical Case
(52:01) – Specific case for particular metals
(56:46) – Areas in the future that excite him or that he wants to learn more about
(1:03:42) – Advice for people interested in investing
(1:05:15) – Kindest thing anyone has done for Jeremy
Learn More
For more episodes go to InvestorFieldGuide.com/podcast.
Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub
Follow Patrick on Twitter at @patrick_oshag
Transcript 10,730 words · 4 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Patrick O'Shaughnessy? I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai.
0:36 Patrick O'Shaughnessy? Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.
0:57 Speaker 01 Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.
1:22 Patrick O'Shaughnessy? My guest today is Jeremy Grantham. Jeremy is the co-founder and chief investment strategist of Grantham, Mayo and Van Otterloo, aka GMO. GMO, which manages more than $60 billion for clients, was a firm that helped educate me early in my investment career. They've long published thought-provoking research, most of which came from Grantham himself. He's regarded as a highly knowledgeable investor in various stock, bond and commodity markets, but is particularly noted for his prediction of various bubbles. In this conversation, we discuss the current crisis, which he calls the fourth major event of his long-instored career as an investor. As he says, this one is the most uncertain. We also discuss unique topics like commodity-based companies and how opportunity often lies between fields of expertise. Please enjoy our conversation.
2:09 Patrick O'Shaughnessy? So Jeremy, thank you so much for doing this with me today. You've had such a long and interesting career in the field of investing that my opening question is a bit of a motivational one, which is, what is the thing that for you is the compulsion or the deep curiosity that keeps you going in the field of investing specifically despite long and large success?
2:31 Speaker 02 That's a difficult, a difficult question. I like analytical problems, data. My idea of heaven, I know it's politically incorrect, is the coronavirus. It's flooding me with interesting, contradictory, questionable data. Some is high grades, some is low grades, some is peer reviewed, some is rumor. It involves every aspect of humanity and politics. And yet, in a kind of grim sort of way, there is a scorecard on each country's response. That is the very essence of what has turned me on in life.
3:16 Speaker 02 It's analysis and statistics under uncertainty, where humans intervene and the quality of the data is mixed.
3:26 Patrick O'Shaughnessy? You've seen such a large transformation of both investing and capital markets over the years. What in your opinion stands out the most from the perspective of someone trying to earn, we'll call it excess return, versus a very bland, broad market benchmark? What today is more important in that pursuit than was a few decades ago?
3:50 Speaker 02 I think that there's always been two major approaches to managing money. And one of them, which was effective in the 1920s and is equally effective today, is at the individual stock level in particular, to focus on
4:11 Speaker 02 Unappreciated changes in the future. What is going to happen? And find out, deduce what the market thinks, and look for unappreciated changes, good and bad, and bet against the market. And bet that your analysis has picked things up that the marketplace has missed. So fundamental, old fashioned analysis is effective at any time. We were lucky when we came in in that some parameters that somewhat reflected a value had worked pretty well as contrarian indicators for 80 years or so when we started 40, 50 years ago.
4:56 Speaker 02 And those were things like price to book, PE, price to cash flow, price to sales, what I have long thought of as dopey value. What they are really is just expressions of the markets discussed. And the cheapest price to book are really the assets which dollar for dollar the market thinks are the least useful. And the lowest PE are the earnings the market least believes will be sustainable. And the highest yield, the most likely to be cut or not sustained. There's no reason why those things should work. And indeed, for 20 years now, they haven't been working. But in the old days, they worked because the market loved comfort so much that it was constantly overpaying
5:41 Speaker 02 a little bit for the proctoring gambles and underpaying for those nasty cyclicals that kept getting excess production and getting crushed. And we came in, my first firm, I started in 1969, and we applied those standard Graham and Dodd techniques. And they worked beautifully. Life was simple. Didn't work every year. And you occasionally had a string, a painful string of two, three, or even four years where the stocks would trash you and upset your clients. But they came back, made up for the lost ground. So if they gave up four points one year, they would make it back and deliver the usual four points a year
6:26 Speaker 02 the following year. And so life was easy. And I think the general caliber of competition back in those days was very weak. And therefore, if you did decent analysis, looked for value, you could find it. So we were able to build simple mechanistic models, giving points for cheap book and so on, and have a win on a very broad basis. So we could manage a lot of money. And we were winning two out of three years and adding a few points on average a year. And that era perhaps started to end around 2000. Too many machines were picking it up, too many quants, too much money.
7:09 Speaker 02 And pretty soon, the aversion to, the historical aversion to cheap stocks had disappeared because they acquired the reputation for having won. The quants made it clear, they understood that for 80, 100 years into the midst of time, these were factors that worked. And indeed, academics wrote it up and got a lot of credit for such a simple minded idea. Anyway, that was the past and those early pickings have gone, leaving, as I said, old fashioned, labor intensive, stock by stock analysis, not only labor intensive, but risk intensive, because you have to bet that things will change and you have to bet that the
7:53 Speaker 02 market is wrong. And that gives a lot of people, not surprisingly, a lot of trouble.
7:59 Patrick O'Shaughnessy? One of the things that GMO is most well known for is its asset allocation or seven year forecasts of major investment categories or groupings. Talk a little bit about how that idea has evolved and what sort of the key components are analytic or quantitative that go into that very popular concept?
8:22 Speaker 02 Basic mean reversion is the bedrock idea. So we studied the rate at which asset classes tended to mean revert and around which levels.
8:33 Speaker 02 So asset allocation is profoundly based on history repeating itself or following certain principles. One principle is that if you have an abnormally high return in an industry, or a company, or a marketplace, it will attract more competition and drive it down to some historical null. And it should work that way. In a healthy capitalist system, if a subset of an industry starts to make 40% a year return, everyone should drop what they're doing and spend some of their energy and money copying it as faithfully and as quickly as they can.
9:14 Speaker 02 And if they do, you have a dynamic, rapidly moving capitalist system. You also have one in which those returns will get bid down pretty fast and more towards the more average returns. That's a healthy system. Now, we've diverged away in recent years from that, last 20 years, and the degree of monopoly, particularly in the US, has climbed. The degree of corporate influence over government and regulation has climbed, which facilitates monopoly. The willingness of the Justice Department to break companies up has declined, not surprisingly, under those conditions.
9:54 Speaker 02 Consequently, the returns have been above average for much longer than would have been feasible in the old days. They would have been competed down, and that process has weakened. And in the short run, it's great for stock prices; in the long run, it's bad for the capitalist process. It's definitely shows a weakening in the competitive spirit and speed. Conservatism and high return is put ahead now of growth and being the first and the biggest at something new. Not that there aren't splendid firms who still do that, but just the meat and potatoes enterprises have become more conservative.
10:38 Patrick O'Shaughnessy? If you take the old kind of adages of "don't fight the Fed" and "don't fight the tape," perhaps we need to add "don't fight FAANG," and using "FAANG" here as just a convenient acronym for large growth kind of technology complex. Do you agree with that? And what's an investor to do in face of the reality on the playing field here that these companies have just dominated not only market returns but fundamental growth?
11:02 Speaker 02 Well, to take your point in pieces, don't fight the Fed has had a pretty good record and has not applied to my life or GMO. We have always played value first and if the Fed wanted to be on the other side of that game for a while, we would carry on regardless. And eventually, the great bubbles broke. We didn't catch the top. We were painfully early, but they broke and we won. And we made more money on the decline than we lost on the upside. Classic would be the 2000 tech bubble. We didn't really fight it until the P E on the market became the highest in history.
11:45 Speaker 02 The highest P E in history had been 1929 at 21x trailing. And by early 98, let's say January 98, it was at 21x earnings and we were officially very bearish. Why would you not be with the highest P E in history? Anyway, it went from 21 to 35 and it went from 21 to 35 on rising earnings. And at the time, the earnings were vastly overstated and they were later revised downwards, which was cruel and unusual extra punishment for everybody, bulls and bear. So that the earnings people thought they were looking at in early 2000 were revised down probably more than ever before in history. But at the time, they looked to be at a very princely level.
12:29 Speaker 02 And so earnings had been marked up enormously in two years and the P E had shot through the roof. And it was the very grievous demonstration of business risk for us. And we lost half our asset allocation business at least. And then, of course, the S and P collapsed and the much cheaper alternatives did much better. So the US R A I Ts, which yielded 9.1% at the top of the market, were up 30 by the market loan. The S and P minus 50, US R A I Ts plus 30. And they were said to be entitled to behave like small cap. And of course, small cap has a high beta.
13:13 Speaker 02 So small cat was meant to be down sixty five if the S and P was down fifty. But the REITs, a subset of small cat, were up thirty. Because they were so cheap and a yield of nine percent. And the S and P had the lowest yield in its history in ever in the March of two thousand. It yielded, I think, one point six. Everyone was saying, oh, well, yeah, but the S and P has a higher growth rate of its dividends. And we did the data and we pull it out and show them and say, yes, you're absolutely right. The S and P's dividend stream has grown one point one percent faster than the REITs. And that's why you get an extra seven and a half points of extra yield.
13:55 Speaker 02 Anyway, the principle was we were perfectly happy to ignore what the Fed was doing. Going along with the Fed is a different game. A short term, take all these other factors together, stir them up and get lucky and speculate. But I think if you're going to be an investor going for value, you have to be prepared to ignore little things like the Fed. The Fed take today, the Fed is swamping the system with paper. It's not producing jobs for people who are unemployed. Unemployment may go higher than twenty percent, much, much worse than anything since the Great Depression. The Fed is not going to address that.
14:36 Speaker 02 The Fed is not FDR, having arrived for the second time with great work programs to build bridges and parks and refresh our railroad system and upgrade our grid and all those good things and winterize all the houses in the northeast or the north. That's real stuff. But paper is not the same. Ten percent of the people drop out of the workforce and you throw ten percent of the GDP in paper, two and a half trillion at it. And you think, well, at least that will make confidence better. It will help. I get that. But if you take that thought experiment and extend it and you imagine a world in which everybody is unemployed and you throw twenty five trillion dollars of paper, a hundred percent of the GDP at it.
15:21 Speaker 02 What do you have? You have no goods, no services to buy and lots and lots of money to buy at work. So of course, it's intrinsically inflationary process. We are cranking out paper as. The output of goods and services drops way down and that can easily go wrong. In the short term, a lot of it flows through to the market and pushes the market up. But my guess is, based on history, when the earnings are finally presented as down thirty, forty, fifty percent, the P E's will drop and the market will decline. That is at least a risk, is it not? You have today a market that is at the same price it was last June when everything looked great.
16:06 Speaker 02 And everything is not great now, we know it, but you have the same stock price. So this is a fairly fantastical circumstance. Now, given the power of the Fed, you can't be absolutely certain that it won't go on. But you know it's not guaranteed. You know there is a balance of risk and return. And since the prices are already high by historical standards in the top ten percent before this even started, and the debt levels are the highest they've ever been, you know you're playing with fire. Is it not prudent to be very cautious?
16:38 Patrick O'Shaughnessy? Do you think that the world presents more opportunity for an active investor than in years past today? And I ask the question because what we see is a lot of those record price levels are driven by this don't fight the fang concept, that the multiples on these companies are very high and therefore the market is higher. But that within the market, there are a patch of extraordinarily cheap stocks. So valuation spreads are quite wide, at least in the U.S. Do you see something similar? And what is your take on where opportunity may lie? I'd love to talk about resource stock investing here as well in today's market environment.
17:17 Speaker 02 I'd like to say to my colleagues and clients for that matter, that this is the fourth great stock market event of my career. And rightly or wrongly, we took a position in the previous three. Where we felt nearly certain that we were right. And we presented it that way. I did a piece for Fortune where my title was three near certainties for uncertain times in the spring of oh eight. The near certainties was that the housing market collapsed, the risk premium would rise and profit margins would get whacked. I mean, of course, they were near certainties. And the one before that was the tech bubble.
17:59 Speaker 02 And the tech bubble really had a lot of craziness that sadly may be missing today. But the pet dot com, if you will, there were just hundreds of new enterprises on the aimed at the internet, which didn't make any sense. And very great majority of them went out of business completely. And there were the main tech companies who were selling at fifty, sixty times earnings, just ludicrous. So you could be nearly certain that that whole thing would collapse. There were plenty of cheap things to own in the bond market, the real estate market, and the small cap market and the value market. They were all gloriously cheaper than the tech and the internet.
18:44 Speaker 02 And the one before that was Japan, where in a way the mother and father of all bubbles, the Japanese real estate market is probably the biggest bubble in the history of capitalism, much bigger than the South Sea Bubble. The land under the emperor's palace really was in nineteen eighty nine, a selling for a value greater than that of California. We spent a couple of days kind of tracking it down. It really was true. And the stock market, which had never sold over twenty five times earnings, went to sixty five in Japan. And of course, we were early, painfully early, but we made a ton of money on the round trip. And we were certain that we would win. We just didn't know when the hell we would win. And the timing is always tough, but you know, in the end, these things will break, we thought.
19:29 Speaker 02 And we made a big fuss about it at the time. And in two thousand, I debated the boss of Wharton, Jeremy Siegel. I think it was nine times, including some very big audiences where he was the bull and I was the bear and touting regression and collapse of the S and P. And also in seven oh eight, we were absolutely confident the US housing market would break.
19:54 Speaker 02 We had all the data on the housing market and this was not just a bubble. This was a three sigma event. Our definition of a bubble is a two sigma every forty year event. Three sigma event is every hundred years. And basically, there had never been one like that in the US real estate market. California would bubble, but Illinois and Florida would be busting at the same time. America became famous for that, but it took Benanki Greenspan. It took their devoted attention to have every real estate market in a diversified country like the US bubble at the same time. And it took them to miss the point of Benanki saying that US real estate market merely reflected a strong US economy.
20:39 Speaker 02 I mean, it was complete nonsense. Where were his statisticians when you had a hundred year bubble? Anyway, the housing bubble proceeded beautifully to peak and slow down. And then, under the surface, we were aware that some of the subprime was deficient. We had no idea how deficient, by the way, but we knew it was going to cause a crisis. And we didn't know how much was owned in Europe and so on. But we knew it was way enough to create a major league recession. The housing market coming back down, we calculated with a little bit of overrun below trend, would remove ten trillion dollars worth of perceived wealth from US homeowners.
21:17 Speaker 02 Now, that is guaranteed to be an economic problem, a really severe problem, and it was. And the market came down perfectly. So they were all near certainties. This one is, without trying to pun, this one is novel. This is different. It is completely original. We have never had anything like this. And I want to come back to your fangs because they are novel in a completely different way. But everything about this cycle, going back almost twenty years, has been different.
21:50 Speaker 02 I argued with Grant of Grant's newsletter at his annual conference. He called me an apostate in value because I had given up the pure religion that everything regresses to the me, or this time is never different. The five most dangerous words, or whatever it is in the English language, said John Templeton. And I responded by saying, forget the four words, the five most dangerous words in the English language is this time is never different. Because occasionally, of course, something really important happens that is different, and the coronavirus is one of them.
22:30 Speaker 02 But the entire base of American capitalism has shifted since about 2000, with the emergence of much higher levels of return, many more stock buybacks, and much more conservatism. The number of people employed in new enterprises in America that are one or two years old has halved since the late 1970s, halved. We're simply not as aggressive capitalist system as we were. So everything, everything has changed. And now into the teeth of that comes a virus. And it doesn't arrive at any old time, by the way. It arrives at the end of a 10-year-longest economic upswing in history, with the lowest
23:11 Speaker 02 unemployment for eons, but with the highest corporate debt levels ever, and some very smart people believe it's badly understated in official data, and the highest ever sovereign debt levels around the world, with weakness in the EU and with odd leadership in the US. So a very vulnerable time, the end of a 10-year cycle, exactly when you'd expect things to start going wrong, when you're exposed to high levels of debt, you're very vulnerable, not at all resilient, and then bang, this thing hits. Unique in many ways, but not the least way being that it's a supply hit and a demand hit simultaneously.
23:54 Speaker 02 So you can be simultaneously short of customers on one side, and you can't get the raw material at the other. And far and away the fastest rise in unemployment in history, much quicker than in the 1930s. And with curlicues stretching out, tentacles if you will, out into the future, will airline travel be ever what it was? Will not a lot of us reconsider the need to make so many long, tiring, infectious-type journeys? We already knew we were getting the flu and the colds every second trip to Europe, and now we throw in perhaps a recurrent coronavirus. It's quite possible.
24:36 Speaker 02 Yeah, so some industries will simply change. And it's also a period of enforced introspection. What a good time to follow up on some of the reservations we were developing about capitalism, inequality, climate change, the things that governments were not doing well. And here we get to stew and read and think and maybe even growth at any price and to hell with the consequences, which has been the mantra of US capitalism. Not always, by the way, but increasingly in the last 10 years. Just as a side issue, when I got here in 1964, it turns out to have been about the sweet spot in American capitalism.
25:18 Speaker 02 Everything working pretty darn well with the notable exception of civil rights, but in terms of respect for your workers, developing effective pension funds on their behalf, paying a decent wage, having a respectable ratio between the CEO 40 times his average worker, and as was Japan then. Japan today is 40 times and we are 300. We've gone from 40 times to 300 times your average worker for a fortunate CEO. So a company today does not necessarily have a 1964 level of respect for the city it works in, the state it works in, and the country it works in.
26:00 Speaker 02 They have become kind of global enterprises, trading one country off against another, moving their factories and their workers where they can make the most money. Basically, following on Milton Friedman's definition of social responsibility, which was the social responsibility of a corporation is to maximize profits. And as I like to say, the corporations are treated like individuals. If an individual had a policy which is to maximize my self-interest, you'd say he was a sociopath. It's a workable definition of a sociopath. So basically, we have sociopathic companies proud of that mantra. We were just beginning in the last two years to hear some pushback from that, including a lot of more respectable corporations saying,
26:44 Speaker 02 "We've gone a little too far here, guys. Let's reconsider." And now we have a wonderful opportunity, don't we, to reconsider some of that? And one of the side effects of the virus has been dramatically to bear down even more on the poorest quarter of workers. And they not only get three quarters of the virus deaths, but they also are losing their jobs. Multiples of the top quarter, who can safely work from home, as I am doing here in the countryside, taking a couple of beautiful walks every day. I feel guilty, but it is part of the aggregate problem. A word on fangs, because of all the things that have changed since 2000,
27:28 Speaker 02 in the this time everything is different world. The fangs are one of my favorite examples. The fangs are unlike any other. They're seventeen and a half percent of the S and P. They're unlike anything that ever walked the face of the earth. They generate market capital as thin air. The use of assets is totally unlike the possible exit of a bit of apple, unlike it used to be. It's not about traditional capital being depreciated and replaced and cranking out widgets. It's all about intellectual capital and brand.
28:06 Speaker 02 And speak and using your brains and innovating. Even though I'm really quite down on American capitalism as being a little fat and happy past its prime, I am very long on American venture capital. It's the really vital part of the capitalist model. Venture capital was always the dominant one in the world, and it still is. And if you look at the FANGs, to me, I'm an older guy, and I've been in this business for 50 years. But at GMO, we hired away the potential employee number 22 for Microsoft, the oldest of the new modified group of FANGs. So they're simply not that old.
28:50 Speaker 02 They're not the Procter & Gamble's and General Electric's and Axon's and Merck's that were around in the Great Depression. These are newbies, and some of them very new indeed. And generally, the US venture capital industry remains vital and effective. And if you have a brilliant student today, he doesn't want to go and work for Goldman, sorry, Goldman, like the financial Michael. He doesn't want to be a management consultant like the 1970s. He wants to set up a shop and do something new and make a difference and make a fortune doing it. So venture capital is getting all the very brightest people to go into that area, and why not? It is at least useful.
29:35 Speaker 02 It's dynamic. All the new great ideas that change is very densely constituted in venture capital. And FANGs are somewhat an offshoot of that. They are the absolute winning, winning winners of the last 50 years of venture capital. So all based on new technologies, new ideas, and they're different. So my advice to everybody is be a little careful. You need a good value model that deals with intellectual capital, that deals with growth and with quality and stability. You need to get far away from simple minded PE and price to book when you're dealing with these guys. Maybe they're expensive.
30:20 Speaker 02 It's not what I do these days, but they are not Cisco of 2000. They're not 65 times earnings. They're growing fast and they're fairly high priced, but you should be careful dismissing these guys. They are different. But the downside there is maybe society is getting a little fed up with them in the sense that they don't pay much tax anywhere. They move around the globe. They exploit better than anybody the opportunities of trading off one country against another with taxes and production and complicated accounting. And they are playing fairly fast and loose with political influence, some of them, and
31:01 Speaker 02 irritating particularly Europeans, but also some Americans. And maybe that will start to regress and cause them problems. So I am not touting them by any means. I'm merely pointing out that they are one of the many important differences of this cycle, of this last decade in particular, and that old fashioned routines have to be moderated.
31:26 Patrick O'Shaughnessy? You mentioned that this is the fourth extraordinary stock market event of your career. I'm curious how you speak to clients then about your posture facing it down in the midst of it. The first three GMO famously had a very, very specific view. That view is very clearly expressed in portfolios, often very contrarian expression. What is the equivalent today? You mentioned that it's novel. Is GMO's response also novel relative to those three extraordinary events?
31:56 Speaker 02 Yes, our preface on the bottle of pills you're taking every morning, the warning is this is not the near certainty that we felt in those three prior events. This has more differences and therefore you can't be as certain of how this thing will play out. As you could before. It's more complicated and it's less certain. Okay, that's the caveat. Now, I've been giving you the long list, longer term problems along the lines of climate, resource limitations, a long end to the longest economic cycle in history and the highest levels of debt.
32:40 Speaker 02 So, and now you impose this stress on the system and clearly the management around the world is very uneven on how they're dealing with this. This has created an almost uniquely risky environment. So the uncertainties remain completely for us, but they also dominate one's portfolio and management attitude, don't they? This is not as knowable. The future is even less knowable than normal. And the near certainties have disappeared. But you know for sure, as I said, that this market is in the top 10% of all time P Es
33:23 Speaker 02 and the economy, trust me, is not in the top 10%. It's in the bottom 10% of all time economies. And that's a splendid mismatch carried on the broad back of the Fed. The Fed, we don't quite know how long and how impressive it can support stock prices. But if you're a fundamentalist and you're patient, you don't like that combination of being in the highest 10% of P Es and the lowest 10% of economic certainties. Nobody knows what's happening in the economy. We all know we're going to have a wipeout in our earnings and we all know we're going to have a wipeout in employment and so on. And we all know it's going to go on longer than we thought. And that's an interesting point, by the way.
34:08 Speaker 02 When the market hit its low, it's had a huge rally. But during that huge rally, what has come out about the economy? Almost anyone with a brain is more nervous about the economy in terms of the length of how the effect will be felt in terms of the peak levels of earnings setback and unemployment. So we're more pessimistic than we were at the very day the market hit its low. This is all once again carried on the broad back of paper being thrown at the system.
34:41 Patrick O'Shaughnessy? I'd like to go to the almost exact opposite extreme from the intangible heavy FAANG to a fascinating topic that you've explored for years now, which is natural resources and companies tied to those natural resources. What is the origin of your deep interest in this area? These very hard asset, very traditional, I'll call them, companies? And why do you think, one, they're important? And two, they may represent an interesting investment opportunity?
35:08 Speaker 02 Well, the long-term argument is outrageously simple and unarguable. And that is, you can't have compound growth on a finite planet. I always lead very quickly by a quick demonstration. Just imagine the Egyptian empire, which lasted for 3,000 years, by the way, with the same religion, the same pharaohs, and the same culture, same language. For 3,000 years, let's just imagine for a second that its population had grown at 1% a year. The world's population has grown faster than that during my lifetime, when it just tripled. And 3,000 years later, that multiplies by nine trillion times the population of Egypt.
35:53 Speaker 02 There would be nowhere to put them on this planet or several other planets. And if you do the same with physical output, a lousy 1% a year, 1% a year increase in physical outputs, and you start with enough goods to fill one of the giant pyramids, and you come back 3,000 years later, and you've grown at one miserable percent, breaking all the economists' hearts, and you have enough physical goods to fill up the solar system. It doesn't take as long as you think to compound into craziness. It doesn't take as long as you think to start cranking out so much carbon dioxide that the surface of the planet starts to heat up.
36:38 Speaker 02 For example, just as a quick aside, the difference between the darkest glacial phase with two miles of ice on Manhattan and the interglacial, such as we've had in the last 12,000 years, that allowed civilization to get going. That's rather convenient weather. The difference is 100 parts per million of carbon dioxide from 180 parts to 280. And thank heavens, carbon dioxide is brilliant greenhouse gas because if it went to zero, we would be a frozen ball with not much life other than microbial perhaps. But it would be minus 15 to 25 degrees centigrade. And so that first 180 gets you to the ice age.
37:21 Speaker 02 And the second 100 gets you to where we were in 1850. And what we've done since the Industrial Revolution is we've gone from 280 to 410. We have added more parts per million than that which separates two miles of ice on Manhattan from today's Manhattan. I mean, this is just a shocking and amazing experiment. And we're going to do the same again. We're going to add guaranteed, no way we can avoid it, another 120 parts per million. And what that will do, nobody knows for sure. It is just the same kind of huge unknowable risk that you would do anything to avoid if you were sensible. I think what we've learned since we knew
38:05 Speaker 02 the risk of climate change is that this species is not that sensible. And that it just plays the short term, ignores inconvenient long term things and hopes everything will work out and that they'll be dead anyway and screw their grandchildren, apparently. But it's all available science. And we choose at the government level to do quite a lot about it in a handful of enlightened governments and ignore it as a hoax in a handful of the really worst at the other end and everything in between. We're simply under responding as a global species big time. And we will have the temperature go up and the floods.
38:47 Speaker 02 The most dependable feature is that the flooding will go up, which we see everywhere, even today as we speak, and we see the droughts that go up, much less though, but still. And the main reason the droughts go up is not because there's less rain, which there isn't, it's because the temperature's gone up and so it evaporates the available rain and produces a California situation more often. Now, as it turns out, for technical, regional reasons, there is a long-term profound drought in the southeast, which there might have been anyway, but the higher temperatures are just making it much worse. So anyway, that's a digression which I can never resist, since we spend all our money
39:28 Speaker 02 attempting to propagandize and communicate the problems of climate change and we invest our portfolio in green technology to try and do something about it. Not as philanthropy, by the way, but as purely sensible defensive behaviour on the part of a family to look after its grandchildren and their grandchildren. But to go, you may have to repeat the original question, which was on resources, okay. So you can't have compound growth on a finite world. Very quickly, you start to run out of this, that and the other. When I grew up, we had a coal fire. And the coal, since we were kind of middle class, the coal we afforded was anthracite,
40:10 Speaker 02 which is denser than oil, it's relatively clean, hasn't got much dust, black shiny stuff they now use for jewellery sometimes. And it's gone. It was burnt in our north country, England fireplace in 1944 and it's now disappeared. It's all been used up. It happens. And most of the high-quality coal in the UK which drove the Industrial Revolution has gone. Same in Germany, their high-grade coal has simply disappeared. And you develop the cheapest, shallowest, thickest ore mines first. And every succeeding mine has lower-quality ore.
40:53 Speaker 02 And the copper mines today have 10% of the ore that you could find in 1900. And it continues as far as the eye can see. Each generation of mines is lower quality. In the case of oil, it's deeper and offshore and more technical. Or in the case of fracking, you've had to develop the ways of using energy to squeeze a solid rock into giving up its oil. And that's the way it always goes, until eventually, energy cost of getting that low-grade copper ore from a deeper and deeper mine and shipping it around in these trucks
41:34 Speaker 02 where the wheels are bigger than a house is simply too energy-intensive. And what we noticed is that technology overcame this increasing embedded inefficiency of using the best first. Up until about 2000, the price of everything went down. The marginal increasing cost would push it up a couple of percent, but the technology would drive it down by 4% and it would net out at something close to a 2% decline for 100 years, ending in 2000. And over the 100 years, the price of the average commodity dropped 7%. Pretty amazing help to getting rich.
42:16 Speaker 02 And then we began to hit the transition phase where the sheer limits began to hit up against the technology. So now you have the same 4% technology, but now you have a 4% increasing cost. And they're bouncing around, some going up, some going down, some going sideways. And that downward trend from 1900 to 2000 is simply broken. And oil, of course, we can come to as a separate issue, a very interesting, special case. But the other day before the virus, the price had spent a few years between 80 and 60.
42:57 Speaker 02 And the average price back in the late 1990s, it got down to 16.
43:04 Speaker 02 In normal conditions too, we had broken out in the price of oil. Oil is half the value of all commodities traded. And that had passed the inflection point. And the long term decline driven by technology had been replaced by a growing shortages. And a much higher percentage of oil coming from deep offshore expensive wells. And no longer discovering the giant fields of the nineteen forties and fifties in, in the Gulf. Where you put a hole in the ground and it bubbles up for eighty years. And it costs you in those days, ten cents a barrel to pump it. Today, maybe two bucks a barrel, but it's nothing.
43:44 Speaker 02 Anyway, outside that, if you, if you take a list of the rare, the rare metals. There's a lot of iron, there's a lot of aluminum. Eight percent of the earth's crust is aluminum and four and a half percent is iron ore. But then you get down, there's a huge drop off and suddenly you get a list. If you add nickel and copper and tin and lead and zinc and molybdenum. And gold and silver and platinum and palladium and four others together. They are much less than point one. That's so, they are some almost unbelievably tiny fraction of the amount of iron ore. So in general, you don't want to go short. You don't want to worry about iron ore and aluminum.
44:28 Speaker 02 You want to really worry about all of those other metals that we need in our high tech world. They are all beginning to run out. They're all have supply pressure on them. And you're going to go, what's going to happen is you get into a shortage. The price will triple, quadruple of say cobalt. People will redesign everything and substitute it. And open a new plants, new mines. And then the price will come down, but it will bounce up into others and the price of nickel will go through the roof and so on. We will just have a pattern from now on for a while where the best description of commodities is that they will go up and down.
45:12 Speaker 02 And that the downward trend of a hundred years will clearly have disappeared. I think that is the case since two thousand, in my opinion. And then, starting any time soon, we enter the endgame of when the average price of the average commodity, including food, starts to go up as diminishing returns finally gets the better of technology. There are signs of that here, there and everywhere, again, in my opinion. And it's a long-term argument, and you never know over any given few years what will happen to any given metal or any given commodity. Oil is, of course, a super special case, hugely important, and fracking completely
45:55 Speaker 02 changed the world's supply-demand balance for a handful of years. The US, out of nowhere, started to add over a million barrels a day. The world's total is 100, so on the margin, a million or two goes a long way to go from excess or deficit. And the US quickly added, over six years, 6 million barrels a day, without which the price of oil would be way over 100, exiting out of a virus. It would be a different world. However, in the long run, there isn't that much fracking oil, probably outside two and a half years' worth of global supply, which you can hear doesn't sound that impressive.
46:39 Speaker 02 But when you take it and you ramp it up quickly and you throw it into the market with no price control, no control at all, no Texas Railroad Commission telling you what to do like the 30s, 40s, 50s and 60s, exercising some sort of discipline, no, you just crank it out as fast as you can, slap it into the market. But it's only two and a half years' worth, so you run through your highest, best fracking resources pretty damn quickly. Another couple of years and we would be plateauing in all probability. But it was wonderfully helpful to the US. You can back out fracking and say it might have been at least half of the difference between us and Europe.
47:20 Speaker 02 We have handsomely outperformed in economics in the last 10 years, Europe, which has had a rather dismal 10 years. But half of that has been the amazing effect of fracking in several states, but mainly, of course, Texas and North Dakota, but also Pennsylvania and a couple of others, New Mexico.
47:40 Patrick O'Shaughnessy? There's a chart in the paper you wrote on this topic, which is incredibly stark, which shows the relative discount of energy and metals companies versus just the broadest in P500. Historically, there's been an average discount of about 20%. So it's not unusual for these companies to trade at lower valuations, higher yields, et cetera. But today, that same number is 80%. So we're talking about a historic discount, all the way back to the early 1900s, of these types of companies. It sounds like sort of the opposite story of what you described earlier, where we've got top 10% PE, bottom 10% economic conditions. I think what you're saying here, from an investment standpoint, is we've got sort of
48:21 Patrick O'Shaughnessy? bottom 1% of relative discount, but a good argument for strong fundamental improvement from here. Is that well summed up?
48:29 Speaker 02 Unfortunately, I have to divide commodities into three groups: oils, metals, and food. For metals, that is absolutely my view. The long-term argument is very favorable to higher prices or decent prices, and the discounts are typically extreme. In food, there is a long-term squeeze on food supply-demand relationships, and the productivity gains are dwindling. A population, although it's slowing, is still growing rapidly. The growth rate is slowing, but we're still growing over 1% a year in global population.
49:10 Speaker 02 And we're having a very hard time keeping the productivity of grains at 1% a year. So we're in a real horse race between population growth and our ability to squeeze out more. And under the surface, we are eroding our soils and beginning to long-term damage the productivity of agriculture. It is said there are only 70 good product years left at best, and in places where we are already showing the downside of having worn away through sloppy agricultural practices. And overuse of our arable lands all over the world that has gone on. And the carbon content of the soils in the US has come down from about 6% in the Midwest to about 1.5.
49:55 Speaker 02 So the kind of activity level, the ability to soak up water is a small fraction of what it was at a time when the floods are coming as they are right now. Far too often, much heavier downpours than we had ever seen before. And they're the ones that cause erosion. But they also are the ones that need high-quality soil to soak up the water. And that is a direct function of the carbon content, the biological matter in the soil, which we, under big ag, modern techniques, have been eating away and in many cases killing off with toxic pesticides. Which is another topic we could get into because those toxic pesticides
50:37 Speaker 02 have been doing a terrible job on killing off all the insects on the planet, which are down, ideally, and no one can agree on the numbers. It's a very hard, difficult topic to fix on. But here and there, they're down 75% and in other places they're down only 25%. But without insects, you get into real trouble, the birds and so on and everything else. And the creatures of the ground don't have them to feed on. But much more immediate than that, the pesticides affect us. The chemical levels in our bodies has gone through the roof to such an effect that, among other things, our fertility rate is affected. And I wrote a paper, rather surprisingly I suppose, from my job description,
51:19 Speaker 02 that included a description of how our sperm count in the developed world has dropped to a third of what it was. It's about 40 units down from 120. And it continues to drop at almost 2% a year. The leading epidemiologists say it shows no sign of deceleration yet. So what that means is, in 25 years, the average young couple is going to need help in the US. And 20 years ago, only a handful of people, it wasn't a topic. But today, you'll bump into it if you try because 10, 15% of young couples already have trouble. And these things are moving faster than climate change.
52:02 Speaker 02 And we will do nothing about it because we put the value, the intellectual property values of the corporations so high that where they act and ban the chemicals in Europe, we do not.
52:14 Speaker 02 There they say if there's a reasonable doubt, they have to prove they're safe. Here we say if there's reasonable doubt, the benefit of the doubt goes to the corporation, which is an odd choice to put the intellectual capital of Bayer and Monsanto ahead of your sperm count. In the end, that's what we do.
52:34 Patrick O'Shaughnessy? It sounds as though, from an investment perspective, the metals case is maybe the most clear-cut, meaning the most clear-cut potential investment opportunity. Food is sort of rife with all these interesting issues, and then oil, we talked about a bit. But I guess, to sum up your point, you have to view these three categories separately. You're not making a case for all commodities, but rather urging investors to consider all three categories.
52:59 Speaker 02 I'm making a case for the metals, but ignore iron ore and aluminum. All of the interesting nickels and tins, I'm making a case for them. I'm making a case for good farming. The opportunity exists to get into farming almost anywhere in the world and do it in a more sustainable, regenerative way, where you improve the soil and the carbon content and the ability to absorb and store water and to have wonderful microbial life. The quality, the nutrient value of the food goes up, the toxicity goes down because you need much less in the way of pesticides. So that is a win-win, and the farmers can make more money. And it's beginning to get a lot of traction from a very low base. But
53:44 Speaker 02 that would be a great investment opportunity. And there's a lot of green technology around that area that we do considerable investing in, in our foundation. And yes, we do try and make money, but it all goes back to fighting the cause for good agriculture and climate change. And good farming has lots of interrelationships with climate change. Done correctly, it really helps. And then the third one, as you say, is oil. And oil is a very interesting special case because we are hitting the threshold now that people don't quite realize where the electric car is going to become in the next two, three years cheaper to build as well as to run, which it is today. It's cheaper
54:26 Speaker 02 to run today, it's cheaper to maintain today, it has 15% of moving parts. And as a proud owner of a Tesla Model 3, it is beautiful to drive, trust me, and it's not dirty and it's quiet as a mouse. But it was expensive. And as the cost of battery, which dominates the equation, comes down, that changes rapidly. In 2010, the other day, Tesla needed $1,000 a kilowatt hour. This year, probably 130. And if it's not, it may be 120. But the next generation of battery, which they're introducing and talking about quietly in their odd way, is going to knock that down to below 100. Below 100,
55:09 Speaker 02 you become as cheap as a regular car. And their batteries in five years will be 50 or better or less. So they will be absolutely the default transportation. And the car, the Tesla in China they're offering, if you pay up, gives you 400 miles. I paid up on the version a year ago, and I got 300 miles. So it's a bit irritating. But somewhere between 300, 400, and the new batteries will do 500 in two or three, in two or three years. And they'll last a million miles, by the way, so that you'll be able to recycle car batteries to help out the electric grid. So transportation is done. Transportation is a very big chunk
55:51 Speaker 02 of oil use. So this is now a terrific horse race between the speed and the capital needed and the supply system to deliver the electricity to electric cars. Between that going on, which chews up a lot of money and so on, on the one hand, and the demand for oil on the other, it could well be that oil will peak as late as three or four years from now, if the transition is slow, that it could have peaked.
56:21 Speaker 02 We might come out of this virus phase and never see a higher oil demand level than we have seen. So peak oil will turn out, as many thought, to be peak demand rather than peak supply. But either way, it's a special case and watch your tech in terms of demand. Now, having said that, 10 years ago, the S and P was made up of 16% oil. Today it's 3. So you won't get rich shorting traditional oil stocks from here. They have just been crushed and crushed and re-crushed and as has the price of oil. It's the kind of, you could argue on the ethics of owning oil, but it's been a diabolically
57:05 Speaker 02 bad, probably as bad a major group, one of the 10 great groups of the S and P, probably as bad a drop in relative performance as has ever occurred in a decade in the S and P.
57:18 Patrick O'Shaughnessy? I have to say, I must characterize the things that I would call your sort of long portfolio as refreshingly diverse and unique. So we've talked about the opportunity in farming, in a certain type of farming, in a certain type of metals. You've talked about the benefits of what I would call technology entrepreneurship, US having a keen vantage in something like venture capital, which has led to these enormous corporate success stories. And then we've also talked a lot about all the things that are a little bit scary about the world. I'm curious sort of where you think we go from here. What do you not understand well right now that you wish you did? Where are you going to be spending your time as you think about the future?
57:56 Speaker 02 Let me just add to that, that the Granton Foundation has 60% in venture capital, if you can believe that. Our target is 70%. And we see the most amazing and interesting and dynamic opportunities. And green tech is one of the most exciting of all of them. But there are plenty of other areas of venture, which is also exciting. And how it will be treated and handled in the virus economy, Lord alone knows. But there should be lots of opportunities for those of your listeners who can take advantage of venture capital opportunities. There will be some interesting, cheaper opportunities than normal.
58:35 Patrick O'Shaughnessy? First of all, I think it's fascinating, the strength of that allocation. The question is more around thinking through the future. What do you not understand well that you wish you did or asked differently? Where are you trying to run up a learning curve today?
58:50 Speaker 02 I am focusing on the intersection of the virus, the economy, and the stock market. This is kind of what I do. And what you find is the seams between specialties are where the opportunities are and where the ignorance is. So you can have, even in hard science, you go to the boundary of one person's expertise and the next one, and there's a gap. So when we study agriculture, we find that the soil scientists know about erosion and the climate scientists know about other damage in heavy floods, but they don't know about the other person's work. So we know more about erosion when we talk to climate scientists giving their views on agriculture than they do. And you think, how is this possible?
59:35 Speaker 02 There are scientists in this general field, but it is possible. It happens everywhere. And what happened in the virus problem is you had virologists, very confident, they know more than everybody else, they know they know more than everybody else, but they know nothing about economics. And they were stomping all over the economists. And then you have economists who know nothing about virology or medical systems. And you have people in the medical system who understands the spread of diseases and all of these things, and they know nothing about economics or sociology. And the economists know a little bit about sociology, but the medical world knows very little, and then crowd psychology and politics, and you put them all together in a mess.
1:00:20 Speaker 02 And what we've ended up, for a while, was a world in which the medical people ruled the roost. This was not a medical problem alone. This was an elaborate trade-off between medical consequences and the costs of addressing them. You needed to put together a brains trust of a handful of experts, medical experts, a handful of economist experts, a few social experts, and a few people with common sense, and sit down and not let them out of the room, kind of FDR style, until they have agonized through the sensible trade-offs of costs and consequences. And we didn't do that.
1:01:01 Speaker 02 We got into kind of pap of, oh, you can't put a price on life. Nonsense. We put a price on life all the time by not having universal healthcare. You're putting a price on life. It's too expensive to do that. It's done all the time. The idea that you could stop the entire economic system without consequences to save a life, a single life, is of course crazy. So everyone knows that. So now you start drawing the boundary. Where is the effective trade off? Is it in the Swedish model, the German model, the New Zealand model? There's a variable floating along with that too, which is just competence.
1:01:43 Speaker 02 The competence covers how aggressively you attack a problem, how fast you attack it as well. Regrettably, some of the big countries have had very low levels of competence. And some of the countries out east, including New Zealand, Australia, along with Taiwan, Singapore, Hong Kong, China, South Korea, Vietnam, have done brilliantly, brilliantly better. So we give a passing grade, maybe to Germany. And we hold it up as doing a good example as a quarter of the deaths, say, of the Brits, much less than the US. But those that I just mentioned are better than 10 times better than Germany.
1:02:26 Speaker 02 How is it possible to have your standard of competence be 10 times worse in deaths? Taiwan didn't have an unfair start over Germany, quite the reverse. It was right next to China, is arguably part of China. And outside Hoobai province, they did much better than 10 times better than Germany also. In a country with 1.3 billion people outside that province. And they had less than, maybe a 20th of the death rate of Germany, which had half of the US and a third of the Brits. It's very painful to be a Brit or a Massachusettsian. And Massachusetts actually has more deaths per capita than Britain,
1:03:10 Speaker 02 which is a contender for worst. And unlike BS, this is a grade. Every country comes with a grade. They all started in a fair fight. They all had the same information about the same time. And some locked down quickly, effectively, tested, traced, or had cultural cleanliness and dispense customs like Japan, which again, I forgot Japan. Japan is a tenth as bad as Germany and never had full lockdown. And it's going to have less economic consequences than the heavy lockdown countries and hardly any of the deaths. What an amazing opportunity to be efficient.
1:03:52 Speaker 02 And yet Massachusetts, New York, they talk a good game, but the numbers speak for themselves. And the UK, all terrible beyond belief, incompetent. It's the only explanation. Move too slowly and not effectively when they move. So pay a very high economic price for dismal medical results.
1:04:14 Patrick O'Shaughnessy? I'd be curious what advice you would have for younger people interested in the field of investing, given all that you've learned across the span of your career and knowing as much as you do about the current economic business investing landscape. What advice would you give a 20-something that is interested in this field?
1:04:35 Speaker 02 I get asked that in real life. And my understudy is going to venture capital. Gives you the same opportunity to use your brains and your research, your analysis. But it's more opportunity to use your imagination and to mix with people who are trying to change the world for the better. And it is useful. Private equity and regular investing is shuffling shares between one player and another. Doesn't change anything. I sell a share, you buy it, who cares? Venture capital is you're taking new money away from something else and you're putting it into a new idea. You're building a plant, small maybe, that would not have been built without your money.
1:05:19 Speaker 02 You're working on research that would not have been done. You're producing products that would not have been produced. You are changing the world. And as it turns out, you are in the end going to be producing the next generation of fangs and the great companies perhaps.
1:05:36 Patrick O'Shaughnessy? I love that answer.
1:05:37 Speaker 02 Yeah, no, that's a nice, simple answer. I would really, it turns a bureaucratic job into a job that really makes a difference.
1:05:47 Patrick O'Shaughnessy? Jeremy, my closing question for everybody is to ask for the kindest thing that anyone's ever done for you.
1:05:54 Speaker 02 One or two people have said such kind things about me that, no, you think, well, that's unjustifiable, that's ridiculous. I would think of those. I used to be an avid reader of one person who wrote at Probarons. He did the lead, the intro, for 40 years, had a very kind of flowery, entertaining, occasionally jokey, occasionally very serious style. I'm blocking his name, of course, which is, I'm only amazed to have had more blocks by now. But everyone used to know him because some of us, a lot of us, used to buy Barons really only for this guy. He was so good at the front. He died sadly
1:06:36 Speaker 02 five years ago. But in his classic style, in his intro, and of course, getting into his intro in Barons was always a very big deal. And he kept his eye on my quarterly letters. But just kind of apropos of nothing, one week, he says, "In the world of mountebanks and scandals, Jeremy is the model of virtue." Now, what do you say to that?
1:06:59 Patrick O'Shaughnessy? It's a wonderful comment, and it's something I think we can all aspire to, right? In this business, first of all, I would almost couple your last two answers in an interesting way. The idea on venture capital being fundamentally creative versus positive sum instead of zero sum. Maybe that's a fair summary. And our whole conversation really has that tint to it. So I just want to say thank you for joining me, for all your time, for all the insight, and a very unique conversation. Thank you, Jeremy.
1:07:28 Speaker 02 It's been a complete pleasure, by the way. And the guy's name is Alan Abelson.
1:07:32 Patrick O'Shaughnessy? There you go. Fantastic. Well, we close on a good spot. Thank you.
1:07:38 Speaker 02 Yeah, bye.
1:07:41 Speaker 03 Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter @Patrick_OShag. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening. [music]
Previous Ben Thompson – Platforms, Ecosystems, and Aggregators - [Invest Like the Best, EP.176] Next John Collison – Growing the Internet Economy - [Invest Like the Best, EP.178] Page updated October 25, 2026 · transcript and summary are machine-generated
