Jeremy Grantham An Uncertain Crisis - [Invest Like the Best, EP.177]


Hello and welcome everyone, I'm Patrick, Shaughnessy 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, but investor field guides dot com. Patrick o'shaughnessy, if the CEO of a Shaughnessy asset management, all opinions expressed by Patrick and podcast, guests are solely their own opinions and do not reflect the opinion of o'shaughnessy asset management this podcast informational purposes only and should not be relied upon as a basis for investment decisions clients of Shaughnessy Asset Management May maintain positions and the securities discussed in this podcast. I, guess today's Jeremy Grantham Jeremy is the CO founder and chief investment strategist of Grantham Mayo Van Audible, Aka Gmo. GMO, which manages more than sixty billion dollars for clients was a firm that helped educate me early in my investment career. They've long publish 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 various. In this conversation, we discussed 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. Disgust unique topics like commodity based companies, and how opportunity often lies between fields of expertise. Please enjoy our conversation. 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 as the compulsion or the deep curiosity that keeps you going in the field of investing specifically, despite long enlarge success. That's a difficult a difficult question. I like analytical problems data. My idea of heaven I know it's politically. Incorrect is a corona bars. It's flooding may with entrusting contradictory questionable data some as high grades some. It's low grade. Some peer reviewed some as room. It involves every aspect. Of Humanity in 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 it's telling me on. and. Life is analysis and statistics under uncertainty. Where humans intervene, and the quality of the data is mixed. 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? Then was a few decades ago. I think the there's always been. Two major approaches to managing money. And one of them, which was effective in the nine hundred twenty s at is equally effective today. Is! The individual stop level in particular to focus on. unappreciated changes in the future what is going to happen and find out deduce what the market things and look for unappreciated changes, good and bad and bad against market. And that that urinalysis has picked things up that the marketplace. Has missed so fundamental. Fashioned analysis. Is effective anytime. We will lucky when we came in. And that. Some parameters that somewhat reflected. Value had worked. Pretty, well, as contrary indicators for eight years, or so when we started forty fifty years ago and those things I priced book p price cash price to sales. What I have long thought out the as dokie value, what they are really is just expressions of the markets discussed. And the cheapest price the book I really they assets which dollar for dollar the market thanks of the least useful. And the lowest PG the earnings market beliefs will be sustainable and the highest yield, the most likely to be cut on not sustained. There's no reason why those should work. And indeed for twenty 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 a little bit for the procter and Gamble's. And underpaying for those nasty cyclicals kept getting excess production getting crushed. And we came in my fest fun. I started in nineteen, sixty nine, and we applied those standard. Graham and DODD techniques. And they worked beautifully. Life was simple than whatever yeah and you occasionally had a string painful string of. Two three or even four years, whereas stocks for trash, you and your clients, but they came back made up for the lunch crowd, so if they gave up four points one year they would make it back and Alicia the usual full points a year the following. And so life was easy and I. Think the General Caliber Competition back in those days was very weak, and therefore if you did descend analysis looked for value, you could find it, so we were able to build simple mechanistic models at giving points for cheap, and so on and have a win on a very broad basis, so we could manage a lot of money. And we will winning two out of three years, and adding a few coins on average year that era perhaps started to end around two thousand. Too many machines where picking it up. Too many qualms too much money. And Pretty soon the aversion to The historical abrasion cheap stocks had disappeared. Because they acquired the reputation for having won, the klumps made it clear. They understood that for eight hundred years into the midst of time. These factors that worked. And indeed academics. wrote it up and got a lot of credit for such as simple minded idea. Anyway, that was passed, and those early pickings have gone leaving as I, said, old-fashioned labor intensive. Stop by stock analysis, not only intensive risk intensive because you have to bet. Things will change and you have to bet that the market is wrong. And that gives a lot of people. Not surprisingly a lot of trouble. 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. Basic main religion is bedrock idea, so we studied the at which asset classes tended to mean, revert and around which levels. So asset allocation is profoundly based on history. Repeating itself off following some. Principals One principal is that if you have an abnormally high return in an industry or company or marketplace, it will attract. More competition and drive down to some historical, and it should work that way in a healthy capitalist system, if a subset of an industry starts to make forty percent year return. Everyone should drop what they're doing and spend some of energy and money a copying faithfully in this quickly as they can. And if they do you have a dynamic rapidly moving capitalist system, you also have one in which those returns will get bit down pretty. Fast Mola's towards speed more average pretends. That's a healthy. Now, we've diverged away in recent years from the last twenty years, and the degree of monopoly, particularly in the US has climbed the degree of corporate influence of government regulation. which facilitates monopoly the willingness of the Justice, Department. Break companies up has declined not surprisingly under those conditions. 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 at scrape for stock prices in the long run, it's bad for the capitalists process. It's definitely shows a weakening in the competitive spirit and speech conservatism in high return is put ahead now of growth, and being the first, and the biggest had something new, not that there aren't splendid firms who still do that, but just the meat and potatoes enterprises have become more conservative. If you. Take the old adage of. Don't fight the Fed and don't fight the tape. Perhaps we need to add. Don't fight Fang and using Fang here as just a convenient acronym for large growth kind of technology complex, do agree with that, and what's in investor to do in face of the reality on Plainfield here that these companies have just dominated not only market returns, but fundamental growth. Bell to take your point in pieces, don't fight. Fed has had a pretty good record, and has not applied to my life or oh, we have always plane value I! The Fed wanted to be on the other side of that game for a while. We would carry on godless 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 two thousand tech. We didn't Really Find It until the pee on. The market became the highest in history. Highest Paean history had been nine, hundred, twenty, nine twenty one times trailing. And by early ninety, let's say January ninety eight. It was twenty one times earnings, and we were officially very barish. Why would you not be with his? History Anyway went from twenty one to thirty five, and it went from twenty one to thirty five on rising. And at the time the earnings were vastly overstated then they were later revised downwards, cruel and unusual, extra punishment. For everybody bulls amber so the the earnings. People thought they were looking at another two thousand were revised down probably more than ever before in history, but at the time they looked to a very prince they level, and so earnings had been mocked up enormously and two years, and the P. had shot through the roof, and it was a very grievous defense. Business Risk for us. And we lost. Half our asset allocation business, at least, and then of course sap collapsed, and the much cheaper alternatives did much. So the US Rit's. Going Shield at nine point one percent of the top of the market. We're up thirty by the market low. The SAT minus fifty US Rei chased plus thirty, and they were said to be entitled to behave like smoke. And I've called. small-cap has a High Beta. So. Small cat was meant be down. A sixty five s and P was down fifty, but the reit's a subset of small-cap or up. Because they were so cheap and a yield of nine percent, and the P. had the lowest yield in its history in. In March of two thousand that yielded I think one point sets. Everyone saying Oh, well, yeah, but the S. and P. has a high growth rate of the scuba dance, and we did the data, and we pull it out and show them and say yes. You're absolutely right. Yes, and peace dividend stream has grown one point one percent faster than the it. And that's why you get an extra seven and a half points of extra guild. Anyway the principal was we were perfectly happy to. What the Fed was doing going along with the Fed is a different game a short term take all these other factors together stood up and get lucky in and speculate. But I think if you're going to be an investigation 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 is not producing jobs for people. Who are unemployed. Unemployment may go higher than twenty percent much much worse anything since the Great. Depression the Fed is not going to address that the Fed is not FDR having arrived for the second time with quake work programs to build bridges impacts. Refresh on railroads system upgrade grid oldest good things and winter is all the houses in the northeast or the north. That's real star. But paper is not to say. Ten percent of the people drop out of the workforce and neutral ten percent of the GDP and paper to a half trillion acid, and you think well, at least that will make competence better, it will help I get, but if you take that thought experiments and extended imagine a world in which everybody is on. And you throw twenty five trillion dolls of paper one hundred percent of GDP at it. What are you have? You have no goods, no services to buy and lots and lots of money to buy it with. Though of course, 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 closer to the market and pushes the market up. But my guess is based on history. When the earnings a finally presented as down thirty forty fifty percent, the pig is will drop, and the market will decline. That is at least a risk as the not you have today market that is at the same price. It was last June when everything great and everything is not great. Now we know, but you have the same stock price since valley, fantastical circumstance now given the power to you copy absolutely set 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 price is already high by historical standards in the top ten percent, before the season starts, and the debt levels of the highest, the been you know you're playing with fire. Is it not proved to be very cautious? That the world presents more opportunity for an active investor than in years past today and I asked the question, because what we see is a lot of those record price. Levels are driven by this. Don't fight the concept that the multiples on these companies are very high. Therefore, the markets 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 US. Do you see something similar? And what is your take on where opportunity may live up to talk about resource stock investing here as well in today's market environment. I'd like to say to my colleagues and clients for that matter that this is the fourth grade. Stock Market Event of my career, and rightly or wrongly. We took a position in the previous three where we felt nearly. That we arrive and we presented it. That way I teach for fortune. Where my title was three uncertain times in the spring of await the near the housing market collapsed, risk premium would rise in profit. Margins would get wacked. I mean of course. They were Nisa and. And the one before that will stay tight bubble and the tech bubble really had a lot of craziness stood, sadly may be missing today, but the pet dot com, if you will that who had just hundreds of new enterprises on the aimed at the Internet, which didn't make any sense and very great majority of them. A went out of business completely, and the were the main tech companies who was selling it fifty six times just ludicrous. Nearly, not that whole thing would collapse and there were plenty of cheap to. In the bond market, the real estate market and smallcap market on the value market, they were all gloriously cheaper than the tech, and the Internet, and the one before that was Japan well in a way, the mother and father of old bubbles 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 Empress Palace really was and nineteen, eighty, nine, a selling per value greater than that of California. We spent a couple of days kind of tracking down. It really wants and the stock market which had never sold over twenty five times, earnings went to sixty five. 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 win the hell we'd win and the timing is always tough, but you know in the end these things will break. We thought and made a big fuss about it at the time, and in two thousand I painted. The boss of will Jeremy. Siegel I think it was nine times including some very big audiences where he was people. I was bad and counting regression collapse of the S. and P., and also in Zebra no eight. We were absolutely confident. The US housing market would break. We all data on the housing market and this was not just bubble. This was a three sigma of. Definition of a bubble is to sigma every forty. Three sake event is debris hundred years, and basically that had never been like that in the US real estate market. California bubble, but Illinois Florida would be busting at the same time. America became famous for that, but it took Banenky Greenspan. It took the devoted attention to have every real estate market in. By country like the US bubble at the same time, and it took them to miss the point of Banenky saying the US. Real Estate Market Milly reflected the strong U. S. economy. I mean it was complete nonsense where statisticians when you had a hundred year bubble anywhere. The housing bubble preceded 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 with zone in Europe. 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 with perceived wealth from US homeowners. Now that is guaranteed to be a economic problem, a really severe problems. And the market came down perfectly, so they were all Nisa Jeez. This one is without trying to ton this one this 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. I Argued With grants of grinds newsletter at its annual conference. He called me an apple state in value. Because I had given up the pure religion that everything regresses to the me. All this time is never different, the five most dangerous words or whatever it is a main dish language, said John Templeton. An I responded by saying forget the fall woods to five most dangerous was an English language. Is this time is never different? Because occasionally, of course something really important happens, that is different, and the corona virus is one of but the entire base of American. Capitalism has shifted since two thousand with the emergence of. Of much higher levels of return, many more stock buybacks, a much more conservatism, the number of people employed in new enterprises in America that a one or two years old has ha- since the late nineteen seventies, risk simply not as aggressive capitalist system as we were so everything, everything has changed, and now into the teeth of that comes to bars, and it doesn't arrive at any time by the way it arrives at the end of a year longest economic upswing in history with the lowest unemployment. I e. But with the highest corporate debt levels ever, and some very smart people believe as badly understated in official data and the highest ever sovereign debt levels around the world with weakness in a you, and with odd leadership in the US, so a very vulnerable time the end of the ten year cycle exactly when you'd expect things to start going wrong. When you're exposed to high levels of debt, very vulnerable, not a toll, resilient and then bang. This thing has unique in many ways, not least way being that it's a supply. Hit Anna Demont. So you can be. Simaltaneously shorted customers one side, and you can't get roll material at the other. and Far and away the fosters rise unemployment in history much quick. At then in the nineteen thirties, and with colored cubes, stretching out tentacles. If you will out into the future will ally, travel be ever wanted was will not a lot of reconsider the need to make so many long tiring infectious type journeys. We already knew we were getting the flu and the the Coles every second trip. To Europe and now we throw in perhaps a recurrent corona virus. It's quite possible yet, so some industries will simply change. And it's also a period of introspection. What a good time to follow up on some of the reservations when we're developing about capitalism, inequality, climate change the things that governments were not doing well, and here we get to do and read and think, and maybe even growth at any tries to hell with the consequences which has been. The mantra of US capitalism, not always, but increasingly in the last ten years just as a side issue when I got here nineteen sixty four turns out to in about the sweet spot in American capitalism, everything was pretty done well with the notable exception of civil rights, but in terms of respect for workers, developing effective pension funds on their behalf, paying a decent wage, having respectable ratio between the CEO. Forty, times, his average worker, and as was Japan Japan. Today is forty times and we a three hundred. Forty Times to three hundred times your average, worker or fortune. So Accompany today does not necessarily have a nineteen sixty four level of respect for the city at works in the state works and the country. They have become kind of global prizes trading one country against another moving their factories on that work as where they can make money, basically following on Milton Friedman's definition of social responsibility, which was social responsibility. Cooperation 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 myself interest, you'd say a sociopath. A workable definition of such path. So basically we have sociopathic. Companies Proud. Of that Metro. We were just beginning in the last two years to hear some pushback from that. Including a lot of more respectable corporation sang gone a little too fi guys. Let's reconsider. And now we have a wonderful opportunity. Don't wait to reconsider some of that and one of the side effects. Of the virus has been. Bad down even more on the chorus quarter of workers, and they not only get three quarters of the virus deaths, but they also a losing their jobs multiples of the top quarter. Who can safely a work from home as assigned doing? Here in the countryside, taking a couple of Beautiful walks everyday guilty, but it is part of the aggregate problem a word I'm signs because of all the things that have changed since two thousand in the this time. Everything is different world. Defines a one of my favorite examples. The fangs unlike. Any other the seventeen seventy S. There unlike anything that ever walked the face of the they generate market cap on. The years of assets it's totally unlike possible extended a bit of apple unlike it used to be, it's not about traditional capital, being appreciated and replays and cranking out widgets. It's all about intellectual capital and brand. And speak and using your brains and innovating even though I'm 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 five part of the capitalist model bench. Capital was always the dominant one in the world, and it still is, and if you look at the fans to me, a I'm an old guy and I've been in this business fifty years but jam. Oh, we hired away. The potential employee number twenty two from Microsoft the oldest of the of the new modified group facts, so the simply not that they're not the procter and gamble's general of light trade, and an Exxon's and Merck's were around in the Great Depression these new boots, and some of them very new indeed, and generally the US Capitol Lynch, street remains vital an effective. And, if you have brilliant student today, he doesn't want to go and work for. Oregon. Like financial it onto be a management consultant like the nineteen seventy. He wants to set up shop and do something new and make a difference and make a fortune doing so venture capital is getting all the very brightest people to go into that area and why not? It is at least. Useful, it's dynamic. All the new great ideas so change is very densely constituted in venture, capital and fangs somewhat enough shooter that they are absolute winning winning windows of the last fifty years of venture capital are all based on you, technologies, new ideas and the different. So, my advise 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 stability, you need to get far away from simpleminded PA and price to book when you're dealing with digital is maybe they're expensive is not what I do these, but they are not Cisco up two thousand. They're not sixty five times. That growing fast, and they're fairly have high priced, but you should be careful. dismissing these guys they are differ, but the downside Dad's may be. Society is getting a little fed up with them in the sentence 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 production, a complicated accounting, and they are playing fast and loose with political influence, some of them and irritating. Take your cans, but also some Americans, and maybe that will start to regress and caused him problems so I am not touting them by any means I'm merely pointing out that they wanted many important differences of this cycle of this last decade in particular and the old fashioned routines have to be moderated. You mentioned that this is the fourth extraordinary stock market event of your career. I'm curious how you speak to clients about your posture facing 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 although novel relative to those three. Events. Yes our preface on the bottle of pills. You're taking every money. The warning is this is not the near certainty that we felt in the street prior. Events, this has more differences and death law. You can't be as. A POW, distinguished, Playa. As you could be. It's more complicated and it's less. Okay. That's the Cabbie, now have been given you. The long list longer term problems along the lines of climate results limitations. Along. And two longest economic cycle in history and the highest levels of debt. So. A now you imposed a stress on the system and the clearly that management around the world is very uneven. On how that dealing with this? This has created an almost uniquely risky environment, so the uncertainties remain completely for us, but they also dominator once portfolio a management attitude down. This is not as no future is even last knowable nome. And the Nisa have disappeared, but you know sure as I said that this market is in the top ten percent of all time PS and the economy. Trust me has not in the top ten percent. It's in the bottom ten percent of all time, economists. Is a splendid mismatch carried on the broad back of the Fed the Fed. We don't quite know how long and how impressed it comes stock prices, but if you're a fundamentalist and your patient, you don't like that combination of being in the highest ten percent of PA's and the lowest ten percent of economic certainties. Nobody knows what's happening in the economy. We all know we're GONNA have wipe out in our earnings, and we all know we're going to have a wipeout employment. And so and we all know it's going to go on longer than we thought Nelson interesting by the way when the market hit its lobes. How did you rally? But during huge rally? What has come out by the economy? Almost anyone at the brain is more nervous about the economy. In terms of the length of how the effect will be found in tons off. Peak levels of earnings setback in unemployment so pessimistic than we were at the very day, the mock at hidden slow. This is all once again carried on the broad back of paper. Being thrown at the system. I've liked to go to the almost exact opposite extreme from the intangible heavy Fang to a fascinating topic that you've explored for years now, which is natural resources in 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. while. The long term commitment is outrageous are simple and unarguable, and that is. You can't have compound growth on a finite planet. I always. Very quickly by a quick demonstration, just imagine the Egyptian Empire which lasted three thousand years by the way with the same religion, same Faraz and the same culture same language. For three thousand years, let's just imagine for a second that its. Population had grown at one percent a year. The wills population has grown faster than that my lifetime when it just tripled. And three thousand years later that multiplies by nine trillion times population. LBJ there would be no wet them. On this planet are several other planets, and if you do the same with physical output, allows one percent a year, one percent, a year increase in physical outputs, and you start with enough goods to fill one of the giant pyramids, and you come back three thousand years later. And if grown one miserable descent breaking all the economists, Ha and you have enough physical goods to fill up the solar system. It doesn't take as long as you think to come. Pound and craziness doesn't take as long as you think to. Stop cranking out so much carbon dioxide that the surface of the planet stops to heat up. For example just as quick inside the difference pre in the DACAS glacial face with two miles of ice on Manhattan. And interglacial such as last thousand years and allowed civilization to get going. With, the difference is a hundred pots, million of carbon dioxide from. One hundred eighty pods, two hundred nate and thank heavens, carbon dioxide is brilliant greenhouse gas. Because it went zero, we would be a frozen bull with not much life, other the microbial perhaps, but it would be minus fifteen to twenty five degrees centigrade, and so that first one hundred and eighty gets you to the ICE age. And the second hundred debt you to where we were in eighteen fifty and what we've done since industrial revolution is, we've gone from two hundred, eighty, two, four, hundred ten. We have added more. Million than that which separates two miles of ice? On Manhattan, from today's Manhattan I mean this is just a shocking in the mazing nights permit, and we're going to do the same again or to add guaranteed no way we can avoid it another one hundred twenty. That's enough and what that will do. Nobody knows for show. It is just the same kind of huge. UNKNOWABLE risk that you would do anything to avoid if you sensible. I think what we've learned since we knew. The risks of climate changes, the species is not that sense. And the it just plays short term acknowledged inconvenient long-term things and hopes everything will work out, and they'll be dead anyway and screw that 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 enlighten governments and ignore it as a hoax and a handful of the ready West, at the other end. And everything in between with simply under responding as a global species, big time, and we will have the temperature go up on the floods. The most dependable. Is the flooding will go up a which we see everywhere even today as we speak, and we say the droughts ago up much less, but still and the main reason the droughts go off is not because there's less rain which there isn't. It's because the temperature has gone up and so by praise rates of the available rain, and produces a California's situation more often now as it turns out for technical regional reasons that Rizzi long-term profound drought in the southeast, which might have been anyway, but the high temperatures just. Just making it much worse so anyway, that's a digression. resist since with spend money attempting to propagandize and communicate the problems of climate change in reinvest op. Follow in green technology to try and do something about it, not as philanthropy by the way, but as purely sensible defensive behavior on the part of the family to look after its grandchildren and their grandchildren, but to go, you may have to repeat the original question which was on resource. It's okay, so you can't have compound growth on a finite will. Very quickly you start to run out at this that and the up. When I grew up, we had a cold front. And the coal since we were. Kind of middle class. The cold we did was answer. Side, which is denser than oil is relatively, claim hasn't got much dust black shiny stuff. They now use for jewelry sometime and it's gone. It was burned an north country England, five plays in nineteen, forty four, and is now just pit. Stop it happens and most of the high quality coal. In the UK, which drove the industrial, revolution has. Same, Germany? High Great Cole has simply. Disappeared, and you develop the cheapest shallow shallows thickest. Aw Minds I. And every succeeding mind has low quality. Aw, and the couple of the minds today have ten percent of the oil that you could find in one thousand, nine hundred, and it continues as far as the eye can see. Each generation of of mines is low equality in the case of oil, depot and off-shore and more technical. Aw, in the case of fracking. You've had to develop ways of using energy to squeeze a solid rock into giving up its soil. That's the way it always goes. To eventually energy cost. Of getting that. Low Grade, culpable from a deeper and deeper mine and shipping it around in these trucks, whether the wheels are bigger than a house is simply too energy intensive. And, what we noticed is that technology overcame this increasing embedded in efficiency. Of using the best I up until about two thousand, the priceless everything went down. The marginal increasing cost would push it up a couple of stand, but the technology would drive it down by four percent, and would net out a something close to a two percent decline for a hundred years ending in two thousand, and over the hundred years, the price of the average commodity dropped seven. Pretty, amazing help to get rich. And, then we began to head the transition phase where the ship limits. Began to hit up against the technology. So now you have the same percents technology, but now you have a full percent increasing cost, and that bouncing around at some going up some going down some going sideways, and that downward trend from nine hundred to two thousand is simply at broken and oil. Of course we can come to separate issue and very. Interesting special case, but the other day before the virus, the prize have spent a few years between eighteen and sixty and the average price back in the late nineteen ninety S. it got down to sixteen. In normal conditions to we had broken out in the price of oil oil is half the valuable commodities traded and that pasta inflection, point and long term decline driven by technology, had been replaced by a growing shortages and much higher percentage of oil, coming from deep offshore expensive wells, and no longer discovering the giant of the nineteen forties and fifties in and the Gulf why you put a hole in the ground at it bubbles up for eight years. and. It costs you in those days ten cents a barrel to pump it today. Maybe two Bucks Abou- but. Anyway outside that that you should take a list of. The, Rat Tara, metals. There's a lot of ion. There's a lot of aluminum. A set of the Earth's crust is aluminum and Foreign Office. Is I know? But then you get down, there's a huge drop often suddenly you get a less if you add nickel and copper and tin and lead and zinc, molybdenum and gold and silver and platinum palladium, and for out those together that they are much less than point one the they are some almost unbelievably time fraction of the amount by. So in general, you don't WanNa go short. You don't want to worry about I on our and aluminum. You want to really worry about all of those other methods that we need in a high tech. They are all beginning to run out there. All have supply pressure on them and you're going to go. What's going to happen as you get into a shortage, the price will triple quadruple love say cobalt people will redesign everything and substituted. and. A new clients you minds, and then the price will come down, but it will bounce off into other than the price of nickel will go through the roof, and so we will just have a patent from now on for a while where. The best description of commodities is that they will go up and down, and that the downward trend of one hundred will clearly of district. I think that is the case since two thousand in my opinion. And then starting anytime, so we enter the game when the average price of the average commodity including To go up as diminishing returns finally gets the better of technology. There are signs of that here there and everywhere. Again my pin and it's a long time I'd. And you never know of any given few years. What will happen to any given methyl orange given commodity oilers course super special case hugely important. And fracking completely changed the wolves Biden on balance for. Years the US out of nowhere started to add over a million barrels a day. The world's total is one hundred so on the margin, a million or two goes a long way to go from excess all deficit. And the US quickly added of the six years six million barrels a day, without which the price of oil would be way over one hundred Xing out of a virus, there would be a different world, however in the long run there isn't that much cracking oil, probably a outside two and a half years was a floral supply. But you can hit doesn't sound that impressed. But when you take it, and you wrap it up quickly, and you throw it into the market with no price control, no control adult note Texas. Railroad Commission telling you what to do like the thirties, forties, fifties sixties, exercising some sort of discipline. You just crank it out as fast as you can slotted into the market. But it's two and a half years. What so you run through your highest best? Tracking results is pretty quickly another couple of years when we would. PLATEAUING and build. But it was wonderfully helpful to the US you can back out tracking. Saying might have been a least Haas off the difference between us your. We have handsomely out to bond in economics in the last ten years. You're which has had a rather dismal ten years, but half of that has been the amazing fact up fracking in several states, but mainly of course Texas and. North Dakota That also Pennsylvania. Couple bothers you Mexico. There's a chart in the paper. You wrote on this topic, which is incredibly stark with shows, the relative discount of energy and metals companies, versus just the brought us five hundred historically, there's been an average discount of about twenty percent, so it's not unusual. These companies to trade at lower valuations higher yields etcetera, but today that same number is eighty percent, so we're talking about a historic discount all the way. Way Back to the early nineteen hundreds of these types of companies, it sounds like sort of the opposite story of what you described earlier where we've got top ten percent P. E. bottom ten percent economic conditions. I think what you're saying here from an investment standpoint is we've got sort of bottom one percent of relatives discount, but a good argument for strong fundamental improvement from here is that well summed up? Unfortunately have to divide commodities into three groups. Will I'll. Metals, and food for methyl signed his absolute might view. A longtime argument is very favorable to higher prices on these prices and the discounts. Are Typically extreme. In food there is a long-term squeeze on food supply demand relationships. And they productivity gains dwindling population, although at slowing is still growing rapidly. The growth rate is lying, but we're still growing of one percent year global population, and we're having a very hard time keeping productivity of grains at one percent a year. So, we're in a real horse race between population growth and our ability to squeeze out more an under the surface. We are eroding soils, and beginning to long term damage, the productivity of agriculture seventy, good chronic, yes, left at best and in places. We, already showing the downside of having one away through sloppy agricultural practices on overuse of Allah arable land all over the world. That has gone on. And the carbon content of soils and the US which come down from about six send in the mid West to about one and a half. So the. Activity level the ability to soak water is a small fraction of what it was a time when the floods coming as they are right now far too often much heavier. Downpours. We haven't seen before and add wants a 'cause roach. But they also the ones that need high quality soil to soak up water, and that is a direct function of the common content, the biological matter, and saw which we on a big AG modern techniques have been eating away an in many cases killing off with toxic pesticides, which is another topic we could get into those toxic pesticides a being doing a terrible job on killing all the insects on the planet. which down I do oblivion. No one can agree on the numbers. It's very hot, difficult topic to fix on, but here and that down seventy five percent and in other places. Places down only twenty five percent, but without insights 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 fact deaths, the chemical levels in our bodies has gone through the roof to such an effect that among other things off facility right is affected and I wrote a paper rather surprising special my job description that included a description of power sperm count in the developed world has dropped to a third of what was. It's about forty units down from one hundred. And it continues to drop it almost two percent a year. The leading. Epidemiologists say it shows no sign of. Yet so what that means is. And Twenty five years. The. Average couple is going to need help in the US. and. Trying to ago a handful of people, it wasn't a topic, but today you'll bump into it if you try. Because ten fifteen percent of young couples already have trouble, and these things are moving faster than climate change, and we will do nothing about it because we put value, the intellectual property values of the corporations so high. The way they act and banned chemicals in Europe. We do not. That is say if there's a reasonable doubt. They have to prove sex. If reasonable doubt, the benefit of the Dow goes to the corporation. which is an odd choice to put the intellectual capital of? Bio and Monsanto ahead of your spam. Count in the US when we do. It sounds though from an investment perspective. The medals cases, 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. Talk about a bit, but I guess to some 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 making a case, but the metals, but ignore I and aluminum all of the interesting Nichols tens of making a case for them, and making a case for good farming, the opportunity exists. Get into farming almost anywhere in the world. And do it in a more sustainable regenerative way where you improve soil and the carbon content. And the ability to absorb install water, and to have wonderful microbial life, the quality the nutrient value food goes up. The toxicity goes down because you need much less than the way. Pesticides, so that is a win win, and the famous can make more money, and it's beginning to get a lot of traction from our Lopez, but that would be great investment opportunity, and there's a love green technology round that Eric than we do considerable investing in our foundation, and yes, we do try and make money, but it all goes back to fighting the cost for agriculture and climate, change and good farming has lots of inter relationships with climate change done correctly it really helps, and then the third one is you say is aw. And Oil is 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 has, today is cheaper to run. Today is cheaper to maintain today. As fifteen movie pops, and as a proud owner of a tesla model three. It is beautiful drive. Trust me. And gives you an up to the. Quad House but it was expensive. And as the cost of battery, which dominates the equation comes down. That changes rapid. Twenty ten day, Tesla needed a thousand dollars a kilowatt. This. She probably a hundred and thirty, and if it's not committee one hundred twenty. But the next generation of batteries, which the introduce and talking about in there ought way is going to not back down to below one hundred below one hundred. You become as cheap as a regular car and their batteries in five years will be fifty Abacha less so they will be absolutely the default transportation and the car the Tesla in China's offering. If you pay up if you four hundred miles I paid up on version a year ago and I got three hundred miles. The starts bit heretic, but somewhere between three four hundred, and the new batteries will do five hundred into three and two or three. Yes, the last million miles away so that you'll be able to recycle car batteries to help out the electric grid. So transportation is dumb. Transportation is very big chunk of oil. So this is now a terrific hall hospice between the speed and the capital needed and the supply system to deliver the electricity to electric cost between that going on which choose a lot of money, and so on on the one hand and 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 slow that it could have peaked. We might come out of this virus phase and never. Ohio 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 check. In, terms of now having said that ten years ago, the SNP was made up of sixteen percent oil today. It's three, so you won't get rich shorting. Traditional oil stocks from hit. They have just been crushed and crushed and re crushed. And as has price of oil, it's the kind of. You could argue on the ethics of owning oil, but it's been a diabolically bat, probably as bad major group, one of the ten groups of the probably has battered drop and relative performance as has ever. In a decade and the S&P. Must characterize the things that I would call your sort of long portfolio as refreshingly diverse in unique, so we've talked about the opportunity in farming in a certain type of farming in a certain type of metals you 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. 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? You wish you did. Where are you going to be spending your time? As you think about the future, let me just add to that. Granted Foundation has sixty percent venture capital. If you can believe that are target the seventy. And we see the most amazing. An interesting dynamic auctions and green tech is one of the most exciting. But there are plenty of other areas adventure, which is also. An how it will be treated and handled in the virus. Economy Lord alone knows, but there should be lots of opportunities, but those of your listeners who can take advantage of venture capital opportunities that will be interesting cheaper opportunities to normal 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 ask differently where you try to run up a learning curve today? 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 aware the opportunities. And, where the ignorance it's, 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 refined 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 talked to climate scientists giving views on agriculture than they do. And thanked. How is this possible there scientists in this general feel, but it is possible and happens every. And what happened in the virus? Problem is you had? Biologists, Very confident they know more than everybody else. They know. They know more than everybody else, but they knew nothing about echo. And they were stomping all over the Congress and you have economists who know nothing about. They're all G on medical systems. and. You have people in the medical system who understands the spread of diseases, and all of these things and I know nothing about economics all sociology. And the economists know a little bit about sociology, but the medical wellness very little and then crowd psychology. And politics and you put them all together in a mess. 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 offs between medical consequences and the cost of addressing. You need it to put together a brain trust of handful of medical experts, a handful of economist suffused social experts and a few people with common sense on sit down, not let them out of the room kind of FDIC style until they have. Agonized through the sensible trade offs of cost and consequences and we didn't do that. We got into kind of. Happens price on life. On since 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 cycle is a single life is crazy. So everyone knows stops so now you stop drawing the boundary whereas the effective trade is in the. Swedish model, the German model. The New Zealand Model! There's a variable flooding along with that, too. Which is just competence? Competence covid how aggressively attacked 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 country's out east, including New Zealand. Along with Taiwan. Singapore Hong Kong China South Korea Vietnam have done brilliantly brilliantly. So we give a passing grade. Maybe to Germany, we hold it up as doing a good example. That's a quarter of the. Deaths of Brits. Much less than the US, but those that I just mentioned are Besse than ten times better than gem. How is it possible to have your standard of competence? Be Ten times what? in-depth, Taiwan didn't have unfair Stott gymnast quite the reverse. It was right next to China is. Part of China and outside who by province they did much better than ten times better than. Also in a country with one point, three billion people outside that province, and they had less than maybe a twentieth of the death rate of Jim. which had. Of the US and a third of the Brits, It's very painful to be a or a Massachusetts in. Massachusetts actually has more deaths per capita than Britain, which is a contender for worst. and. B. S this is a great. Every country comes with gray. They all started in fat Fai. They all had the same information about the same time. And some lockdown quickly effectively tested trays, or had cultural cleanliness and distance customs like Japan which again I forgot. Japan Japan is tense as bad as Jimmy and never had full lockton and is going to have less economic consequences than the heavy lockdown countries. Hardly any of the deaths. What an amazing opportunity to be efficient and yet Massachusetts New York. They talk a good game, but the numbers speak for themselves and the UK all terrible beyond belief incompetent is the only explanation moved too slowly and not effectively when they moved. So, Paige very high economic prize for dismal medical results. I'd be. 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 twenty something? That is interested in this field. I get asked that in real life and my honest answer is going to venture. Capital gives you the same opportunity to use your brains in 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 shuffling hsieh's between one player and. Doesn't? Change anything. I sell a share you buy it who? Then Chapel is it taking new money away from something else, and you're putting it into a new idea you're building plant small may be. That would not have been built without your money. You're working on research. That would not have been done. You're producing products that would not have been produced. You are changing. And as it turns out, you're in the end going to be producing the next generation of fangs and the great companies. I love that answer yet. No, that's a nice simple answer I would really. Turns a bureaucratic job into a job that really. Makes the difference. Jeremy Mike closing question for everybody is to ask for the kindest thing that anyone's ever done for you. Wanted to people have said such kind things about me. You think we'll. That's on justifiable. Ridiculous I would think of the used to be an avid reader of one person who wrote for balance. Did date. The lead the intro for forty years at a very. flowery entertaining. Occasionally Jokey, occasionally very serious thought. Blocking his name, 'cause which is. A Muni amazed. I have had more blocks by now, but. Everyone used know him because they some of us a lot of just by Byron's really only that the sky was so good at the front. He died sadly five years ago, but in his classic style in his Intro, and of course getting into Tro-, embarrass was always a very big deal, and he kept his eye on my God lettuce, but just kind of apropos of nothing one week he says in the world of mountebanks and scoundrels Jeremy is model, the Birger. Now what do you say to that? It's a wonderful comment and it's something I think we can all aspire to write in in this business. First of all I would almost couple your last two answers in an interesting way, the idea in venture capital being fundamentally creative, I is 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 WanNa. Say Thank you for joining me for all your time. For All the insight and a beer unique conversation. Thank you Germany. It's been a complete pleasure. By the way the guy's name was Alan. Abelson there you go. Fantastic well, we close on a good spot. Thank you. Everyone Patrick you again to find more episodes invest like the best go to investor field guide, DOT COM forward slash podcast. If you're a book lover, you can also sign up for my book CLUB AT INVESTOR FIELD GUIDE DOT COM forward slash book club after you sign up to receive a full investor curriculum right away and then three or four suggestions of new books every month. You can also follow me on twitter at Patrick Underscore, Osieck O. S. H. G.. If you enjoy the show, please leave a quick review for us on I tunes, which will help more people discover? Invest like the best. Thanks so much for listening. Own.

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