CNBC’s Wilfred Frost sits down with Jeremy Grantham, legendary investor and co-founder of GMO, to talk about the markets and global economy.
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I was really hoping the magnificent bubble ending to this. As there had been to the three. Great recent experiences where. The housing bust. 2000 tech bust and Japan they were all classic they ended with euphoria.
And a rapidly accelerating stock market. They're easy you know they'll be followed by an abject decline. This one I was hoping that would happen doesn't look like it will. And therefore. You're going to have a decline of a different nature. I wrote a paper three years ago called not with a bang but a whimper. Which I suggested that does the trend line that used to be 15 and has jumped for 20 years to 20 or 21 which is a lot higher. Is probably not going to go back the way the value managers would love it to in a hurry. It may move back. Slowly and steadily. And I think it will move back to have two thirds of the way but it will take 20 years. Not the usual. Five six or seven years. So this will be limping along three steps down two steps back. It's not a typical experience but it looks increasingly likely to me.
And when we see that the Fed has pivoted and become relatively speaking more easy once again and the ECB has done that to today. Does that make you think that U.S. equities are attractive for the next couple of years ago.
No I'm afraid not. You can't get blood out of a stone. At these prices. Even the Bears the Bulls and everyone in between a GMO agree that over a long horizon like 20 years. market will be delivering two or three percent real. And for the. Last hundred years we're used to it delivering perhaps 6 percent real. So this is a fairly painful. It's not the end of the world. But it's going to break a lot of hearts. When we're right. 3 percent a year is going to seem terribly disappointing. Now if you stay away from theU.S. which I absolutely would. In emerging markets I suspect you can do even better than six maybe seven or eight if you tilted towards value your five or six Your forecast is for factual declines in U.S. equities is that right. I would think declines are more likely than the other and if the market is up it's.
Highly unlikely to be up a lot. And I think that's the key thought. And the main reason was that valuations of those valuations and the fact that the economic cycle. Will clearly not be in our favor. The reason we've done so well for 10 years is we had an enormous pool of unemployed. This is not a trend line growth. This is taking 1 percent a year almost. Out of the unemployed pool and sticking it into the marketplace. And that has boosted our apparent growth rate by almost a point a year. This economy does not have a trend line growth of 2.8 or 2.5 times the trend line growth of about one point five. And we've been boosting it on a cyclical basis. And people if you keep anything up for 10 years in the stock market people think it's the trend line but it is.
And so on that topic of the economy rather than the markets in theU .S. Do you fear a recession are there any signs you see that suggest one is on the horizon in the next year or so.
I think people have been worried about recessions for two or three years. I've taken the view that there was enough labor hiding in the participation rate we had frightened people away out of the workforce but.
On on on the numbers they were there looking around somewhere and in the last two or three years we have quite effectively drawn back about one and a half percent. People who were dismayed and weren't bothering now have registered and show up and they employed all the unemployed. And. That game may still have a point and a half left and a point and a half could keep us going for another couple of years. Or it could stop tomorrow. The point is what we cannot do is we cannot grow at the speed we've grown for the last 10 years. Because the labor pool is simply not available. And the underlying productivity has not been there.
For a long time. And what about the global growth outlook. Clearly fears about that had surfaced in the second half of last year. Do you feel like they're adequately priced in now or is that one of my problems is I always like to think longer term apparently than anybody else but when companies do very well it can be inconvenient but the growth rate of the population of the developed world. Has gone to hell. And the population eventually will start to decline in the next.
Couple of decades. Everywhere in the developed world. You need two point one percent fertility rate to replace. The U.S. just announced one point seven six 15 percent below that it's below in every developed country. This really has an effect on the top line numbers. And there's no way around that it's not going to change ever. I would. Guess. So we have lower. Workforce growth. We have an aging population which doesn't help. And the growth rate of the of the whole developed world is settling down. Maybe one and a half in the U.S. maybe one in Europe. Are much lower than people seem to get their brain around and outside Europe. I think the population growth is. I am certain the population growth rate is also slowing. And so generally speaking we can look at a world where the secular growth is getting slower. That's the long term picture. Over the next two or three years I suppose the understatement is your guess is as good as mine.
Sir enough and let's dive into Europe a little bit more as we were discussing the ECB has downgraded its growth forecast from one point seven to one point one percent. Is there a bigger problem bubbling under the surface. Could they face another existential crisis like they did in 2010 to 12 anytime soon.
The downgrading by the way is getting awfully close to what I think is the long term growth rate about one. No one else believes that but I'm pretty confident they will eventually. So they're going to have to learn to live with a low growth rate. They have of course other problems of immigration which has been rattling the cage so viciously for the last three or four years politically. And that is highly unlikely to go away. Africa is the only place on the planet where the growth rate in population is still. Prodigious. And the UN says they're going to produce an extra three billion people. And the rest of the world will be declining. Now there won't be three billion extra Africans but that may well be one one and a half or two billion. And there will be immigration waves that make the recent experience look trivial. Now it's going to stress out the European politics and I think that will be the biggest factor. And as they get stressed out it produces opportunities for the big players Russia China to misbehave or behave about it but it increases uncertainty.