I watched an extraordinary interview last weekend.
I get a lot of time to read, listen to podcasts and catch up on research over the weekends, which is nice.
I’ve got a stack of stuff to share with you actually, which you’ll find at the end of this page.
But the one which stuck out for me was a follow-up to last week’s letter.
We looked at how Jeremy Grantham was arguing the case for selling down some assets, describing the current market position as a “fully fledged, epic bubble”.
Now this is a position that I pretty much agree with.
As you know, I don’t think we can ever be too confident about anything in this line of work. And we must always balance attack and defence.
Hence why I previously outlined my four-part strategy for true diversification in 2021.
To those four buckets, I would consider adding a small allocation to a true tail risk strategy, like an inverse ETF of the S&P or Nasdaq. 10% becomes 5% if the index doubles, which you can probably tolerate if markets do double, as the rest of the portfolio will have done very well.
But if markets get cut in half, or by 70% (remember, the Nasdaq fell by almost 90% after 2000), then its value should jump to 20% or 25%, which will provide very welcome relief in a deep bear market scenario.
Anyway, that’s not what I want to talk about today.
I want to talk about an interview with Jeremy Grantham (you can find it on YouTube, titled Why Grantham Says the Next Crash Will Rival 1929, 2000).
Because following on from his excellent piece about the state of markets a month ago, you can picture me spitting out my tea in shock when I heard his answer to this question.
Interviewer: Where can investors hide from the coming crash?
JG: Shares that benefit from the greening of the economy will do much better than the rest.
Anything to do with renewables, electrification of the system, electric cars, etc…
These are all going to have top line revenues that dwarf the declining growth rate of the rest of the global economy.
It will take trillions of dollars to decarbonise the global system. It will dominate everyone’s portfolio.
If you have to own American stocks, these are the ones to own. So go find yourself a good climate change fund.
And they’re doing well, now that the focus is clearly, finally… It took people 20 years to wake up, but in the last year people have begun to understand the size of the problem and the need to move money into the green economy.
Spit-take: while everyone else is jumping to the easy conclusion that green stocks are leading the bubble (and Grantham does point to Tesla and QuantumScape as examples of individual stocks which are excessive), the king of calling bubbles himself reckons there’s enough truth behind that story that they might be worth owning.
Perhaps he’s a reader of this letter!
Jeremy, if you are reading, hello, well done, and thanks.
Here’s what I think, and I’m quoting myself from a recent email to a friend who works in the space.
It’s very easy to point at Tesla, QuantumScape, ITM and co, and say “bubble”… However, I feel we mustn’t forget that 18 months ago we were screaming out, wondering why no one was looking at this stuff. So I believe things definitely came from a very underappreciated position, and this should mitigate some concern. Also, it’s reasonable to expect, as Jeremy Grantham put it (while decrying a wider market bubble), growth rates for the winners here are likely to “dwarf those in the rest of the economy”. So there is some reason to it, at least.
Also – “bubble” suggests an ephemeral thing, which will be gone once it’s over. But in this case, I’d say the early bitcoin mega-rallies are a better comparison. Yes they look bubble-esque in their extremity, in the short term… But this transition is a multi-decade trend and we shouldn’t lose sight of that. Heck, if it does all tank, then it will surely be a great buying opportunity, rather than the end of a silly fad. It’s a 20-year trend, which might be getting ahead of itself. But again, I think it’s worth remembering that and distinguishing it from a pointless speculative bubble.
He went on to talk about how governments should focus their fiscal stimulus on green solutions and infrastructure, and I’m paraphrasing:
Govt spending is quite different [from monetary].
If you can spend on infrastructure, especially green infrastructure, You’re killing two birds with one stone.
You’re doing necessary investing, decarbonising the economy, that if you don’t do will be such a shock in twenty years that it’ll destabilise the global system. You have to do it. You turn it into a virtue.
Many of these areas have a high societal return. If you put in an efficient grid, everyone benefits, if you put in well insulated efficient homes in every cold area of the country, society benefits. You use less energy. These are handsome returns.
I certainly hope that the incoming admin will have a continuous strong public spending program emphasised as bridges, roads, but doing green infra, wind, solar, storage, research, retraining people for green jobs, get it done, it has a high return. In the end, it may save our bacon.
This is classic build back better stuff, and I completely agree.
Grantham also made some other fascinating points which I’d like to share.
Firstly, about the signs of a bubble bursting, and I’m paraphrasing again:
You find the stocks that have done the best – Tesla, QuantumScape…
And you wait until they start to have big daily drops, and swings in volatility. That’s a very early warning.
Back in 2000, the pets.com’s were taken out and shot first. The little guys. Tiny market caps.
Then they took out the junior growth stocks and shot them. Then the mediums. And by the summer, they were taking out the big guys – the Cisco’s. The entire tech part of the market had been shot.
So they got tech, which was 30% of the index. But the other 70% continued to rise, until S&P reaching a new high in September.
Only then, once tech had been taken out, did the other 70% roll over en masse, like a giant iceberg.
Bubbles don’t break en masse. In 200, they sliced off tech, and the dotcoms, then the rest gets infected, and in that case went down for over two years, by over 50%.
He also made an interesting point which relates to the shifting consensus on how capitalism should work, and again I’m paraphrasing:
60s were the peak of American capitalism.
Milton Friedman has a lot to answer for.
Companies used to feel a responsibility to employees, the city they operated in, and the country.
It drifted slowly away in the 80s and 90s.
Keynes has a lot to answer for. The idea of profit maximisation is a terrible business formula, and also shockingly amoral way to run anything.
An individual who only looked after their own interests, exclusively, that’s sociopathic.
We are not like that as individuals. Altruism are crucial in society.
That some people set a good example and lead (like Biden).
Anyway, I do recommend you go and listen to the whole thing, it’s a great half an hour.
This last comment is especially interesting.
I have written before (here) about Japan and the ideals of stakeholder capitalism.
It’s still capitalism, but less greedy and more socially conscious than our Western form.
Companies feel a duty to look after their workers. To care for the environment, the local area, resources, the country, their customers. They are less focused on profit.
Profit maximisation has led to greed, share buybacks, and mis-incentivised management.
Environmental, social and corporate governance (ESG) is tackling this and it has twin aims.
The moral argument, that we would prefer a more reasonable version of capitalism, which is less greedy and more long term.
And the analytical one – the companies which are more caring, thoughtful, and lon- term orientated will offer better rewards to investors.
The ESG movement is just good investing in disguise.
It’s disguised and often seen as a bunch of namby-pamby virtue signalling. As a fad, as box ticking, as greenwashing, marketing, and subjective nonsense. This criticism is not unfair, but it is wrong, in my opinion.
Because what ESG really is, is a simple idea.
The idea that companies who think about less tangible risks will do better than those which don’t.
That a company which recognises that environmental factors present both a threat and an opportunity and act accordingly will do better than one that simply ignores climate change.
That a company which looks after its workers, with good salaries, perks and a positive environment will do better than one which treats its workers badly, underpays them and doesn’t contribute to their pension.
That’s just… good sense.
As Grantham says, “pure profit maximisation” is a bad business strategy, as well as morally questionable.
Anyway, lots to kick off the week.
Here’s a few links to things I got my teeth into over the weekend:
A podcast with the UK’s climate Envoy. He makes some very interesting points about China, and about the importance of COP 26 being delayed until this year (it changes the US’s contribution materially). It’s called U.K.’s Climate Envoy on the Race to Net Zero, and you can find it on Apple Podcasts.
Also – my own podcast! I made a guest appearance on the Booze, Booms and Busts podcast, where we talk energy transition, crypto, and beers both small and large.
Finally, a beast of a podcast, which is actually from a while back, with Grant Williams and John Hussman, whose work I’ve recently discovered and really enjoy. It’s called Hmmminar 5 and is available to view on the Grant Williams website.
Editor, UK Uncensored