Countdown to Exchange: GMO's Jeremy Grantham

Karrie Gordon, staff writer, VettaFi: The last few years have been tumultuous ones for markets and investors. This year is shaping up to be little better, with a profusion of risk factors in play. What are the top three things you’re watching in 2024 markets?

Jeremy Grantham, co-founder and long-term investment strategist, GMO: There’s a distinction I’d make between tactical, short-term thinking — this quarter, or this year — and what really matters, which is the long term.

Three topics that I think really matter in the immediate future are:

1. AI: It is a major development like the internet itself. And it’s being greeted in the usual way, where the initial response creates a bubble. This has in fact caused a bubble, which is also occurring in the middle of the deflation of the already existing bubble caused by COVID stimulus, a situation that has no precedent.
2. The population bust and related consequences: In a small town going from 14 restaurants to seven as it shrinks, what’s that journey like for its economy? It’s barbaric trying to manage topline down. The Japanese have done it brilliantly.
3. Butting our heads on climate and resource limitations: The divergence is getting fascinatingly wide between the deterioration of the climate, with increasing government and social response, and the terrible recent performance of the stocks that are best positioned to benefit from action on climate change.
4. The problem with climate investing is it is very long term. Solar power has no ongoing fuel cost like a coal or gas plant; it is paid for entirely up front. So it is very exposed to interest rates. Markets are overreacting in the short run, as they usually do, to the current trend of increasing discount rates.

Gordon: I’m happy to see you pushing back against some of the climate narrative that’s so predominant lately. The long-term opportunities of climate investing aren’t discussed enough and are often drowned out by the perceived short-term risks. Speaking of risks, what advice do you have for advisors navigating ongoing market uncertainty?

Grantham: The rest of the world is looking much cheaper than the U.S. Emerging is very cheap. We’re also particularly interested in Japan. It has been doing well lately and looks to be in the midst of a multiyear, steady improvement of the effectiveness of its corporate system. Japan was always a laggard there, but now it’s catching up. They have a 30- or 40-year head start versus the rest of the world on facing population problems and have adjusted already.

But you also have to own the U.S., and I’d own U.S. quality. Quality, although not spectacularly cheap today, has a long history of slightly underperforming in bull markets and substantially outperforming in bear markets. Even as the odds now of a longer-term bear market are good, this time quality has outperformed in a bull market too, which is a bonus! So put your money into the GMO U.S. Quality ETF (QLTY B+).

Resources are very cheap, as they usually are, which is why they tend to do well. In the very long run, they’re finite and running out, and so their prices will rise. Right now, I worry about longer-term growth trends like geopolitical problems and slowing productivity. Resources are counter-trend; they tend to do well in serious longer-term negative movements in the economy, and at long horizons they’re negatively correlated to the broader stock market. They’re far and away the most diversifying group.

Gordon: You mentioned QLTY, let me follow up on that. GMO entered the ETF arena last year with the launch of the GMO U.S. Quality ETF (QLTY B+) in November. Can you speak a little about the decision driving the firm’s move into ETFs?

Grantham: Part of GMO’s history is that for much of our existence, a wide variety of investors were familiar with our firm and our strategies but weren’t able to invest with us because of how our vehicles were set up. In recent years we have made great strides in making GMO much more accessible. Our extension into ETFs is our next step in that direction, and is in response to sizable demand from the intermediary and wealth management communities.

One of the great elements of ETF is that they can be tax-advantaged and operationally efficient. Launching an ETF allows us to offer a vehicle that aligns with these investor preferences. And our initial ETF has done spectacularly well so far! After just over 50 trading days we have hit $200m in assets, and we are thrilled to be reaching more clients.

Gordon: There will be a wide range of content and activities happening at Exchange this year. What is something you’re looking forward to at Exchange?

Grantham: What I’m hoping to see is better ways for investors to participate in climate investing. There are a few public companies that are helping push us to sustainability, but not enough. Green technology is very promising and is so important for the world — but most of it is only available to VC investors.

Gordon: Finally, you’re one of the legendary investors who’s been a prominent voice in finance for decades. What is one of your favorite inspirational quotes, and why?

Grantham: “Anyone who believes that exponential growth can go on forever in a finite world is either a madman or an economist.”

It’s a quote from my favorite Brit and favorite economist, Kenneth Boulding. Because it was said a long time ago, it’s funny, and it points out the key problems with economists. They don’t do long term, they don’t do resource limitations, and they don’t do energy. We are already a few decades into the phase where we learn the truth of this phrase, and it’s going to be the most horrific grinding of economic gears you have ever heard. And to celebrate it, economically, we are having the most extreme party in the U.S. stock market ever, which is an interesting irony.

Don’t miss Jeremy Grantham on stage at Exchange with Cameron Dawson of NewEdge Wealth on Tuesday, February 13. Register for the conference here and see the agenda here.

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