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Here's the outer value. So, today is part two of summarizing and commenting on an interview with Ray Dalio and Jeremy Grantham. So, go back to part one yesterday if you want to see uh the first half. But, today is probably going to be more than 10 minutes long and certainly more than 2 minutes. So, if you're on Twitter, click one of the links to go to the full episode.
And if you're on one of the 10-minute versions on LinkedIn and Tik Tok, and where else? For this 10-minute short form uh Instagram, then uh go to one of the larger episodes, the longer episodes on YouTube or Spotify or other podcast platforms. Anyway, let's get into it. So, part two. So, they were asked the question, both of them this is they're both talking together, "How are you How are the trends you and Jeremy have been describing likely to play out in the next 5 to 10 years?" Ray was asked.
So, he said, "This is the This is a three This has been a a three-year The last three years has been a very aggressive monetary expansion. There's a lot of inflation pressure." And I noticed he said that on a short-form video that's just posted on his channel to YouTube uh in the last few hours. So, there's been a lot of inflation pressure and everybody's long.
Everybody's been long and wants everything to go up. It creates a dynamic where everything goes up. And there's the short-term business cycle of 7 years on average. Sometimes longer, sometimes shorter. He said, "We We seem to be moving a lot faster at the moment. We're going to be in a tight environment, and that's that and that changes everything.
So, returns on equities and well-being of companies is going to affect that. And the rising rates creates a squeeze on equities. Change It changes the economics and the cost of debt is changing. So, basically he's implying that asset prices should probably be suppressed or go down. Uh there's a shock, a punch in the face, as Jeremy describes.
And what he's talking about there is is the bubble bursting, a bubble bursting. He's not as explicit as Jeremy when he's talking about bubbles, but he does definitely seem to see it. Because that's what Jeremy just described, a bubble bursting, a big one. So, he says uh this thing things everyone believes in, that tech companies like in the tech bubble, and they're getting hammered.
So, people believe that tech companies were were the future, they're going to go up. And he said like a the the negative 75 the 75% decline in Cathie Wood's funds, mentioned that. Uh the core um And so, but he says companies adapt, and uh you know, corporations adapt when times change, and we're just at the beginning of that.
And it's most similar to the 1970s, he thinks. And Jeremy Grantham says something similar to that, that first the bubble bursting, and then he thinks we're going to a environment similar to the 1970s. So, Ray says this the 22 the 2022 election will have a big impact, he thinks. He talked yesterday about he thinks geopolitics and politics will have a bigger impact than economics or an impact on economics over the next period of time.
Thinks that we'll see a greater political extremism. Uh moderates are leaving. There are lots of populists, both from the left and the right. And there's a risk that system is in jeopardy because of extremism. And people not accepting losing, like losing the election. That's what happened last time, right?
And he sees that in the risk in the US and Europe is in the same is that position. So, you know, pretty not very pretty pessimistic there, you could have to say. It will be It will be important to diversify well in terms of investing in things and to be long and short different assets in order to that perform well in that environment, like an inflationary environment and a low asset growth environment.
So, then they turn to Jeremy and ask him, "We have a market today that feels it superficially like 2000." He says, "I think that it's going to play out initially like 2000. The bust that happened in 2000 was quite a long bear market after that. Unfortunately, I think it's going to phase into the 1970s and the deflationary effects on the economy and the stock market will result in a longer a world rather like the 1970s in which all assets will be priced lower than they are today." So, they're both I'm on on the same page there.
So, what he says about inflation is that I agree with the word Ray that monetary policy in general Fed over stimulus for 35 years, the war and COVID, all three influences that guarantee we have we have a problem in the short and medium term. But, he says what worries him is the longer term inflation worries.
We are running out of people in China and the US, the developed world, all will be squeezed for labor. He talks about but there's also something about population decline here or not replacement rate. We have a scarcity in developing developing in resources as well. He's talking about population decline in developing and those in China as well.
Europe, US, and resources, but also at the same time there's a resource scarcity. So, we're deep in we're digging deeper oil wells. We uh uh We the the iron ore is not The quality of iron ore is going down. Uh didn't know that. The first The The So, the quality ones are the first to go. Is it for 100 years?
Tech got a hit of scarcity. Tech Tech Tech got us here of scarcity. We have been getting to run out over the over the past 20 years. We are fragile now. Uh COVID showed that. And the same applies to food. This pressure price pressure on raw materials, metal, food, and long term and long term on labor.
It feels like a new era in which inflation will be part of the background music. Like it was in the 20th century. So, there he's talking about scarcity of raw materials continuing in in you know, tech's got ahead of that. Every time we thought there was a scarcity This has been happening for hundreds of years.
We're coming to the end. Resources have run out. Then we find a way to produce more, but he's saying that you know, you can agree or disagree with that. I tend to think tech might efficiency, tech sustainability, but he's into that, too. As he As he does explain later, he's one of the biggest area areas he's focusing on investing is climate climate tech.
So, he said the Fed hasn't got a clue about the debt bubble. That's the end. Uh that more debt creating more growth is not proven in the data, which is the assumption at the moment, and there's no evidence for it. It's it's to do with higher risk from time to time. And Ray says reiterates, you might have heard this before, cash is trash.
Still thinks cash is trash. The inflation environment, bonds, and debt aren't going to be good, he thinks. Claims on financial assets claims on financial assets. So, you're talking about financial assets not being real like not being like money, it's just a claim on if you've got an appreciating asset, there's a claim on that.
It could go down. So, he said uh he said prepare yourself position yourselves for inflation and assets going down. In my and assets going down, that's my notes because uh that's simply the implication. And I agree with Jeremy on commodities. Okay? So, they both think there's pressure on commodities.
Com- companies adapt to a commodity super cycle. You have to uh neg- you have to you have negative returns in that environment. They're talking about negative returns on commodities but in general assets. Separate alpha from the beta, he thinks. How to create a balanced corporate portfolio in that environment.
So, he explains you can reduce risk and uh raise returns by having inflation by by raising inflation investments. Inflation invest- investments that will perform well in an inflationary environment, he's talking about. That's largely missing from portfolios now, he thinks. And we should be very well diversified.
That's what he's uh recommending. It's not my recommendation, not uh not investment advice. This is just entertainment. So, the the social and political conflicts will be a big investment thing in coming years, he thinks. Uh in in need places with good income statements and balance sheets. Places meaning companies and countries.
So, that they will can weather weather those things. I don't think he might mean weather the storm, but he hasn't come out and said it. And they also and also civil and and they are civil with each other. So, sort of So, he's talking about sort of safe places, really. Internal conflict and bad finances are going to be a defining characteristics of where to invest or even where to be physically.
So he's pretty pessimistic about geopolitical environment and many even mentioned a war at one point in Iraq, possibility of that. Am I going to take I am I going to have a risk of being in an international war? There we go. It would raise lots of uh lots of threats, different investment threats he's talking about, economic threats.
Look to parts of the world that are not plagued with this, he thinks. I can merge and he he mentions emerging Asia, India, diversify, look at neutral countries during that time as well. Uh watch out for government controls on capital markets though and logical step which is a logical step that happens, history has shown that.
So going back to Jeremy, he says if you listen if you believe in inflation, you know that inflation's going to happen and going to stick around, you know you know resources do very well and the rest of the economy does bad. There's a strong case for a resource portfolio, he thinks. And the last time we had a super bubble in commodities, there were large mines waiting to come online, but they they put no capex into that sector recently in the last 10 years.
And since China started slowing down its buying and growth in the past 10 years, so it's in a different situation. Raw material constraint he's talking about there, so and raises uh the US dollar is asked about the US dollar as a reserve currency, what what is he's talking about, what is a store of wealth in the coming in this inflationary environment?
He says all currencies will compete, a lot of them. Uh we're in a store of wealth issue. Store hold, we're in a store hold of wealth issue. So he's talking about where you know, as a store store of wealth, what is that in this environment? Think about currencies to hold store holds of wealth. Gold, he talks about gold for wealth.
Saying gold is an overlay and an insurance only only an insurance policy in war, it's the only asset that's not someone else's liability. So, it's like a thing in itself, store an actual store of wealth that's not based on debt or credit. It has It is international and tried and true. It can be moved around.
It's a hedge. As a hedge, it's good, but not as a core asset. And he talks about 15% of portfolio being in gold, which is quite high, I would have thought. I'm pretty much sure that in earlier times he's talking about 10%, but maybe it's gone up to 15. He said cash will not be at the best asset class.
Cash is trash. Think of store holds of wealth, he says, but not cash. Must be able to move it from country to country. Cash is trash. So, Jeremy talks about climate change. He's investing in climate change. He says obviously gas oil and gas are unsustainable. And uh he talks about reading reading history of the rise and fall of civilizations over thousands of years.
And there are about And there are five or six major reasons they happen, including overburdening the environment. Complexity is another one, too much complexity. Uh which is all complexity is very is energy intensive is what we have kind of have now. And the current global civilization checks off almost every one of these five or six things.
So, pretty pessimistic. It is humans appeared to be hardwired for to self-destruct. We will expand to fill the the space available. But he does say, you know, more optimistically we've got some The clauses from this. Uh and one of them is choosing to have fewer children, which we're doing. About population sort of not replacement.
We're way down on the on replacement rate in places like Europe, Japan, Taiwan, China. And that's a necessary condition for sustainability. So, on the one hand, it's you know, as we were saying before, economically, it's a stress. It's uh not great economically in terms of economic growth. But, it's good for sustainability.
So, he's saying also the speed of our science is also a good factor. We're trying to compound to an on on a finite planet. And but he says that these there is a whiff of the infinite that we have in technology such as fusion and green, you know, green tech. Um And our fusion of, you know, energy that will never run down, abundance of the energy, and that is cheap.
And geothermal is infinite and green. So, these things aren't assured. We don't have enough but there's a possibility of that. And also to energy storage to go along with that, which basically is batteries. And I know he's invested in a battery company. Um and so, energy to storage energy storage to go with renewables.
If we can get the cost down and mix it with solar and wind, the time it takes to get there will be will be a problem though. So, if we can get there in time with climate change looming without having too much damage or irreparable damage. So, in Jeremy has a foundation for climate, uh and he finds it an exciting area that he's working on uh and investments in.
And we have to look at growth that's sustainable versus not. And he thinks that's kind of been the biggest areas in coming decades. And I I actually agree with that, even if it's even if prices are elevated or have been the last few years, it's it's got to be it is. I mean, it's just it's got such a huge tailwind.
And he talks about EVs versus ICE vehicles, combustion engine vehicles, and fossil fuels versus renewable. So, you know, these ICE vehicles and fossil fuels are kind of sunset, even though we'll keep using we'll probably keep using them just because the whole you know, the whole world runs on it, but progressively changing over transition.
I mean, it's got great tailwinds. So, that's it for the interview. That's all. So, I hope you found any value in this. Like and subscribe, wherever get notifications, and join me on Twitter at the Art of Value. Okay, hope you enjoyed that. See you next
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