Transcripts For KQED Charlie Rose 20130312

We seem to be muddling through quite reasonably given all the obvious problems rdz you worry about a number of things including the United States will never, ever, or you dont expect it to ever go back to the level of Economic Growth and gdp annually that it did in previous years. Right. And i worry that the powers believe that it will. So clearly bernanke seems to believe it will go back to 3 , the good old days. Rose you dont think thats possible. Well, the population, which is a huge input into gdp, its population times productivity. And or population plus productivity. And the population which often hit 1. 5 while i was in america, has dropped all the way down to maybe 0. 2, 0. 3. And these are kind of official numbers adjusted for the fact that he work a little bit less each year. And women, who hardly worked back in the 50s really created a billing boost in the number of people hours offered to the work force. Rose so that acceleration of women in the workforce has will seed down. No its completely finished. It peaked out in about 2,000. So now we dont have a very rapid growth in people, women are finished. We work a little less. And as far as we can work out, we shouldnt expect more than about 0. 2 increase in hours offered to the workforce. And in the old days it was, you know, well over 1. So its dropped by a point. And yet bernankes estimate of 3 hasnt dropped by anything. So by inference, hes assuming that somehow the productivity will accelerate by an offsetting 1 . And that is there is no possibility of that. Last 30 years, productivity has been 1. 3 a year. And in the 40 years before that, after world war ii, it was 1. 7, 1. 8, 1. 9. So its actually decelebrated decelerated. And theres plenty of reasons to think it will modestly decelerate in the future so if you have 1. 3 productivity, and lets say you hold that, which is fairly optimistic, and you add on your 0. 2 for extra man hours, youre at 1. 5. And not at 3 or not at 2. 5 which is the imf and the world bank. And even at 1. 5 doesnt make me happy because it treats resources incorrectly. It treats trades an increase in resource cost as a boost to gdp. So if you drill, a much more complicated well that takes more steel and more people, the gdp goes up. When i think its obvious to anybody that providing resources is a cost of doing business for the rest of the economy. And if you spend 150 producing a barrel of offshore brazilian oil, and the same barrel, exactly the same utility as the 10 soundee barrel ri is to you gone, you are not going forward. And yet the gdp measurement clocks in everybodys employment, and so the more people you need to get a barrel of oil, they think the economy is stronger. And of course its weaker. So we worked that out. And we say how fast is the rest of the economy growing. Take out the resource component, and the answer is in the last ten years, about. 5 a year,. 4,. 5 a year less than is measured by the gdp. So we have to knock that off which takes our 1. 5 down to a point. Now when the price of resources was declining as it did for a 100 years up until about 2000, it was underestimated. Maybe underestimated by almost a quarter of a percent. When the price of resources are going down t makes getting wealthy much easier. And in total the typical commodity dropped by 70 over a hundred years. And then it turned on a dime and gave the whole 100 years back between 2000 and 2002 and 2008. In six years it gave back a hundred years of decline. It went up more steeply than it did in world war ii it is quite amazing no one talked about it, there was no fuss, there was no world war three. But suddenly we seem to be running out of cheap resources. And when we look for the reason, incidentally, it seems to be steady population growth, and perhaps more importantly, the enormous china, 1. 3 billion trying to grow faster than the 20 million South Koreans did 20 years ago, growing their demand for resources at least 10 a year. And pretty soon you end up with numbers that dont seem to compute very easily. China is 53 of all the cement used on the planet, not traded, just used. They use 47 of all the coal, 46 of all the iron. These are unimaginable numbers. And if they mean to even slow down to 7 , it means 10 years from now weve got to find another 47 coal, just for china. Rose but let me just stay with the demand in china. China is fridaying to shift from an exporting economic model to a domestic demand economic model. Will they be successful at that . And if they do, because of a rising middle class in china, and population growth, will that also serve as new markets for europe and the United States, and latin america . Of course it will. Rose and therefore Economic Growth. Yes, its a gooden begin in the short term for Economic Growth. The problem is its incredibly energy intensive. And if they mean to keep growing at these rates, they are chewing up coal and oil. Rose an polluting their environment. That has enormous environmental consequences which in the end could be quite deadly. But in the short term it pushes up the price of oil. And what has happened, the most pont thing, really, in resources is that the price of oil, which was 25 bucks a barrel in 2000, is approximately a hundred bucks today. Its four times. Its also half the cost structure of all the other resources. So when if goes up four times, if you are mining copper, youve got to spend four times the amount on your energy. Plus the quality of your copper ore is declining, so maybe su have to spend 8 times as much. And so the price keeps going up. So if china continues to grow at these rates, yes it will stimulate Global Business and b it will keep pushing up the resource prices. And resource prices have been rising faster than Global Growth rate so they are squeezing the rest of the system. Rose why were you opposed to the keystone pipeline, because a lot of people think we need all the its very simple math. Fossil fuel we can get. Theres a short term, medium term, long term argument against them. But the long term is the carbon math is pretty simple. We have pushed up the temperature by 0. 8 degrees centigrade. Rose global warming. Global warmingment and you see the affect. Everybody sees the affect in new york floods and burning up the midwest and burning up the whole of russian wheat crop last year too and so on around the planet, for three years in a row it is really getting quite obvious. And spring arrives a couple of weeks earlier than it used to. You cant really miss it. And we know what it took to push it up, 0. 8 degrees centigrade. It took a certain amount of Carbon Dioxide which we can measure carefully and we can calculate how much it would take to push it up to 2 degrees. 2 degrees is scently agreed by clime at scientists and others to be a boundary. You go above that and you will certainly have really dire consequences which will get worse for a long time because these things flow very slowly through the system. Stay below 2 degrees and we might limp our way through this. And so we can calculate how much in the way of carbon it would take. Its actually 565 gigatons. Its a lot of carbon but the bad news is that we already have in our prove own reserves five times that kment is so we have enough to completely cook our goose and guarantee that our grandchildren are near starvation and so on with floods and. Rose do you think we will . No, i think im not optimistic about the common sense of our species. Rose of our species or our politicians. No, of our species, particularly the politicians. But i do think that in a real crisis when things really start to go wrong that we will belatedly have some determined. Rose havent things already really gone wrong . Enough for scientists to be frightened. But not enough to frighten the average guy in the street. Rose heres what is interesting about you. To listen to you talk about economics an listen to you talk about the environment, you are a numbers man. Yes. This is entirely numbersdriven. Thats how i got into this trouble. You just look at the numbers and they say watch out, were going to fry. And if you mean to pump tar sands, were going to pump all the good oil, all the good oldfashioned high quality, low cost oil, were going to pump all that and were going to pump all the traditional natural gas. But if we mean to dig all the coal and we mean to scrabble through the tar sands, extremely costly and utterly ruin us environmentally, not just Carbon Dioxide but just terrible things that they are doing, then were toast. We have no chance. And by licensing that pipeline were saying to the world, were going into round three. Were going to start facilitating the flow of such utterly Dangerous Energy resources that we have no reasonable hope of surviving with the planet as we know it. Its a very nice planet and it has a lot of biodiversity still left. Rose right. And undiscovered, even. Yes. And we humans probably taking care of maybe 10 in the last 10 or 12,000 years. But we are racing through in terms of getting rid of biodiversity. This is known in the trade as the 6th great die off since the beginning of time. And its happening at lightning speed by previous. Rose you are sounding malfusian. He wasnt interested in the die off of the species. Rose but he was interested in food. Well, he described the past very accurately. We had spent lets say 12,000 years living with our noses pushed up against the boundary of food supply. And sometimes there would be four or five bad years and they would die. And sometimes they would have a great run of 20 years and they would multiply. But that was the determining factor, like a rat population. We just move back and forth. And right up until his time. And the terrific irony is as he is signing his book which is 1798, theyre digging the first coal. So that the coal and then oil gas bought us a timeout, an amazing, but short timeout which will probably be about 250 years in which you have almost infinite energy, a gallon of gasoline is Something Like 200 man hours of labor, try pushing an suv uphill and you will realize how powerful oil is and gasoline. And so ode people became, in a sense, richer than the kings had been in the past. And it meant surplus, food, population growth, civilization, science, all these wonderful things. But we only had a limited supply. Millions of years of stored energy from the sun. Its in your bank account. And were draining down the bank account without any real regard for what were doing. And what it leaves our children and our grandchildren. Its our inheritance and were running through it. Rose what are you doing about it . Basically everything i possibly can. Rose protesting a pipeline. No, no, we have a foundation for the protection of the environment. And the money we get goes into it. And we spend it as effectively as we can to combat some of the nonsense out there in the airwaves. If you have most of your stock value in the value of your oil reserves our your coal reserves, you will be pretty reluctant to entertain the thought that it would be poisonous to our longterm wellbeing to pump it out. So they are. And they oppose it. And theyve opposed it very effectively and the propaganda has been superb. But as ive often said it leaves me with the question have they no grandchildren these people. Rose let me move to agriculture because ive gotten a little bit interested in agriculture because of bill gates. Bill gates is really interested in agriculture now. He just went down to mexico and he and carlos slim launched some project down there. Youre interested in agriculture. Certainly. Rose how did you become interested in it and what have you learned about it. And why do we care . We got into resources via the numbers. We had always studied asset class bubbles. Right. And looking through the bubbles we thought we had found a situation where every single bubble had always broken without exception. And then i began to realize the oil had spiked quite a long time ago and was never going to come down to the old price it was 16 a barrel for 100 years until opec in 1974. And then it jumped to 35, what i call a paradigm jump which was unique in any large asset class. And it traded for about 30 years with the usual great volatility, oil is very volatile, around 35. And then in the last few years it took another jump to about 80, 85. Which is a whole lot different from 16. And you can wait as long as you like until you die of old age. Its not going back to 16. Rose is it going back 20to35. No, this is cost driven, you go to shell, to bp, ask them what does it take in your mind to find a decent amount of oldfashioned oil. And they will tell you, 80 bucks, 85 bucks. Rose this is again how you look at numbers. There is an impending shortage of fertilizer, according to you, yes . There is a guaranteed longterm shortage. And thats what separates most of our work from that of other people. We find that oil is a paradigm shift. We then say well why shouldnt it apply to all the other things that are in the ground. And we found it did. Then we created our index showing that the price had declined for a 100 years and then exploded. And then within that subset i started to say, and which is the tightest, most problematical situation and that brought to us phosphate oil ors to forous. And the scary thing abouts to for os which really does give me goosebumps when i think about it, its an element. You cant make it you cant substitute for it and no living thing, humans, animals, vegetables, everything needs phosphorous to grow. You cant grow anything without it, and we are mining it in what we call big ag, big agriculture, were mining it, it is a finity resource, now that should make you pretty scared am you can calculate how long it will take to run out. If you were for a second to take out one country, morocco and say we will ignore their wonderful, cheap, high quality reserves, a dried up ocean, incidentally, how much have we got left. And the answer is at 2 a year growth to allow the chinese to eat a bit of meat now and then, weve got maybe 50 years. Rose and then its gone. And then, you know, youve got to be optimistic. We have found ways to develop new things all along. But you cant substitute, very few things in this world. You cant substitute for water, not really for soil, not potassium and not phosphorus. Rose how do you know we are not going to develop a desal inization process that will provide us all the water we need. Well, thats well respondedment because i am willing, i am willing to not fight a war over water. Because water desperately tries to recycle. I mean its the most amazingly helpful product on the planet. Rose right. You take a really dirty polluted body of water, it evaporates, pure water and then falls where you need it i mean this is really helpful. Phosphorous doesnt do that. It stays underground needing lots of energy to mine it. And its amazingly high quality. Rose but hasnt science for the most part, i mean are you a numbers man again. But hasnt science generally, you know, helped us i mean the reason for 250 years. Rose yeah. What a coincidence. Rose science has helped us. Science is to the going to stop. From about the time we found coal and oil, science has helped us. Rose right. Where was science before that . Isaac newton and the guys, these were scientists rrz yeah. And yet we lived to the limit of our food supply. We never started to develop this kind of arrogance that we can do anything with the infinite capacities of the human brain until coal and oil gave us this supermann power. And now, now, of course, we. Rose without chern oibl we never had the confidence in the science. We would have continued to have grown the science like it was growing in the time of, you know, amsterdam and so on. In other words, doing nicely in these Little Pockets of wealth, making nice scientific advances, progressing slowly, building the odd canal and chopping all our trees down. We would have been in tree hell within 100 years. Rose how many have stepped forward to say, you know, and i know the distinction you make with yourself. How many have stepped forward to say doom, doom, doom and doom, whether its the economy, whether its the planet, whether its and all of a sudden you realize that it wasnt quite quite that bad, that something came along to avoid the result. Before the last 250 years, before coal, what came along was the collapse of the civilization. One after another. They seem as one author has said to be hard wired to selfdestruct. Rose right. They develop a kind of hutzpah an arrogance in the belief of what they can do whether the roman empire, or mayan empire question, do this. Our scientists, our workers, we can build via ducts, we can get the job done. They overreach, the weather turns against them, et cetera, et cetera, and they collapse. Not one or two, every civilization collapsed. And now we have a global civilization with you we have this amazing gifts of 250 years of accumulated sunshine. Enormous energy. And everything you say about the optimists hinges on this little window of 250 years. Rose so the story of civilization over the last 200 years is the development of oil gas. Yes. Rose to fuel our economy, to fuel our automobiles, our planes, our everything. Everything. Rose everything, and every wave of technology has been hugely energy intensive, coal and steam engines. Oil and cars and refrigerators and air conditioning. And ipads. We all run around wondering whether our ipad and iphone is charged. Theyre huge absorbers of energy. However, i am an optimist in two ways. Rose im waiting. Okay. We have two gifts that none of those hundreds of failed civilizations had, that might, its quite undeserved, incidentally, it is pure luck, might get us off the hook. And one of them is the fertility rate. Malfius never dreamt for a second that as people got richer they would volunteer to have fewer children. Rose right. Back in those days if you were rich you had 20 children. Rose right. 15 children. And now you have 1. 5. Rose right. And we have made enormous progress. My favorite being iran. Muslim society, 1960, 7 children per well and now its 1. 5, 1. 6. Rose but its gotten, ah, but at the same time, in a lot of societies now, they are worried about that demographic. Of course theyre all worried about short term wealth. Rose russia is worried to death. China singapore, singapore. Nevertheless, on my rnz china and singapore had such strict baby policies that they are now worried so they have taken all those restrictions away. Not all of them away. Rose not all of them, but singapore they are looking to import malaysians to help their economy and do the jobs. Yes, if you have short term political problems, you behave in the short term way. And in the short term growth appears to be good. Its certainly. Rose with would be the longterm way to behave. In the longterm you have got to get the global population down. We have more population than we can sustain without carbonbased fuel. Rose if you look at, im asking, if you look at emerging nations, it seems to me that one of the things that has driven their Economic Growth has been their population. Yes, of course, it drives growth. It also drives. Rose you said population and productivity. It also drives longterm problems. Rose yeah. It increases the pressure on finity resources until they run out and then you are stuck. Its like the tide going out, you know, the tide goes out and left you high and dry. And you have no fallback unless, like the norwegian government, building up a great sovereign fund. But i never got to the second reason. Rose okay, please do. The second good reason, i have so few good points you have to let me get my two good points in. And that is alternative energy. Rose yeah. Every wave of technology has been has required a wave of energy. Here we have a wave of technology that does exactly the reverse. It suppresses the demand on our finity resources of coal and oil. Every time you have a brilliant new idea, an ipo, capitalism at its best, developing an energysaving technique, solar, wind power, storage, a grid, a any state of the ard grid system, all of those suppress the need to use our finity resources. That is wonderful. And that is happening faster than people realize. Someone from duke power said for them the cost of a solar pan hell dropped in two years to 25 cents on the dollar. I mean these are morse law type reductions, the kind of efficiency increases we only saw in semiconductors. They have been coming down from ludicrously expensive to moderately expensive. Rose help me understand. Im not sure i got the point. So therefore. Therefore we can get off there terrible trap of expanding as long as the coal and oil is there and then being left high and dry. We have the wherewithal to move fairly seamlessly if we chose to make the effort, to a renewable source of energy. That will not run out. Rose because the price has come down. No, because the sun never quits. So if you can capture the suns energy, you can keep you can keep society going. Rose an technology will get us there because it will produce the batteries and be able to store the sun which is my point all along. This is the one area, and the only area where i agree that technology suterly critical rses science will save us. No, science wont guarantee to save us. Science will only give us a possible out if we keep the population falling, despite the fact that people who should no better complain about it as a problem, when its our last best hope that we have the population continue to decline. We have to come back in 2 years and have a population of 4 billion, not 10 in 200 years. And we have to have complete selfsufficiency in renewable energy. Rose how do we do that. We need good policy. Rose how do we have 4 billion. 4 billion is nothing, over 200 200 years that is nothing. That is 1. 8. Every developed country now is at or close to 1. 8. Rose 1. 8 children per couple. Yeah, 1. 8 children per couple. America just dropped to 1. 9 with lots of immigrants. And there are countries out there, japan as you know an china who are way below 1. 8. Even iran, bangladesh is down to 2. 2, amazing. But we need that. We need to encourage it. We need to get the population down as fast as we can. Now of course its a short term shock to the system, older people have to work harder. You have to have 74yearolds. Rose like you. Working but its no big deal. Were not the 70yearolds that we used to be a hundred years ago. Rose there was just the thing in the Financial Times that said 70 71 is the new 30. Yeah, well, having played soccer until i was 62, i can guarantee thats not true. Rose at 62 you didnt play like you were 30. No, every year you watched the kid who was relatively slow 28yearold get a yard faster. You can kid yourself at tennis but not soccer. Rose so let me just stay with this, we have to go back to agriculture. And those two things. You have a larger view about natural resources, about food as well, in terms of when you look at the world and the production of these resources, its an ugly picture. Its an ugly picture and the economists say you dont have to worry about that. Its just a matter of price, to which i say oh you mean when half the world starves, the other half has enough . And thats what is going on. The rich half of the world is pricing out the other half. When china, china has made the cut. China is in the rich half. Theyre in the haves, not the have nots. And as they get richer and eat more meat the price of wheat goes up and moroccans, libyans, ton esians who live on wheat cant afford to buy it. Rose its just the demand equation. Just the demand equation, yeah. Rose you have had this really amazing ability to see bubbles. Where does that come from . Just the numbers. There is an enormous pressure in the Investment Business to deliver good news. Trust me. Good news sells better, stockbrokers thrive on it. Investment houses thrive on it. To go out there in a bubble and talk about badly overpriced markets and Downside Risks is an invitation to get fired. They simply dont want to hear it as we found, we lost half our book of business in 98 and 99 as the great tech bubble roiled up. You basically said your clients, its a bubble. Its going to burst and everybody is going to lose. The pricing of the market in late 97 went above 1929. In 97. Rose been the great recession. Before at the top of 1929 before the great crash and the great depression, the market was the highest price it had ever been it went above that in 97. And it soared. It was actually 21 dollars for every dollar of earnings and it soared upwards to 35. I mean it was 70 higher than 1929 by the end. Rose okay. But no one was screaming that. The spokespeople for the great Investment Firm were saying oh, jeremy, dont be hysterical. Everything will work out fine. We said look at the numbers. Every bubble of an asset class in the financial world has always broken back to the original trend. Rose right. Back to the. Rose this is very important. Back to 16 times earnings. Or 15 times earnings. And here it is at 35, in march of 2000. That is a pretty painful drop. And we had a ten year forecast. Our ten year forecast officially distributes to all our clients, so the ten year outlook adjusted for inflation was negative 2 . Rose you generally are early on these things. Painfully early. If it decides to go to 35, we werent that early at 21 which was the 1929 level so we, i think, reasonably with hindsight even reasonably said i hear higher than 29, higher than ever in history, you now want to be defensive if it means to go to 35 because greenspan is a congenital distribute ever of ease and money and subsidized. Rose first rate believer in markets. And markets left to their own devices, which will be honest and straightforward and will look after the subprime instruments. Rose so whats your rule about markets . Markets can be from time to time crazily inefficient as we have seen over and over again in history. And any pretense to the contrary is really in defense of some elegant economic theory. Economic theory doesnt work with human beings. Were far too messy. So economic theory assumes that were incredibly well informed. That the buyers know just as well as the sellers which is complete nonsense as everyone knows. And were rational and cool and keep a cool head. You dont believe that at all. No one believes that, i think, except a handful of professors who made their career promoting an elegant formula based on that assumption. How about fed chairmen, do they believe in that . Greenspan, 90 believed from it. And then every now and then he would surprise you by saying the Housing Market is showing some speculative frenzy. Wloops. Rose or irraise exuberance. Or irrational exuberance, actually earlier. But still, and then bernanke has inherited a more completely academic view that the markets are pretty efficient. Let me talk about you again. Japan, you saw the bubble in japan. Yes, the japan. Rose you call that the mother of all japan, you know the old story, the land underneath the peferp errors palace was worth more than the state of california. We spent a couple of days researching that. It really was worth more than the state of california. I mean how ridiculous can you get. Rose that was the price of land in tokyo. In tokyo, under the em errors palace. And that was the biggest bubble in the history of the world. That was much worse than the south sea bubble or chile bubble. And right behind it was the japanese stock market bubble. Rose right. That didnt go to 35 times for every dollar of earnings. That went to 65 times. And they had never sold above 25. They went through their old record, they climbed and climbed and then, of course, we were predicting the end of the world and happily. And we had no japanese holdings. It was 60 of the benchmark against which we get measured. And we had none, nothing. Rose right. For a total of almost 7 years we had 0. Rose so what happened toed amount of money you were managing. Well, the good news is we underperformed by 10 points a year for three years. Then we got it all back with a lot of interest. We lost nothing. We lost nothing for some tre very interesting, important reasons, really. And that is our clients were sitting here watching the crazy japanese. They have very much their own economy, their own culture. And they were able to say wow, thats crazy behavior. And they believed us that sooner or later thing was work out badly and they were not willing to fire us. But when it came here in the tech bubble, most of our committees had a majority of people who believed more or less that it was some sort of golden newera which is what greenspan was saying. The internet was drive away the dark clouds of ig norance and other such nonsense. And how did you know different . We didnt know different. We just looked at the numbers and said every bubble has broken. This is the biggest in history. It will break. Japan even bigger t will break. And they all have. Rose dow have some magic formula to define a bubble before we see it. Oh, yeah. A bubble we had to make a definition long ago and we decided to have a statistical definition of the kind that would occur every 44 years in a random world. It isnt a random world but its closer than you think. The kind of event that would occur randomly every 44 year os kurs in the real world every 30 years. Its much closer than we expected. People are getting used to black swans but they arent as common. Rose so then comes the subprime crisis, did you see that. Yes, oh. Rose that was easy. That was absolutely easy. Because we were lucky. Rose do you know what it did to the Global Economy . Absolutely. And we said it would, by the way. Rose if it was so easy. We cant do more. I tell you what. Rose are you the only smart man. No, no, not the only one. Rose are you the only smart man in . We talked to about a couple of dozen people, newsletter writers, economyist economists, stock advisors, about a couple of dozen am. They all saw it coming. It was not at all difficult. Were lucky in that we focus on bubbles. The u. S. Housing bubble done statistically was a much more impressive bubble than the tech bubble. Because the u. S. Housing market unlike the stock market had been very stable going back into the midst of time it would bubble in chicago or florida but it would bust in california. So it was perfect. Until greenspan and then a great surge of debt pushes up the price of houses, and on our data, it was the kind that would occur randomly every 10,000 years. By the way, bernanke did not see this. He said oh, the u. S. Housing market merely reflects a strong u. S. Economy. Rose john paulson saw this and became a multibillionaire. Did you see it in the same way . And did you act in the same way . My job, just to focus on what i do, ask to inform our clients and write a quarterly letter. Rose dont you have money under management . Our team, of 550 people run a hundred different funds. Rose worth over a hundred billion dollars. And i dont hesitate to nag them but i dont have line responsibility. I delivered my. Rose are they listening to jeremy at the time . Mostly they do. But you cant you cant run a big firm on imperial fiat am you have to allow a small group of people with selfconfidence to make their own decision. But i can tell you what i said. I said i have a problem, dear reader, in that i have been bearish for a long time. The market in my opinion was basically overprice for 20 years. So how am i going to get to you take this seriously. Because this is the real mccoy. And i have thought about it for a couple of weeks, and there is it. And this is july 07. I believe at least one major bank will fail. Broadly defined, meaning the definition of bank. Rose hello bear stearns. Hello bear stearns, leeman, aig, et cetera, et cetera, plus a couple that would have failed but were taken out. Plus a couple more very, very big banks like citi that would have failed unless we the tax pay her come to their rescue. Rose was that the good thing to do, come to their rescue . You had to keep a few banks. Morgan and wells maybe n business. Rose so you would have let citi. I would have left a couple. Rose would you have let citi go. I would. It would would have sent a shockwave. Rose look what happened when lehman went down t they let it g look what happened. I know, once you let lehman go, i would have let citi go as well in order to make the point that we were not going to stand behind every enterprise that made ludicrous bets and then got bailed out by the taxpayer. Then i would have, of course, you have to draw the line. You cant afford a run on the bank. Any solvent bank, that famous american christmastime movie shows, if everyone comes to withdrawal their money, they go bust temp orally because its all tied up in longterm mortgages. And that applies to the Banking System. It is universally agreed that the role of a central bank is to make sure that a run on the bank doesnt happen. But it is not agreed that they should support a bank that is insolvent. Citi was insolvent. A lot of banks were insolvent. In other words, f you just marked their assets to market they were underwater, they no assets. They had made mistakes. They called the market wrong. They should pay the price. Rose there was this circumstances. Standard poors, look, and dow jones are approaching record levels. Merger activity way up. War en Warren Buffett and brazilian investors just bought heinz, okay. Everybody thinks things are getting better. You seem to say yes, short term, long term no, no, no. Correct me. Our longterm argument has nothing to do with the market. Rose right. You can do perfectly well in a portfolio in an economies thats growing very little it has to do with profitability. I have no reason to think Good Companies will not be profitable so this is not about the stock market. Thats about the longterm economy, which is going to grow more slowly. Rose so what is this about . So you can make, you can page good money in the longterm in cheap stocks. What its about is value. If you have a market that becomes overpriced, you will make a return too little given the risk you take. The u. S. Market is not too bad for the great franchise companies, the great coke coles. Theyre not, theyre a little bit expense piv. But the balance of the market is very expensive. And its very expensive because we assume Profit Margins will go back to normal and prices in every way will go back to normal. Back to the trend line. And if we do that, we get miserable 0 returns from the rest of the market in the u. S. Now you get better returns overseas. You get almost reasonable returns from emerging market equities. So its not a terrible situation. 07 was overpriced across the kitchen sink. Everything in the world this is merely. Rose its amazing so few people saw it. Well, that isnt true, by the way. I have a story up my sleeve here and that in the youve been waiting to pull. In the great bubble of 2000, there werent many people who were willing to debate the bulls. And so they dragged me out over and over again. And i thought if were going to go down with the ship, we might as well go down with the so i went out and debated them. And my price for giving a talk amongst professionals, say the annual bash of the financial analyst 1200 people in los angeles, was to say how many of you are fulltime stock professionals, and 300 people put their hands up. I say just two questions. If the price earnings, the measure of how expensive the market is currently if it goes down to 17, which is trend line, will it guarantee a major bar market . Every single one of the 300 agrees. And by the eni had 1200 votes of fulltime professionals. So they all agreed, every single one of the 1200 f it went down to 17 times earnings, it guaranteed a major bear market if it happens within a 10 year window. So the jackpot question is how many of you think it will. And it was so shocking to me i had to rephrase the question three times before i would actually. Rose did anybody raise their hand. Only seven people thought it would not go down. Rose right. So 99 of the engine room at all the great firms knew very well that the market was vulnerable, would go down and would guarantee a major bear market. But the spokespeople who employed those guys, the spokespeople for the firms were on the podium with me saying oh, well muddle through quite nicely. I wont mention their names on the air. But theyre very famous people and they said oh dont get hysterical, well muddle through. Jeremy is always putting down the things. Absolutesly. But the people doing the dirty work knew better. They agreed with me. And the reason is simple, being bullish sells. You will not easily hear honest advise when it is bearish. Okay. So just in case somebody tuned in to this late, so you are, where are you today . To repeat what you said within were slightly underweight global equities. Heavily underweight in the u. S. Outside the quarter of the market that are the great cocacola franchise companies. And im not touting cocacola. Im just using them as a generic. Yeah. So its not a terrible outlier situation like japan that we described or so on. Its just be careful when youre buying ode american do you see a bubble out there . Well, the nis thing about bubbles is you dont have to predict them, you just wait and see. And when you see one you jump. Rose are you seeing one. You want me to guess. Rose yes, i want to you guess. What bubble and when . I think bernanke is as i was writing, is whipping this donkey that can only grow at 1 , this economy, because he thinks its a racehorse that should be growing at 3. So hes going to keep on wliping this donkey. This donkey cant run. Until it either drops dead or turns into a racehorse. Yeah, right. And you are betting on dead. And im betting on dead so, it is a very unsafe situation to have the most powerful person in the economic world by far. Rose but hes trying to do something. Hes trying to use the fed to create employment, how about that. They dont have the tools to generate employment. They shouldnt have that in their mandate. They should just have in their mandate. So it wont do it. Absolutely not. You need fiscal means. If you have people unemployed, by all means do useful projects to employ them. Go and install sensible solar panels, what i am trying to say is insulation. Go and insurance late every northeast and every cold area, it will have a high societal return. Youll never regret it. Redo the grid system. Hell never regret it. So in other words, youre saying if you want to create jobs, create jobs to build something we need. Absolutely. And debt is vastly exaggerated which is a huge, huge debt is exaggerated. A huge topic. So you and paul krugman are right on. One of the same voice. Let me tell you something about debt. In 1982, if you added all the debt up it was 1 and a quarter times the size of the gdp. And then, and it had been fairly flat for a long time, drifting slowly up. And then it kinked 45 degrees and it goes shooting up steadily without too much volatility. Just goes straight up. When was that. 82, 1982. And it goes steadily upwards to 3. 5 times. So we had this amazing. When Ronald Reagan was president , 82. Yes, right. And so we had this amazing experiment. The biggest economy in the world. Almost tripling its ratio of debt. Over a block of time that really counts, 30 years. And what happened in terms of the growth rate of the system, it slowed way down. Now there are other reasons. I grant you that. But theres no room in that equation to believe that increasing debt has anything to do with longterm growth. Is there . That you triple it, what more can you do, and the growth rate of our system slowed materially . Its so contrary, isnt it. They are the facts. They are so contrary to the general belief. We have been conned into believing by the financial world that debt is everything. Let a bank go, oh my god it would be the enof the world there are plenty of reasons why this economy coulds lad, by the way, quite sufficient. You dont even have to use anything to do with the collapse of the financial system. We had a housing bust. We had a housing one and 10,000 year event. If that was to go back to trend, you were going to lose 10, 11, 12 trillion dollars. Everyone was going to feel poor. It was going to devastate Consumer Spending and consumer confidence. Secondly you had the price of oil triple. Look what happened in the oil crisis of 74 and 79. They a big recession each time. So you not only tripled the price of oil, you tripled the price of food, you tripled the price of k07er, of all the metals. Why would that not have caused a major recession. They had three great reasons. The Housing Market collapsed and commodities just squeezed you to death. You dont need a third reason to explain why we had the most serious recession. And Housing Market alone explains why it has been very, very slow to recover. Because theres nothing more dangerous than messing with houses. So you are, you are an unre you were just a pure keynesian. I am a a pure numbers guy. But are you causes me to shall did are you not . No, i wouldnt is a say thatness why would you not say that. Because im a great admirer of chapter 12 of the general they are general theory which is about the stock market. He was wonderful in the stock market. He was about 60 years ahead of the economic world. You dont know how many years ahead he was because they still havent caught up. He basically said its animal spirits, guys, that can mess up everything. And he pointed out the game we play in the stock market is managing your career. Never make a bet on your own. Would keynes have agreed with you about debt . I dont know. I really dont know. Its such a different world now. The levels of get are so much higher. We probably have some ingenuous new theory. Okay am but most people believe that we do have, i mean they look at the percentage of gdp to debt or debt to gdp. I can prove that debt does not generate longterm growth. I have given you the numbers. It does not prevent. It doesnt cause longterm growth it doesnt create it. Debt, we triple the debt and gdp growth rate went down. There is no evidence that increasing debt increases gdp. And yet that mandate has been given to bernanke who thinks apparently that it does. By keeping Interest Rates low, youre transferring money away from retirees who spend every penny and are really hurting. And by the way, theres far more of them every year now than there ever was when economic theories were being panned out. You take money from them, and who are the beneficiaries. The guys who run the hedge dpunds. And the Banking System in general. And speculators. And corporations theoretically can use it to build. But theyre building less now than practically in history. There is no major League Capital spending boom going on. What should be the levels, for example of new revenues to spending cuts . Let me say i am not an expert in this. And i dont want to represent myself as such. It is wickedly complicated. I have enough trouble in the stock market where life is simple. The economy is extremely difficult. The debt in the long run is not as significant as people think. How you manage debt is an art form. Right. Whether you do it this year, next year, how you spread these things out. How high is too high, i have not spent my career in those areas. I feel, i guess that its substantially too high. I guess that you shouldnt try and make it low in a hurry but you should have a 20 year plan to chip away. That is what i was weve gotten into a bit of a rat hole and we should be careful getting out of it. But it is not the overwhelming thing that will dominate our future. What it does is it distracts us from the real world. Debt is an accounting world. Its paper. The real world is the quantity and quality of your people. And the quantity and quality of your capital spending. Are you building new machines. Are you building inventive. Are you training your people. Is your High School System delivering the same education that it used to relative to the South Koreans, relative to the norwegians, no its not. We should worry more about the real world and less about the paper world. And showers in this death grip that only paper things matter. And so there is much too little attention spent on educate education, training, capital spending, finding a way to beef it up. And also i would rather stimulate the economy directly through Government Spending than i would like to play games with the monetary system. And games with the interest rate. Inflicting great wounds on retirees and so on. And transferring wealth to people who wont spend it. Transferring wealth from the poor to the rich by keeping Interest Rates low. Im not even sure the economy gains at all by a lowinterest rate. And furthermore no one is established convincingly that it is a good idea. Its a tradition that is a good idea. Thats not the same. Weve had lots of traditions like the market would look after itself. People wouldnt be crooks because economic theory assumes that theyre not. But they often were crooks, and greedy and shortterm oriented and willing to dance until the music stopped. Although they said the music had actually stopped long before. Rose thank you. Thank you. Rose its been a great pleasure. Yes, it was fun. Rose lots of things you have said that i think people will think about and talk about and we will continue the conversation at another time. I look forward to it. As we have more numbers. Yes. Rose jeremy grantham, thank you for joins joining us. Wilts see you next time captioning sponsored by Rose Communications captioned by Media Access Group at wgbh access. Wgbh. Org. Funning for charlie rose has been provided by the cocacola company, supporting this Program Since 2002. And american express. Additional funding provided by these funders. And by bloomberg, a provider of multimedia news and Information Services provider of multimedia news and Information Services worldwide. Announcer explore new worlds and new ideas through programs like this, made available for everyone through contributions to your pbs station from viewers like you. Thank you. Dr. Holden to understand us better, i think we have to realize that we really do have two selves. One of these selves is the truth about you, and another one of these selves is a story about you, and you have to know the difference. Announcer allow dr. Robert holden to introduce you to your two selves and understand your true self. Dr. Holden so im not asking you to change yourself, but i am inviting you to change your mind about yourself. Announcer make the shift to a more authentic, successful, joyful, and happy life, with six proven principles and practices, when shift happens live an inspired life with dr. Robert holden airs next. Bestselling author and speaker Robert Holden is director of the happiness project and success intelligence. He travels the world coaching business, education and political leaders, and holds a phd in psychology. [applause] dr. Holden it was the best of times, and it was the worst of times. It was the age of wisdom, and it was the age of foolishness. It was the epoch of belief, and it was the epoch of incredulity. It was the season of light, and it was the season of darkness. It was the spring of hope, and it was the winter of despair. We had everything before us. We had nothing before us. An intro to a tale of two cities by charles dickens, written in 1859 but set in 1775. We could so easily be talking about today. Its an honor to be with you here on pbs, and im very happy to be with a broadcaster