Introduction:
Jim Haskell introduces Alex Shahidi, the co-CIO of Evoke Advisors, who has been searching for insightful investors with the ability to see big waves coming and avoid getting wiped out. Alex Shahidi met Jeremy Grantham 20 years ago and Ray Dalio 15 years ago and has been following them closely ever since. The conversation is structured into two parts: the biggest dynamics in the world today and what investors can do about them.

Jeremy Grantham and Ray Dalio’s First Meeting:
Jeremy Grantham recalls meeting Ray Dalio 25 years ago in Martha’s Vineyard before a Kodak pension fund event. They took a walk along the beach, and Dalio expounded on his views of how the market really works, which Grantham later plagiarized on a page in his presentation. Dalio remembers the conversation as being really interesting and the beginning of their relationship, which has had many interesting conversations over the decades.

Ray Dalio’s Perspective on the Current Environment:
Alex Shahidi asks Dalio to describe how he’s thinking about the current environment and how it compares to the past. Dalio explains that he’s been studying history for over 50 years and has found that there are certain patterns that repeat themselves.

Global Debt and Monetization:
The excessive creation of debt and its monetization has significant implications for the economic system. It disrupts the balance between supply and demand for debt and credit, leading to a stagflationary environment.

Internal Political, Social, and Economic Conflict:
The rise of ideological allocation of resources and the diminishing influence of economics in decision-making. Conflicts like the acquisition of Twitter by Elon Musk and the clash between Disney and DeSantis exemplify this shift. This prioritization of ideology over economics has wide-ranging implications.

Rising Power Challenging the Existing World Order:
The emergence of China as a dominant economic and military force challenging the existing global power dynamics. The relative decline of the United States as the sole superpower.

Acts of Nature and Climate Change:
Natural events like droughts, floods, and pandemics have profound effects on economies and societies. Climate change is recognized as a significant factor influencing the economic landscape.

Human Capacity for Adaptation and Invention:
Despite the challenges, human ingenuity and innovation drive progress and economic growth over the long term. Per capita income and living standards tend to rise over time.

Overview:
Jeremy Grantham, an expert in resources, climate change related investing, and investment bubbles, discussed market trends and the current investment bubble. He noted that the recent market performance is reminiscent of the third great investment bubble of his career.

Market Performance:
The S&P 500 experienced its worst opening of a year since 1939. The NASDAQ is down 27.5% from its high, the Russell 2000 is down 23%, and the S&P 500 is down 15.5%. Bitcoin dropped 10% in 24 hours, reaching $32,000. ARK Invest’s fund, led by Kathy Wood, has returned to its 2018 levels, down 75% from its peak. Meme stocks like AMC and others have also experienced significant declines.

Investment Bubbles:
Grantham believes that the current market bubble is playing out, similar to the previous two major bubbles he has witnessed. He emphasizes the importance of investing in resources and climate change related opportunities.

Grantham’s Bubble Research and Observations:
Grantham focuses on the four great bubbles characterized by hysterical behavior, extreme optimism, and accelerated price moves. He identifies a rare indicator of impending doom when blue chips rise while risky stocks decline, indicating a shift from risky assets to safer ones. This indicator was observed in 1929, 2000, and again in 2021, signaling the end of the bubble.

Dalio’s Economic Analysis:
Dalio emphasizes the end of a paradigm where everyone believes in rising asset prices. He warns of a decline in real wealth due to the excessive creation of money and credit, leading to negative real returns. The current tight monetary environment will squeeze equities and change the economics of companies.

Political and Social Implications:
Dalio sees greater political extremism and populism emerging from the 2022 elections, potentially leading to heightened risks to the system. He highlights the importance of diversification and the ability to be long and short different assets to navigate the changing landscape.

Grantham’s Outlook:
Grantham compares the current market to 2000, expecting an initial similar playout followed by a transition into a 1970s-like scenario. He anticipates deflationary effects on the economy and stock market, resulting in lower asset prices. Grantham raises concerns about long-term inflation due to labor shortages in China and the developed world, similar to the situation after the bubonic plague.

Commodity Scarcity:
GMO’s index of 36 equally weighted commodities shows a declining pattern for 102 years (1900-2002), interrupted by world wars and OPEC. In the last 20 years, the average important commodity has tripled due to China’s growth and intrinsic scarcity. Technology advancements have historically outpaced scarcity, but now we face a situation where scarcity is outpacing technology.

Labor Scarcity and Inflation:
Labor scarcity is becoming a reality, contributing to inflationary pressures. Price pressures are evident in raw materials, metals, food, and labor, creating a new era of sustained inflation.

High Debt Levels and Systemic Risks:
The Federal Reserve has historically shown a lack of understanding regarding the risks of high debt levels. High debt levels pose serious dangers and should be actively discouraged by top management and policymakers. Low interest rates encourage debt and growth, but this relationship has limitations. Increasing debt-to-GDP ratios since 1985 have coincided with slower growth. High debt levels can lead to financial instability, systemic crises, and prolonged economic stagnation.

Debt to GDP Ratio and Economic Growth:
Correlation between rising debt-to-GDP ratios and slower economic growth post-1985. Data analysis suggests no evidence linking increased macro debt to GDP with economic growth.

Ray Dalio’s Investment Strategies:
Cash, bonds, and debt instruments are expected to perform poorly in a challenging economic environment.

Portfolio Positioning:
Focus on investments that perform well during inflationary periods, such as commodities. Allocate portfolio assets to achieve a balanced distribution across various economic scenarios. Reduce exposure to debt and increase allocation to assets that hedge against inflation.

Tactical Investment Moves:
Diversify tactical investments across various asset classes and regions. Consider social and political factors when selecting investment locations. Prioritize countries with strong financial stability, productivity, and civil harmony. Minimize exposure to international war risks and government controls on capital markets.

Emerging Investment Opportunities:
Emerging Asia and India are potential areas for investment due to their economic strength and resilience. Neutral countries with stable economies and favorable investment policies are also attractive options.

Diversification Today:
Jeremy Grantham emphasizes the importance of diversification in today’s uncertain environment. He highlights the negative correlation between resources and the rest of the portfolio, making it a valuable addition for diversification. Grantham mentions the lack of new mines and capex in the resource industry, leading to a potential supply shortage in the future.

U.S. Dollar and Storehold of Wealth:
Ray Dalio discusses concerns about the U.S. dollar potentially losing its reserve currency status. He emphasizes the importance of considering a storehold of wealth that is not limited to currencies. Dalio suggests a balanced portfolio approach with a focus on liquidity and transaction costs.

Gold as an Overlay:
Dalio views gold as a hedge asset and an insurance policy within a portfolio. He explains that gold’s limited supply and credibility as a reserve currency make it a valuable diversification tool. Dalio recommends allocating around 15% of a portfolio to gold as an overlay, not taking away from other asset classes.

Cash and Diversified Portfolio Performance:
Dalio emphasizes that cash will not be the best asset class in a diversified portfolio. A well-balanced portfolio of different asset classes tends to outperform cash over time. Dalio mentions that central banks intervene to prevent prolonged market downturns, leading to market recoveries.

Environmental Concerns and Climate Change:
Jeremy Grantham expresses concern about the world exceeding its capacity and relying heavily on fossil fuels. He highlights the need for scientific research and innovation to address environmental challenges. Grantham recommends the book “Immoderate Greatness” by William Ophuls, which analyzes the rise and fall of civilizations and identifies factors contributing to their failure.

Hardwired for Self-Destruction:
Humans, like other organisms, have an instinctual drive to grab what they can when they can for survival and expansion. We are not programmed to think about long-term consequences, leading to situations like the Brazilian president encouraging deforestation and President Trump’s efforts to undo environmental regulations.

Escape Clauses from Self-Destruction:
Unexpectedly, people in developed countries have been choosing to have fewer children since 1961, with fertility rates declining faster than expected. Fertility rates are now below replacement levels in most developed countries and continue to fall. Some countries, like South Korea, have fertility rates below one.

Factors Working in Favor of Humanity:
Fewer people: Less pressure on natural resources. Rapid scientific progress: Potential for breakthroughs in green energy and carbon capture.

Get Out of Jail Free Cards:
Fusion energy: Infinite, green, and potentially cheap energy source. Geothermal energy: Tapping the heat of the Earth’s core for green energy. Energy storage: Combining solar and wind with cost-effective storage for continuous power.

Challenges:
Time required to develop and implement these technologies. Climate change damage will continue during the transition period. Rising carbon dioxide levels in the atmosphere beyond safe levels.

Grantham Foundation’s Role:
50% of venture capital allocated to green technologies. 25% of venture capital allocated to early-stage ventures addressing climate change.

Investment Opportunities:
Early-stage enterprises focused on green solutions have the potential for highest returns. Top-line revenue growth in green sectors will outpace traditional sectors.

Conclusion:
While there are promising technological solutions on the horizon, the time factor and the extent of climate change damage pose significant challenges. Grantham Foundation’s focus on green venture capital and the growing support for green initiatives provide hope for a sustainable future.