Episode summary
We Asked Jeremy Grantham Why AI Won’t Boost Profits — and What It Will Do Instead
Excess Returns
· · Guests: Jeremy Grantham
Summary
Jeremy Grantham argues that his reputation as a “perma bear” misses the point: he is bearish when valuations and market structure demand it, and occasionally bullish when prices become extreme on the downside. He points to episodes like 1982, the financial crisis, and 2008 as moments when he thought investors should “abandon ship,” while stressing that ordinary bearishness is different from an imminent collapse call.
A major theme is mean reversion. Grantham says asset classes, sectors, and companies tend to revert over time, but he thinks the modern market has been distorted by monopoly power and unusually tolerant regulators. In his view, the Magnificent 7 benefited from quasi-monopoly economics, while the current AI race is turning those firms into aggressive competitors that will spend heavily against one another. He argues AI will be transformative, but not a lasting boost to aggregate profit margins: after the early adoption phase, it becomes a cost of doing business.
He also revisits bubbles through a two-sigma framework and says the biggest danger comes when valuations detach from history. Looking back at Japan, the dot-com era, housing, and 2021, he says institutional investors often fail to endure the pain of value investing during bubbles. His closing message is broader than markets: fight the human tendency to ignore unpleasant news and the long term, and focus on realism, purpose, and a 5-year horizon.
Key takeaways
- Grantham says his bearish calls are meant to distinguish true “abandon ship” moments from ordinary overvaluation, not to predict every market dip.
- He believes mean reversion still governs markets over time, but monopoly power has temporarily distorted returns for the biggest U.S. stocks.
- AI will likely intensify competition among the Magnificent 7 rather than permanently lift aggregate profit margins, because it becomes a cost of doing business.
- He treats bubbles as two-sigma valuation outliers and says major developed markets have historically reverted to their prior trend after such extremes.
- Grantham says many institutions fail because they cannot tolerate underperformance during bubbles and are forced to fire value managers at the worst times.
Notable quotes
“we do not do unpleasant news and we do not do long-term and my advice to the investor is try and fight those two tendencies”
“everything important in the markets is mean reverting”
“We have gone from a monopoly world to a brutal competitive world and we will stay there for years”
“It is now in that point in the future the cost of doing business”
“The really impressive thing about the homo sapiens is um it doesn't like to deal with long-term and it doesn't like pessimism”
How the episode opens
So as a species we do not do unpleasant news and we do not do long-term and my advice to the investor is try and fight those two tendencies. We have gone from a monopoly world to a brutal competitive world and we will stay there for years and there will be blood in the streets because these are aggressive take no prisoner type companies with lots of money and they are heading right into each other's teeth. Fast forward a few years, everybody is doing AI, aren't they?
Everybody is paying for the service that they need. It is now in that point in the future the cost of doing business. It will not move aggregate profit margins or aggregate profits notably higher than they are typically.
Jeremy, thank you very much for joining us today and welcome to Excess Returns. — It's a pleasure. Earlier this year in the Wall Street Journal review of your book, uh the book title is The Making of a Perma Bear, James Grant described you as a principled, value-minded, dogmatic, non-conformist, and I have a feeling that brought a smile to your face.
It did. Yeah. I like the dogmatic part in particular. Jim Grant never never takes any unnecessary prisoners.
No, absolutely not. We've had you on the podcast a few times, and you're exactly right. and and that's what we're going to talk about today.
Sort of the book is going to be the foundation of the discussion. We were fortunate enough to be forwarded copies of that. Thank you very much.
Um and the title, the making of a perma bear is your story. It encapsulates your beliefs on investing, the stories of success in your career, the times at GMO where there was uncertainty and difficulty.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai impact on profits
- market bubbles
- mean reversion
- valuation cycles
- monopoly power
Companies and tickers mentioned
- QS
- GMO
- QuantumScape
- OpenAI
Watch the episode
Watch “We Asked Jeremy Grantham Why AI Won’t Boost Profits — and What It Will Do Instead” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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