We Asked GMO’s Head of Asset Allocation Why This Bubble is Easy — But Investors Will Get it Wrong

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**Ben Inker** (0:55)
A tricky thing about today is we worry that this may be an earnings bubble.
2000 was a little bit of that, but mostly evaluation bubble. We saw earnings bubbles in Europe in 2007, 2008, where the earnings had just gone up 100% over four years. And even today, they are struggling to make it back up on an index basis to those levels. We are likely to be in a situation where over the next 12 months, we see more supply come into the US stock market than has been the case in living memory. Understanding why you're getting paid for the activity you are doing is really crucial. Just because something changes the world doesn't necessarily mean the profits accrue to the people who built it.

**SPEAKER_8** (1:53)
Ben, welcome back to Excess Returns. Thank you for joining us.

**Ben Inker** (1:57)
Very happy to be here.

**SPEAKER_8** (1:59)
We were just talking. It was 2021 the last time you were on the podcast. It's hard to believe it was that many years ago, but we always appreciate having you or the other folks at GMO on with us and our audience. You know, you spend your time managing portfolios and building investment strategies, but you and your team also think deeply, write extensively about markets, valuation, asset allocation, stock market history, and a number of other investing topics. And today, what we thought we would do with you, and we're excited to do this, is kind of look at some of the recent research that you've put out, the firm has put out, and sort of just work through those items with you. I think we're going to start with the AI sort of boom and possibly bubble that we're in and kind of talk about how that, I guess, correlates to past market bubbles, and then we'll get into some of the research that you've done on private equity and some long-term return forecasting expectations. So, we're looking forward to a good, thoughtful discussion with you today. So, where I want to start with you is related to a recent piece of research that you put out, and it was sort of looking at where we are today in the market with AI and looking at it from like an investment bubble perspective, where valuations are, the markets, the speculation that's underneath. One of the things that you said is that it's one of the easy bubbles, easy ones as you put it, for an agnostic investor to handle. So, can you just explain, I guess, what would be the difference between an easy bubble and a hard one to understand and what you meant by that?

**Ben Inker** (3:39)
Yeah. So, for us, an investment bubble is a situation where at least some important asset out there has risen to a level where it feels pretty close to unownable. It's not the only definition of a bubble, but from the standpoint of putting together a portfolio, that's a useful one. We've had a number of those in the last 25, 26 years. And what makes some of them different from others is, if you believe the situation that we believed at the time, so we believe we were in a bubble in each of those times, how hard is it to put together a portfolio that can avoid the worst of the pain, and yet allow you to retain your clients? Because the problem with some bubbles is that avoiding them means running a portfolio where, if the world was normal, that portfolio would make no sense.
An easy bubble is one where you can take a normal amount of risk and still avoid most of the pain of the bubble. So my example of an easy bubble in the last quarter century was the internet bubble. In the internet bubble, growth stocks around the world were horrendously overvalued. The S&P 500 was the most expensive it had ever been in history, and even today, it has still never passed those valuation points, at least on most normal valuation metrics.