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“Yellow Light” – Is The Credit Market Finally Reversing

July 26, 2019

“Yellow Light” – Is The Credit Market Finally Reversing

Keep digging

Yesterday, the European Central Bank held a stand-pat meeting, keeping the benchmark deposit rate at negative 40 basis points.

However, ECB president Mario Draghi indicated that rate cuts and a resumption of asset purchases are on tap for September.  In the accompanying presser, the outgoing ECB chief captured the mood of central bank-levitated markets, stating that: “it’s difficult to be too gloomy today,” while the outlook “is getting worse and worse.” The German 10-year yield traded as low as negative 42 basis points, briefly crossing below the 40 basis point deposit rate. 

While sovereign debt holders continue to rack up mark-to-market gains, not everyone is enamored with the prospect of still-more negative interest rates.

“We already have a devastating interest rate situation today, the end of which is unforeseeable,” Peter Schneider, who represents banks in the south-eastern German state of Baden-Württemburg, told Bloomberg yesterday.

“If the ECB aggravates this course, that would hit not only the entire financial sector hard, but especially savers.”

Meanwhile, policymakers down under attempt to quantify the practical limits of negative policy rates. In a paper written to New Zealand finance minister Grant Robertson in January and recently released to the public, staffers in the Treasury Department concluded:

“The Reserve Bank expect rates could only fall at most 35 basis points below zero before risking the hoarding of physical cash.”

Today, the global stock of negative-yielding debt rose to $13.74 trillion, a new record.

Yellow light

As we close out month 121 of the longest economic expansion on record, let’s take a look at the state of U.S. corporate credit.  Year to date, investment-grade bonds have generated a whopping 12.3% total return, while high-yield has returned 10.6%. Leveraged loans have lagged far behind, with the LSTA Index gaining just 3.3% so far this year.

 …click on the above link to read the rest of the article…

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

April 15, 2019

The World-Wide Suppression of Interest Rates Has Been Something Very Near to a Crime

James Grant, editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns about the growing herd of corporate «zombies» and other fatal market distortions caused by modern monetary policy.

Once again, the expedition to go back to normal has been postponed. After the big market scare at the end of 2018, central banks have abolished their plans to tighten interest rates further. Wall Street loves it. The first quarter has been the best one for risk assets in a decade, and after Lyft’s successful going public, a record year for IPOs seems to be in sight. Jim Grant observes the madding crowd from a sober distance. «Interest rates are the traffic signals of a market economy. Turn them all green, and errors and pileups abound», says the sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer. He states that a decade after the financial crisis, many companies are so heavily addicted to easy monetary policies that they wouldn’t be able to survive on their own. Consequentially, the proficient value seeker has a hard time to find attractive investments in today’s markets. Where he spots rare opportunities, he tells «The Market» in this extended interview.


Mr. Grant, once again, the Federal Reserve is giving investors the green light. US equities are off to their best start since 1998. What’s your take on the current state of the global financial markets?
Stocks are up, bond yields are down and economists are speaking of full employment: Everything seems perfect and improving. But I remain a non-believer in these modern monetary methods. If it were this easy, mankind would have solved the economic problems a long time ago.

 …click on the above link to read the rest of the article…

Nevertheless, he persisted

April 7, 2019

Nevertheless, he persisted

Today, the Nikkei Asian Review reports that Nomura Holdings, Inc. (8604 on the Tokyo Stock Exchange) expects to close over 30 of its 156 domestic retail branches, “previously considered a sacred cow by the group.” In addition, Nomura will eliminate roughly half of its 11 administrative departments and “revisit its policy of maintaining hubs in Japan, the U.S. and Europe.” That comes after the investment bank reported a ¥101.2 billion ($911 million) loss for the nine months ended Dec. 31, its worst such showing since 2008. 

Nomura’s misadventures are no outlier. In early March, Mizuho Financial Group, Inc. was forced to take a ¥680 billion write down that included ¥150 billion worth of losses related to its portfolio of overseas bonds (Almost Daily Grant’s, March 7). More broadly, the Tokyo Stock Exchange Bank Index has seen its return on equity decline in each of the last five years, to 5.33% in 2018 from 9.77% in 2013. The index trades at a paltry 0.47 times book value, worse than even the EURO Stoxx Bank Index’s similarly-depressed 0.62 price-to-book ratio and far below the 1.18 times book valuation commanded by the U.S. KBW Bank Index. 

Of course, much like Europe, Japan’s macro-economic backdrop features negative interest rates and aggressive central bank asset purchases. The BoJ has accumulated ¥557 trillion in assets, equivalent to 101% of 2018 nominal GDP (that compares to about 39% in Europe and 19% in the U.S.), as policymakers continue to up the ante in their quest to achieve a 2% measured rate of inflation.  

With its gargantuan portfolio, the BoJ wields substantial control of the country’s capital markets. As noted by the Financial Times on Sunday, the central bank now holds close to 80% of outstanding ETF assets, equating to approximately 5% of Japan’s total market capitalization, while data from Bloomberg pegs the BoJ ownership of the Japanese Government Bond Market at 43%.  

 …click on the above link to read the rest of the article…

The United States Is Going Broke

November 7, 2018

The United States Is Going Broke

The United States Is Going Broke

Those who focus on the U.S. national debt (and I’m one of them) keep wondering how long this debt levitation act can go on.

The U.S. debt-to-GDP ratio is at the highest level in history (106%), with the exception of the immediate aftermath of the Second World War. At least in 1945, the U.S. had won the war and our economy dominated world output and production. Today, we have the debt without the global dominance.

The U.S. has always been willing to increase debt to fight and win a war, but the debt was promptly scaled down and contained once the war was over. Today, there is no war comparable to the great wars of American history, and yet the debt keeps growing.

In a new Weekly Standard article, the celebrated James Grant of Grant’s Interest Rate Observer reviews not only the current debt and deficit situation but provides an overview of the U.S. national debt since George Washington and Alexander Hamilton.

Grant makes the point that the debt has been increased and decreased on a regular basis but never until today was there a view that the deficit didn’t matter and could be increased indefinitely.

He points out that it took the United States 193 years to accumulate its first trillion dollars of federal debt. And amazingly, that it will add that much in the current fiscal year alone.

Grant also describes how these historic debt management efforts have been bipartisan.

Republicans Harding and Coolidge reduced the debt; the Democrat Andrew Jackson actually eliminated the debt in 1836. Today there is bipartisan profligacy. The article lays out the big picture and the likelihood of a U.S. debt crisis sooner rather than later.

…click on the above link to read the rest of the article…

James Grant Responds To The Bernanke-Paulson-Geithner Op-Ed

September 10, 2018

James Grant Responds To The Bernanke-Paulson-Geithner Op-Ed

Wealth defect

Over the weekend, Global Financial Crisis-era policymakers Ben Bernanke, Timothy Geithner and Henry Paulson brought the band back together to pen a New York Times opinion piece. After sharing their self-exonerating analysis of the events of 2007-2009 and subsequent response (which one of the three did the fact checking?), Bernanke et al. argue for greater regulatory powers, or as they put it, “adequate firefighting tools,” to resolve future financial crises.

Blanket guarantees of bank debt by the Federal Deposit Insurance Corporation, the Fed’s emergency lending capabilities and the Treasury department’s guarantee of money market funds are among the mechanisms cited by the authors as necessary for crisis prevention and mitigation.

The trio write:

We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration. We must also resist calls to eliminate safeguards as the memory of the crisis fades.  For those working to keep our financial system resilient, the enemy is forgetting.

Alternatively, the monetary mandarins could take a cue from Peter Fisher, former executive vice-president at the Federal Reserve Bank of New York and senior fellow at the Tuck School of Business. Speaking on policy normalization at the Grant’s spring conference on March 15, 2017, Fisher offered a commanding critique of the crisis-era response led by the authors of this weekend’s Times piece. Written 18 months ago, the below passage could serve as a direct rebuttal to the authors, particularly former Fed chair Bernanke:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

…click on the above link to read the rest of the article…

Ask The Expert- James Grant

May 19, 2018

Ask The Expert- James Grant

James Grant is an author, columnist, and founder of Grant’s Interest Rate Observer. A frequent guest on business television, including CNBC, Fox Business News and a ten-year stint on “Wall Street Week”, Jim’s writing has appeared in the Wall Street Journal, Foreign Affairs, and The Financial Times. An inductee into the Fixed Income Analysts Society Hall of Fame, Mr. Grant is also a member of the Council on Foreign Relations and a trustee of the New-York Historical Society.

We are thrilled to have him answer seven of your burning questions, including:

  • Will the Fed continue hiking the Fed Funds rate?
  • Can we expect a surge in inflation soon?
  • What factors will lead to a stock market correction?

Get the answers to these questions, plus James’ forecast for gold prices, by listening here:

Listen to Ask The Expert on SoundCloud:

Consequences of Replacing the Gold Standard with the PhD Standard

March 23, 2018

In 2011, Jim Grant chastised the Fed about replacing the Gold Standard with the PhD Standard. Our “reward” is coming up.

Here is the pertinent video clip of James Grant.

“The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. … William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard.“

Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.

The Alps Precious Metals Group commented on Grant in its latest monthly letter.

We’re Smarter Now

​>Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard”.

Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.

Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.

The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.

What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.

…click on the above link to read the rest of the article…

 

 

James Grant: «Markets Trust Too Much in the Presence of Central Banks»

December 12, 2017

James Grant: «Markets Trust Too Much in the Presence of Central Banks»

  • «We live in a hall of mirrors which our central banks have made for us.»
    «We live in a hall of mirrors which our central banks have made for us.» (Bild: Chris Goodney/Bloomberg)

James Grant, Wall Street expert and editor of the renowned investment newsletter «Grant’s Interest Rate Observer», warns of the unseen consequences of super low interest rate and questions the extraordinary actions of the Swiss National Bank.

Nearly ten years after the financial crisis, extraordinary monetary policy has become the norm. The financial markets seem to like it: Stocks are close to record levels and the global economy is finally picking up. Nonetheless, James Grant sees no reason to sound the all-clear signal. The sharp thinking and highly regarded editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» argues that historically low interest rates are distorting the perception of investors. »Principally, Mr. Draghi has robbed the marketplace of essential information», he criticizes the head of the European Central Bank for example. Highly proficient in financial history, Mr. Grant also questions the strategy of the Swiss National Bank. He fears that the voluntary depreciation of the Franc undermines the status of Switzerland as a global financial center.

Mr. Grant, monetary policy remains a primary theme for investors around the globe. What are your thoughts on the state of the financial world?
We live in a hall of mirrors which our central banks have made for us and that hall of mirrors distorts perceptions. That, I think is a big problem.

Why?
Interest rates are prices. In fact, they are the most consequential prices in a market economy because they discount future cash flows and they help us to set investment hurdles and to measure financial risks. In short, interest rates are prices and prices convey information and distorted prices convey misinformation.

…click on the above link to read the rest of the article…

The Next Thing Might Be Helicopter Money

September 26, 2015

The Next Thing Might Be Helicopter Money «I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.»

«I dare to say that we have not yet seen the most radical brainwaves of the mandarins running our central banks.» (Bild: Roderick Aichinger)

James Grant, Wall Street expert and editor of the investment journal «Grant’s Interest Rate Observer», warns of ever more extreme central bank policies and bets on the comeback of gold.

The global financial markets are under severe stress. The postponed interest rate hike in the United States, the fast cooldown of the Chinese economy and the crash in the commodity complex are causing a great amount of unease among investors. Fear is growing that the world slips into recession. «Central bank policy is intended to paper over the cracks in the systems. Seven years after the outbreak of the financial crisis we’re paying for this with a lack of growth», says James Grant. The sharp thinking editor of the iconic Wall Street newsletter «Grant’s Interest Rate Observer» draws worrisome parallels between the command based central planning of the Chinese economy and the economic policies in the West. He also doubts that Fed Chair Janet Yellen is the right fit for the top job at the world’s most powerful central bank. Looking for protection he points to gold and shares of gold miners

Jim, since the fall of Lehman Brothers seven years have passed now. In what kind of world are investors living in today?
It seems longer ago, doesn’t it? Certain things have not changed. The first of those permanent things is the nature of human beings who operate in markets and their tendency to buy high and sell low. That is just as it was the day before Lehman failed and it’s just as it will be forever. What’s new and different is the larger than life presence of government in our markets, both with respect to regulation and with respect to the management and the production and the manipulation of money.

…click on the above link to read the rest of the article…

 

 

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