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Japan Is Perhaps the Most Important Risk in the World
Speculation is mounting that the Bank of Japan is losing control of the bond market. Jim Grant, editor of «Grant’s Interest Rate Observer», believes this could trigger a shock to the global financial system. He also explains why he expects further surges in inflation and why gold should be part of your portfolio.
The news caught markets off guard: On December 20th, the Bank of Japan surprisingly extended the target range for the yield on ten-year government bonds to plus/minus 0.5%. A move that not a single economist had expected.
This week, the Bank of Japan could announce a major policy shift amid rising government bond yields and a strengthening yen. Although barely a month has passed since the BoJ’s last meeting, the bond market is already testing the new upper limit of the yield curve control regime.
«To us, Japanese interest rate policy resembles the Berlin Wall of the late Cold War era, a stale anachronism that must sooner or later fall,» says Jim Grant. For the editor of the iconic investment bulletin «Grants’ Interest Rate Observer,» recent developments in Japan pose an underestimated risk to global financial markets. Not least because virtually no one is talking about it.
In an in-depth interview with The Market NZZ, which has been slightly edited for clarity, Mr. Grant explains what it means for financial markets if the Bank of Japan is forced to scrap its yield curve control policy. But first, he says why he doesn’t believe inflation will end soon, why bonds may be at the start of a long bear market, and why he believes gold is the best choice as a store of value.
«If the past is prologue and if the great bond bull market is over, then on form, we are looking at what could be a very prolonged and perhaps gradual move higher in interest rates»: Jim Grant.
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«The Fed Reminds Me of a Speculator Who Is on the Wrong Side of the Market»
Jim Grant, editor of Grant’s Interest Rate Observer, warns of the rampant speculation in the stock market. He worries that the central banks are underestimating the threat of persistently high inflation and explains why gold has a bright future.
For Jim Grant, this is an environment that calls for increased caution. According to the editor of the iconic investment bulletin «Grant’s Interest Rate Observer», investors have to beware of an explosive cocktail combining exceptionally easy monetary policy, a pronounced appetite for speculation, and the high degree of leverage. He also thinks that central banks are underestimating the risk of persistent inflation.
«We have one of the most speculative Zeitgeists on record»: Jim Grant.
«The Fed reminds me of a speculator who is on the wrong side of the market», says Mr. Grant. The fact that the Federal Reserve is now beginning to taper its bond purchases makes little difference in his view. «It’s like pouring a little less gasoline on the fire,» he thinks.
In this in-depth interview with The Market/NZZ, which has been edited and condensed for clarity, the outspoken market observer and contrarian investor compares today’s environment with the second half of the 1960s and explains why he expects persistently high inflation rates. He explains what this means for the dollar as well as for gold, and where the best investment opportunities are with respect to the challenge of global warming.
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Jim Grant: The Fed Can’t Control Inflation
Jim Grant: The Fed Can’t Control Inflation
Federal Reserve Chairman Jerome Powell insists inflation is “transitory.” As prices have spiked throughout the economy, Powell’s messaging has essentially been, “Move along. Nothing to see here.”
Peter Schiff has been saying the central bankers at the Fed can’t actually tell the truth about inflation because even if they acknowledge it’s a problem (and it is) they can’t do anything about it.
In a recent talk, Jim Grant, investment guru and founder of Grant’s Interest Rate Observer, echoed Peter, saying the Fed can’t control inflation.
During a webcast sponsored by State Street SPDR ETFs, Grant said he thinks “there’s a gale of inflation of all kinds in progress,” adding that he believes it will take the Fed by surprise and “overwhelm our monetary masters.” Grant said, inflation is “clear and present and will manifest itself in our everyday lives.”
That sounds like the exact opposite of Powell’s “transitory” mantra.
Peter has said that once the Fed is forced to admit that inflation isn’t transitory, it will be too late to take action. Grant made a similar prediction, saying inflation will “catch the Fed flatfooted. In response it will “prevaricate” – meaning speak or act in an evasive way. In fact, that already seems to be the central bank’s strategy.
The question is can the Fed actually control inflation. Grant doesn’t think so.
I think the Fed is under the misconception that it controls events. Sometimes, events control the Fed, and I wouldn’t be surprised if this was one of those times. The Fed thinks that not only can it control events, but it can measure them. It believes it can pinpoint the rate of inflation.”
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The Dystopian Bubble: George Orwell Meets Charles Mackay
The Dystopian Bubble: George Orwell Meets Charles Mackay
“Threats to freedom of speech, writing, and action, though often trivial in isolation, are cumulative in their effect and, unless checked, lead to a general disrespect for the rights of the citizen.”
~ George Orwell
In early December I asked Jim Grant how to reconcile exuberant financial markets with economic reality that reads like dystopian fiction. He responded,
I’m not sure there’s much distinction. To me, the current form of dystopia is the bubble form. So I think this is the year of the dystopian bubble.
The opening pages of the new decade feel like we’re living through a combination of George Orwell’s 1984 and Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. On the day the 2020 election results were to be certified in the Senate, a mob from the losing side surrounded and actually breached the Capitol. The outgoing president was accused of inciting a riot, threatened with impeachment, and banned for life on Twitter. Despite the chaos, stocks shrugged it all off and rallied to new highs.
The following weekend cover of Barron’s, “The Case for Optimism,” captured the manic side of the dystopian bubble perfectly. Its editorial staff sees a silver lining in practically every cloud:
[T]his is a market determined to march higher, and it’s not about to be derailed—even by historic mayhem in the nation’s capital. Stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration. A chaotic political season is winding down, while the economy is gearing up for a postpandemic reopening.
Investors need to keep their eyes forward and look ahead to a Joe Biden presidency: to more-predictable domestic policies, smoother trade relations, and additional efforts to revive the economy. Now might not be a good time to own anything defensive.
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Jim Grant Warns The Fed “Firemen Are Also The Arsonists”
Jim Grant Warns The Fed “Firemen Are Also The Arsonists”
Having put put America straight on what we are facing and the consequences of these unelected and unaccountable officials terrifying experiments, Grant’s Interest Rate Observer editor Jim Grant is back with another warning that irresponsible policy from the Federal Reserve made the coronavirus crisis worse than it had to be.
As Grant notes, “it took a viral invasion to unmask the weakness of American finance.”
Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses; but, as Grant exclaims, the firemen are also the arsonists echoing his earlier in the week comments that:
Jay Powell’s seemingly blinkered proclamation that “he sees no prospective consequences with regard the purchasing power of the dollar” as “very concerning” adding more pertinently that he thinks “that wilful ignorance is a clear-and-present-danger for creditors of The United States.”
It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the U.S. economy’s financial integrity.
The coronavirus pandemic would have called forth a dramatic response from the central bank in any case. Not even the most conservatively financed economy could long endure an official order to cease and desist commercial activity. But frail corporate balance sheets and overextended markets go far to explain the immensity of the interventions.
Perhaps never before has corporate America carried more low-grade debt in relation to its earning power than it does today. And rarely have equity valuations topped the ones quoted only weeks ago.
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Jim Grant Warns Fed’s ‘All-In’ Actions Are A “Clear-And-Present-Danger” To US Creditors
Jim Grant Warns Fed’s ‘All-In’ Actions Are A “Clear-And-Present-Danger” To US Creditors
In a veritable treatise on all that was wrong with The Fed’s actions, Jim Grant – founder and editor of Grant’s Interest Rate Observer – was somehow allowed nine minutes on CNBC’s Squawk Box to put America straight on what we are facing and the consequences of these unelected and unaccountable officials terrifying experiments.
Grant began by slamming Jay Powell’s seemingly blinkered proclamation that “he sees no prospective consequences with regard the purchasing power of the dollar” as “very concerning” adding more pertinently that he thinks “that wilful ignorance is a clear-and-present-danger for creditors of The United States.“
It appears his fears are starting to be warranted as USA Sovereign credit risk is rising…
“I am in favor of life going on,” says Grant when asked by the anchor, “shouldn’t The Fed do something amid this massive global shutdown?”
The alternative, the venerable bond guru exclaims is the direction we are heading – “shutting everything down and putting the government in charge.”
Bernie Sanders may (or may not) be out of the presidential race but, as Grant highlights, “his programs are being implemented in fact daily.”
“One can die of despair as well as disease,” warned Grant, reminding viewers of the consequences of mass self-incarceration.
“There are health consequences to isolation, and health consequences to unemployment.. and life as it must go on is is a precious thing too and we ought to at least consider what we are condemning ourselves to if we choose to shut everything down for another month or two or three.”
“I think it would be a fatal error.”
Once again, the CNBC anchor urged Grant to support massive intervention but exclaiming “desperate times call for desperate measures.”
His retort shut down her argument quickly:
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Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”
Jim Grant Asks When The World Will Realize “That Central Bankers Have Lost Their Marbles”
April 15 comes and goes but the federal debt stays and grows. The secrets of its life force are the topics at hand— that and some guesswork about how the upsurge in financial leverage, private and public alike, may bear on the value of the dollar and on the course of monetary affairs. Skipping down to the bottom line, we judge that the government’s money is a short sale.
Diminishing returns is the essential problem of the debt: Past a certain level of encumbrance, a marginal dollar of borrowing loses its punch. There’s a moral dimension to the problem as well. There would be less debt if people were more angelic. Non-angels, the taxpayers underpay, the bureaucrats over-remit and everyone averts his gaze from the looming titanic cost of future medical entitlements. Topping it all is 21st-century monetary policy, which fosters the credit formation that leads to the debt dead end. The debt dead end may, in fact, be upon us now. A monetary dead end could follow.
As to sin, Americans surrender, in full and on time, 83% of what they owe, according to the IRS—or they did between the years 2001 and 2006, the latest period for which America’s most popular federal agency has sifted data. In 2006, the IRS reckons, American filers, both individuals and corporations, paid $450 billion less than they owed. They underreported $376 billion, underpaid $46 billion and kept mum about (“nonfiled”) $28 billion. Recoveries, through late payments or enforcement actions, reduced that gross deficiency to a net “tax gap” of $385 billion.
This was in 2006, when federal tax receipts footed to $2.31 trillion. Ten years later, the U.S. tax take is expected to reach $3.12 trillion.Proportionally, the 2006 gross tax gap would translate to $607.7 billion, and the net tax gap to $520 billion.
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FED LUNACY IS TO BLAME FOR THE COMING CRASH
FED LUNACY IS TO BLAME FOR THE COMING CRASH
This week John Hussman’s pondering about the state of our markets is as clear and concise as it’s ever been. He starts off by describing the difference between an economy operating at a low level versus a high level. He’s essentially describing a 2% GDP economy versus a 4% GDP economy. We have been stuck in a low level economy since 2008. And there is one primary culprit for the suffering of millions – The Federal Reserve and their Wall Street Bank owners. They are the reason incomes are stagnant, the labor participation rate is at 40 year lows, savers can only earn .25% on their savings, and consumers have been forced further into debt to make ends meet. Meanwhile, corporate America and the Wall Street banks are siphoning off record profits, paying obscene pay packages to their executives, buying off the politicians in Washington to pass legislation (TPP) designed to enrich them further, and arrogantly telling the peasants to work harder.
In economics, we often describe “equilibrium” as a condition where demand is equal to supply. Textbooks usually depict this as a single point where a demand curve and a supply curve intersect, and all is right with the world.
In reality, we know that economies often face a whole range of possible equilibria. One can imagine “low level” equilibria where producers are idle, jobs are scarce, incomes stagnate, consumers struggle or go into debt to make ends meet, and the economy sits in a state of depression – which is often the case in developing countries. One can also imagine “high level” equilibria where producers generate desirable goods and services, jobs are plentiful, and household income is sufficient to demand all of that output.
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