James Grant

James Grant, Grant’s Interest Rate Observer founder, discusses whether the U.S. is going the way of Europe and headed for recession.

let’s solve this. all right. welcome back it’s the hot topic on wallstreet. going the way of europe and headed for recession?warren buffett told the economic council. we’re not smarter than the people in the 1930s. we just have a system that worksthat’s been working since 1776. e has under his wing, i think, 80 or 79 operating companies and he’s got one of the better views on the macro economy. let me ask you about the federal reserve’s testimony tomorrow. ben bernanke back beforecongress tomorrow. what are you expecting him to say. a lot of debate in terms of suggestion of more stimulus, qe 3, what do you think? i think we should plan for planitude but there’s adifference between what the fed is saying and and notice they have and the maximum rate of growth occurred a year ago in the spring of 2000. in the last three months it’s mainly treasuries, securities, and mortgages, that has totalled an annual rate of almost 10%. the fed is withdrawing stimuluseven as more and more of the governors and reserve bankpresidents are talking about qe 3. sothing to bear in mind when you listen to bernanke talk. what is he actually doing? and what they are actually doing at the margin is shrinking. what do you think about that? ? give me your analysis on that. unless they continue buying securities, some of these bills, bonds, and mortgages mature and run off. that’s what is happening now.the portfolio is shrinking just by the natural tendency of things to come to the end of their financial lives. so unless there is some new initiative, the portfolio continue to shrink and as the fed asset shrinks, so does the stimulus and the accumulation ofthose assets. i expect that there will be qe 3. you do? i do. i think that very little prodding to do what they have done continuously almost for four or five years and — look, jim, let’s face it. we had a terrible jobs number. 69,000 jobs created in the last month. i know you’re not a fan of all of this stimulus. it’s market manipulation in the past. isn’t it a fun drug? they keep on printing the stuff and we keep on expecting more and today i think part of the source of the levitation was in wisconsin.people are maybe discounting the prospect of something like freer or if not free markets come the fall if the gop wins but a good part of what is going on in the market is the presence of hope of qe 3, withdrawal of that hope. it is a grand nipulation. i think you brought up a very important part with the wisconsin thing. i’ve been asking this thing, are investors going to look at this data as it keeps on worsening and say,re going to have anew president and then start rallying on the expectation that it’s a romney rally? i think so. i think that in a way the worst is better. the supreme court is going to hold forth on whether obamacare is constitutional. i can see a gop victory the market discountithat. if in fact we were to see more expectations that president obama loses the re-election, then this market rallies? that’s the best hope for this stock market? it’s one hope and it’s not in i think it’s one bullish feature to be aware of. give me the long-term implications for all of this money. let’s say we get qe 3. long-term implications are bad. there is nothing free in this life, in money least of all. the world i think has 2008 in its brain. the world is preoccupied with the awful memories of the 2008 and 2009. if you look at the market and volatility market,people are buying protection against a deflationary collapse. the bank regulators are demanding a deflationary event.unexpectedly it began to generate higher than expected rates of inflation, what if interest rates went up. that might be the surprise. that’s what i’m thinking about, that we have all designated on the one hand risk assets. on the other hand, nonrisk assets, right? how about if the labels were stuck up wrong? which they may very well be. are you worried about europe? how much of an issue is europe? at the end of the day i want you to button up and say, how is the investment play here? let me answer it with one short breath. we are looking for microeconomic specific opportunities in europe. equities, distressed debt, busted lbos, cheap real estate. we can’t know the future. we can’t really handicapped these macroeconomic outcomes. but what we can do is stroll for opportunity. that’s what we’re doing. if the op ed today there is pahow about just cool, calm, and collected analysis? that’s what we’re trying to do. that usually works. jim grant, fantastic analysis, as always.will the market rally ahead