James Grant, publisher of Grant’s Interest Rate Observer, talks about the impact of the Federal Reserve’s policy of low interest rates and quantitative easing on the financial markets and U.S. economy. Grant speaks with Tom Keene on Bloomberg Television’s “Surveillance Midday.”
Full Link here-http://www.youtube.com/watch?v=rQafMzc3JhA
Partial video embed code Below:
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Jim Grant was on CNBC today talking about US money market funds’ exposure to Greece. Grant points out as I did the other day that people are taking huge risk for a tiny yield. It is a case of high risk low reward. When the Primary Reserve Fund broke the buck after Lehman collapsed, I believe that less than 2% of the Funds’ assets were in Lehman commercial paper/ short term notes. The five largest US money market funds, have 41% of their assets exposed to europe.
Grant thinks China is going to be a much bigger problem for the world than Greece, as the Chinese bubble bursts.
He comes in at the 4 minute mark. Below is the video followed by the transcript (after the four minute mark).
Jim, good to talk to you again. thank you, carl, nice to be here. you make the excellent point that people at home wonder, well, hoes this really — i’ve got the money in the market. but how is this removed from my holdings, they’re probably wrong. they are indeed. what few know, all too few know is american market funds are exposed to europe in the shape of the investments in the short dated bank instruments in the commercial paper and the five largest u.s. funds, in fact have 41% of their assets exposed to europe. now, we all get out of bed in the morning. wafting in what we call investing. the central problem in the 0% interest rate environment is that people are taking substantial risks with literally zero return or virtually zero return. the largest market fund fidelity yields one basis point before tax. you double your money in 6,900 years so they have to be very, very patient. yeah. it will happen, eventually. you will double your money, but lit be the year — the 8 thouk, i guess. eat well, get plenty of exercise to be there for it. so the president of the boston fed gave a talk on this a while ago. and he pointed out that there were these risks and he — he put the blame — he said despite the postcrisis regulatory regime, we’re looking at the risks, not in spite, virtually because they’re having unintended money market funds, you really can’t do anything at home. they’re regulated heavily. there are — there’s little need for funds in the american banking system, so they go across the atlantic smack dab in the middle of the debt crisis. the concern when you talk about the money market funds is it reminds us of 2008 financial crisis when the money market funds broke the buck. that was the beginning of the real panic that kicked things off? are we seeing something akin to that? it’s hard to handicap the likelihood of a run. people are well advised to walk to their money funds and inquire whether they are in fact prime funds in private obligations or government only funds investing exclusively in treasuries and federally guaranteed agency securities. a 30-day treasury fund yields nothing. the prime money market funds yield as much as 17 basis points in which you double your money in less than 400 years. it makes exactly no sense to take any risk at all in the 0% environment. while you’re talking on the left side of your screen, that’s the prime minister addressing parliament right now. a big deal after the debate is happening throughout the past few hours. he will speak. that’s one of the last things that happen until we get the results. we’re getting close. earlier today, a greek central bank governor warned that a no-vote would be suicide in his words for greece. and i’m sure that’s sort of the message that papandreiu is putting out in greek. we’re not going to translate for you. talking about the money market angle. the solution is to do what? if you are worried about the exposure to europe, take the money out of money markets and go to treasuries? why take any risk at all. it’s not as if the world is stripped of opportunity. there’s always something to do with the value of people, this country much more extraordinary as if we were back in the session. exxon mobile, 400 market cap, you know, increases the dividend to 50% or so for the past five years. trading at nine times earnings, yields 2.4%. you have to ren chur out four years in the yield curve to match. so it’s not as if there are no opportunities in the world. but in the money market mutual fund area, there are little opportunities. it’s no risk. an anomaly made by the board of governors in washington, d.c. it’s a good point, before i let you go, larry fink made a full discussion on treasuries. speaking of treasuries, not afraid of treasuries but if my accountants would allow me, i’d be 100% in equities. they’re cheap. people are going out of equities paying 2 and 20 and hoping for better returns than on equities. anything earning 3% or lower is the dumbest thing you can do. you are moderately positive stocks, aren’t you? the small stuff is way, way up. the social networking stuff, i can’t understand. the greece is the problem. what we have not been paying attention to is the extraordinary, i think, unwinding of the chinese credit bubble that’s a much more substantial problem than maybe other things. thanks for the time. back to michelle caruso cabrera. we’re watching this closely. guy johnson is telling me that the bbc is now saying that the vote in greece is expected to start in the next 20 minutes. michelle? that sounds about right. the prime minister is the last to debate. once he begins talking, he’s the last before the vote happens. we can speak for 20 minutes. we believe that’s the limit. the vote will get under way. take five or ten minutes. what it took last time. it’s done region by region. and you’re going to keep an eye on it as well. 151 votes. he’ll get his way. that’s what we were waiting for, the beginning of parliament in the last step before we get the historic vote under way, something that the financial world is telling us they have to do if they want to see a $17 billion loan so they can pay their bill in july. the conditions they have to meet are the austerity measures they have to pass and it makes people outside so, so angry. they don’t like their salaries cut, jobs loss. most people don’t seem to realize that’s going to happen regardless of how this vote happens. right now, we appear to be on the eve of what is an historic moment in the watershed moment in the ongoing financial crisis we’ve seen in the world in the last several years. back to you guys. check back in with michelle in a minute. a squawk master of the market.