Discussing the state of the economy, and the crash in commodities, with James “Jim” Grant, Founder & Editor of Grant’s Interest Rate Observer. Jim Grant likes two stocks in the private equity industry and believes Ben Bernanke will help drive the price of those firms up.
Video and computer transcript below:
Abacab Fund Sees Mispricing In Options As Black-Scholes Has Become “Inadequate”
Abacab Asset Management's flagship investment fund, the Abacab Fund, had a "very strong" 2020, returning 25.9% net, that's according to a copy of the firm's year-end letter to investors, which ValueWalk has been able to review. Commenting on the investment environment last year, the fund manager noted that, due to the accelerated adoption of many Read More
welcome back. noted economist, jim grant, known for criticizing the fed, he says the central bank’s easy money policy is creating opportunities in one area, private equity. jim grant of grant’s interest rate observer joins us now for an exclusive interview. as always, first, jill, i want to talk to you about the opportunities. how are you? good to see you, by the way. good, by the way, i’m not an economist, maria. you’re right, you’re right. but you have the goods to be called an economist. i’ve got a couple of ideas. all right, so tell me. the world is wide open with respect to credit, right? no credit, no problem. junk bond yields, loans, leverage loans accessible on and on. and also, the stock market, as you have observed, maria, is levitating. this is a perfect world for people that deal in private equity. and there are two publicly traded private equity and so-called alternative managers that actually offer a margin of safety apart from these opportunities that are part and parcel with very easy money. you know, you rarely talk about public stocks in terms of being beneficiaries or getting an impact from the policies out there. which are those private equity firms? blackstone, bx, kkr, and you can guess the ticker, kkr. right, r. both are doing very well in these areas. both of them are adding assets under management. i think blackstone had like 98 or 90-something billion in 2009 and now it’s got over 200. both are seeing opportunities to sell companies in which they’ve invested. both, of course, are beneficiaries of extremely low interest rates and accessible credit. and both pay good dividends. both yield around 6% thisyear, will yield around 6% this year or higher. and both trade at multiples of what they call economic net income, which is kind of a massaged price earnings ratio in the high single digits. i love this idea. i really do. private equity is certainly doing well in this environment. i’m, i guess, a little surprised that we haven’t seen more deals, given the fact that rates are at such low levels. shouldn’t we be seeing a whole host of deal flow and deal activity? we should, and we may. i guess, the opposite side of a coin of a buoyant stock market is higher evaluations and less attractive targets in the public arena. as a stock holder, and i was glad to see blackstone back off from a bid on dell. but, you know, these companies are kind of out of the mainstream. if you’re a stock holder, you’re actually a unit holder. you get a k-1 form, as if you were a limited partner in almost a hedge fund. the accounting is eccentric, because, well, because gap doesn’t quite do these companies justice. so you have to look at this so-called economic net income. and there’s this seeming paradox of private equity companies being in the private market. and if pri equities are so great, why are they public? there’s a lot of bad will, i think, towards these companies, but they offer that thing that is most scarce today in the markets, namely safety. they are actually cheap, especially compared to their public counterparts. these companies have their money locked up for ten years. you don’t just take it away from them. where the mutual fund companies, the money can and sometimes does walk out the door on a given bad day. they trade these companies, for example, t. rowe price and franklin the high teens of earnings, or in the case of t. rowe, closer to 20 times. so it seems to me an oddity and an exploitable oddity that the public alternative asset managers, blackstone and kkr are as cheap as they are. i like the idea, a lot. let me ask you a bit about what else is going on. the last time you were here was right before this new debate came out, about the fed slowing down the policy, by the beginning of this summer, in 2013. i recognize, it’s time to do unemployment and time for the economy. but would you expect the fed to start slowing down the stimulus this year? no. no? fed has said, unless unemployment is better than 6.5%, people have been speculating on the fed’s pulling back since they started pulling forward. it seems to me the burden of proof must be on those w contend that the fed is going to do less rather than more. and does it not appear that we have chiefed something like the kingdom of heaven. sovereign bond yields scraping all-time lows in spite of unprecedented central bank activity. why would they stop? it’s perfect, yet improving. the perfect world. what about gold? i mean, what a — you must have been just watching that screen, watching gold plummet a week ago. yes. and thinking, what is going on here. the last thing i said to you, the prior time, and you were gracias enough to have me on, gold stocks are really an interesting idea. totally lacked. but i’m still bullish.i think that gold is the alternative, is the way to get short central banks. it’s the way to get long in the alternative to central banking. and gold stocks are cheaper than gold. so i was very, very bullish, indeed. so was this just momentum? was it margin calls? what do you think — i mean, because i don’t think — i’ve not seen a decline like that. it seems to me that it was largely the structure of the gold market, meaning the way it was owned, and by whom it was owned and what leverage, rather than anything having to do with the fundamentals of the gold market, which fundamental to me is the institution of managed currency, the central banking. it’s aggressive, unprecedented money printing. that to me is a single fundamental of the gold market. as long as that remains in place, it seems to me, you are compelled to look at an alternative if you’re serious about the money you have earned, and that, to me, the principal alternative to central banks, in the monetary realm is the ancient monetary asset they can’t create. and gold trades for a totally different reason than other commodities. you look at what’s going on in copper — or grains. grains. gold, to me, is not a commodity, it’s money. but also, notice that there is no p.e. multiple, no yield. so it is a price. and therefore, it is subject, in the short-term, certainly, to the vasistudes of anything. thanks so much, jim grant.