Jim Grant, founder and editor of Grant’s Interest Rate Observer, discusses what’s drove the market sell-off on Thursday.
Jim Grant: Is This The Beginning Of A Bond Bear Market?
Corsair Capital was down by about 3.5% net for the third quarter, bringing its year-to-date return to 13.3% net. Corsair Select lost 9.1% net, bringing its year-to-date performance to 15.3% net. The HFRI – EHI was down 0.5% for the third quarter but is up 11.5% year to date, while the S&P 500 returned 0.6% Read More
Bands like those often have a pretty long Langfang long lifetime. So is today overdue right on time.
Well it is overdue. And here we are nine years into what is turning out to be a pretty fair. Business expansion. And the Federal Funds Rate is after adjusting for inflation at exactly zero. And the 10 year Treasury which over the past half century has delivered an inflation adjusted return of more than 2 percentage points is delivering. Less than half of that now. So yeah it's overdue.
Whether or not it's over the June put in perspective for us where we are in real terms and whether this should be really hurting the economy fundamentally yet. Well I think. We have to realize that interest rates the key to my mind that most important crisis in capitalism have been under the thumb.
Of central banks for the better part of 10 years. They have been distorted to the downside. Even today some 6 trillion of debt is priced to yield less than zero. So there's been a huge distortion a systematic distortion of interest rates worldwide. So you ask whether this is going to have a consequence for you. Yeah because people have borrowed. That in effect false prices. We are all to a degree living in a kind of high investment hall of mirrors because the information conveyed by these rates is as artificial information. Well it's kind of fake information.
So what happens next then you saying that that's going to be a big wakeup call for investors and the economy to come for us to go higher before that one.
At least I have blown out too many birthday candles the dogwood ties. But what. May happen. And for me it may just be that the. Great bond the bull market began in 1981. Ended. In July of 2016 that's a possibility. The 10 year yield printed in July of that year. One in three eights. It's now three thirty or thereabouts. And if it were the case that we are embarked on a bond bear market on form it will be rather a long process. Interest rates are unusual among all prices and they tend to trend over a generation long cycles or half of 200 years. 35 years up. Five years down 25 years this direction. So it might be that we are in the early stages of a persistent rise in rates. We'll know more about 2050 winter.
It's not just here in theU.S. I mean rates are actually moving higher around the globe sort of resolution to this I mean Japan thing the highest rate since 2060. They have to zero yet and. I know. Good point perspective of course but it's not just isolated here. But all your own.
All major movements in capital assets really big ones tend to be global not localized. So. That. Is the argument on the side of this being something important.
How much will China be feeling the pressure at the moment whether we're talking about the dollar or the yields in theU.S. housing China. So I think China will feel it's certainly a great deal of leverage financial leverage and trying to make a deal of. Very low quality borrowing and lending. And in such a case will begin to pop in the real economy because people have structured their balance sheets in the wrong fashion they think they've borrowed in the expectation of continued low rates and maybe just maybe. The central bankers are losing control of rates would become so accustomed to thinking about you know what are they going to do what it might just be that they.
Are going to responding to events rather than seeming to control them.
They central bankers globally. They Chinese say they. Know. That the central bank right.
Earlier in the program Stephen Ratho one of our traders says that it's not so much the level that the yields are sitting out but the pace at which they got.
Yes well according to here's what's different with the last bond bear market of consequence was one beginning in 1946 that began about two and a quarter percent. One day the Treasury. And not until 10 years later did that yield reached three and a quarter around 10 years for one percentage point. So the tempo of this bear market if indeed it is a secular bear market is much faster. It's gone from one in three days to three point whereas now three just below three points.
Jim thank you very much for joining me. Great to have you with us as always. Always welcome to make the short walk across the road. As you revealed from your office.