Jim Grant, founder and editor of Grant’s Interest Rate Observer, speaks with “Squawk Alley” on the Fed and Jerome Powell.
The Fed’s Balance Sheet Should Be Smaller, Says Jim Grant
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
What do you think of the discussion?
I think that people are too certain about things about which they should not be said. The future is a closed book to begin with. And secondly we are. In a moment that literally has no press and almost everything in finance has been seen before. What is new and different is the following. You have eight and a half trillion dollars worth of securities priced to yield less than zero worldwide. At no point in the Treasury yield curve as an investor earning. The return of greater than zero after inflation and taxes. Interest rates by one measure in 2016 inflows were the lowest they had been in four or five hundred years. So we are in an environment of extraordinarily accommodative. Essentially free capital we’ve been in. An era of. Essentially free money for many years. Free money is lovely but spending it people will do things they wouldn’t have done that capital cost them something substantial. So. Anyway so here’s a vote my vote. For a lack of certitude about the future. The National Weather Service state it employs 42 hundred people have 76 billion mineralogical observations a year. Spends a billion dollars doing it and often misses a story.
It does although to be fair it’s gotten a lot better. Predicting the weather over the last 20 years it has indeed. But notice the lack of improvement.
In the Federal Reserve forecast the future is not the Fed’s best subject nor is it humanity’s best subject yet we sit around here listening to people telling us what’s going to happen in March. Is going to rain next Tuesday. So I would say that we don’t know a lot and in view of the circumstances of most extraordinary circumstances of our credit markets and capital markets. We ought to be prepared for all manner of outcomes many of which are unscripted.
OK well Dick Abbas vich earlier saying the artificial increase in asset prices is due in part to what he would have liked to have seen which is the huge increase in the Fed’s balance sheet which is now being reduced I assume you agree with these policies that are in place to try to create some sort of normalization.
Oh yes I think the Fed’s balance sheet ought to be much smaller. But having said that I mean I yes lovely if we had rates that paid you something to invest in them it would be lovely if the Fed’s balance sheet were not in need of a program. Weight Watchers well that’s good but I think we ought not to underestimate the possible consequences of normalization which are what rather the country that this economy has capitalized for ultra low interest rates the Federal Reserve the federal government’s finances are set up for ultra low interest rates a one hundred basis point cost that.
Federal borrowing costs the taxpayers 160 odd billion dollars a year. Private equity is capitalized for ultra low rates and on and on. So if we normalize. That’s great. We may have more days like yesterday rather than today.
True although you know you referred to this period as anomalous earlier when we were talking briefly. It’s been 10 years. I mean you ostensibly write a newsletter that’s intended to help people make money. You could have made the same argument and probably did ten years ago Jim and nobody’s made a lot of money waiting for this readjustment. You keep talking about brawl. Between.
The corner in the interstices of the theme that we are on the wrong track and all sorts of things to do. Securities would buy and sell grants actually focus on those. But it seems to me there’s nothing wrong with holding in the front of your mind. Or at least not too far in the back of your mind. The fact that we live in this most extraordinary moment of monetary manipulation central banks the world over have commandeered financial markets in the interest of macro economic policy nicely. It is not even the worst offender. The Japanese have destroyed its bond market Japanese.