Wednesday, March 26, 2008
Jim Grant of Grant's Interest Rate Observer was on Bloomberg this morning and he didn't have much good to say about much of anything. For any of you familiar with Mr. Grant, that should not come as a surprise:
The entire interview runs more than 15 minutes and is well worth listening to in its entirety as Jim is one of the more sensible voices out there at the moment. Some excerpts...
On the Federal Reserve and monetary policy:
The Fed is doing things today - it is undertaking intervention as dramatic as those it performed in the 1930s without the extenuating circumstances of the Great Depression.On U.S. Treasuries and gold as investments:
This country may or may not be in a recession - I guess the White House will let us know if it is. I think it is not in a depression and yet credit conditions, in many respects, are as bad as those this country confronted in the early 1930s and we ought to ask ourselves, "What manner of incompetence - both at the public policy level and at the so-called financial professional level - led to this mess?"
It is really something.
And the people who are paying are the savers, among others. Savers have taken a pay cut as the Federal Funds rate is chopped to accommodate the speculators who need more and more leverage at lower prices. They need a steeper yield curve, that is to say, a more favorable alignment of interest rates over time to facilitate the growth in bank earnings.
A friend of mine is responsible for the wonderful quip, "Treasuries at these great interest rates constitute a return free risk".Gold as a reciprocal - a multiplicative inverse - and Treasuries offering mini-bar values. Both of these are probably foreign concepts to about 90 percent of the public.
Something is out of kilter in our credit and monetary world. Treasury yields are knocking on the door of the lows last seen in 2003 and 2004, ten-year securities yielding 3.5 percent, much less than the year-over-year depreciation of the purchasing power of the dollar. That's one observation. Second is the price of gold, recently at $1,000, it's now at $940.
One ought to have a point of view about which one of these asset classes is absurdly valued.
I own gold personally and therefore you ought not listen to anything I say about it.
Gold is the value investor's gilded (guilty?) pleasure - it yields nothing, it has no stream of dividends, you can't value it on a key ratio of management, but it is a hedge against the depredation of our masters at the Treasury and the Fed. Therefore, I hold it, not knowing what it's going to return, not having any sense of how to value it. It's price is the reciprocal of the world's stock of faith in the person Ben S. Bernanke and others like him.
So, I say, the Fed is worthy of less credit and confidence, ergo the price of gold, all else being the same, ought to go higher. Thinking that, I am necessarily led to think that Treasuries are about as compelling a value as the kind of stuff you find in your hotel mini-bar.