Wikinvest Wire

Jim Grant is still making sense

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:

Click to play in a new window

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.

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.
On U.S. Treasuries and gold as investments:
A friend of mine is responsible for the wonderful quip, "Treasuries at these great interest rates constitute a return free risk".

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.
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.

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Anonymous said...

Return free risk INDEED! If someone had put their money in a savings account in euros last year which pay as much as 4%/year, how much would they have today in dollars?

Nick said...

Correct me if I'm wrong (please, since I don't claim to fully understand this aspect of the financial system), but treasury yields are based on auction prices for treasuries, and move in the inverse direction to the purchase price or current valuation, correct? So that would imply that treasuries are in high demand at the moment, and the government can borrow money very inexpensively because of this, right?

If that's indeed the case, the people driving demand for treasuries must not be too worried about inflation, because why would you buy something with a low fixed yield if you expected inflation to out-pace it. I get the demand for gold as a hedge, but why the high demand for treasuries? Is it just a flight from fixed-income securities which are not backed by the US government (eg: MBS, commercial paper, etc.), or some other factor?

Help me out, internet gurus. :)

Anonymous said...

The demand for treasuries is driven mostly by flight to quality. It is what happens when risk becomes more important than real yield.

Tim said...

I presume you're using the term "flight to quality" loosely here...
Nick, you are correct. Paraphrasing Will Rogers, people are more concerned with "the return of their money than the return on their money".

Anonymous said...

Hi Tim,

Congrats. Yes, quality in the sense that it is better than mortgage paper, CDOs, etc. Cheers.

BTW Nick,

Gold is a hedge only to the extent that you believe in the viability and competence of the Fed/Treasury. If it wasn't obvious before, now given what we just witnessed, you probably want to think of the other way. Hold some dollars/treasuries as a hedge against near-term fluctuations in the value of gold.

Nick said...

Ok, I get that... but buying/holding treasuries in the face of almost certain intentional inflationary actions by the Fed (if Ben's analysis of Japan is an indication of how he will act, which I think it is) would be silly, unless there really isn't a better option for preservation of capital. So that would imply that the big money investors are taking the "under the mattress" approach, and view every investment sector as negative in the sort term.

Do I have that understanding correct?

Nick said...

... in which case, if correct, the short-term treasury yield compared to expected inflation would be a very good indicator of when big money investors begin buying stocks and corporate bonds again, aka when I should move my assets out of the money market funds and back into the market...

Anonymous said...


Take the time to read and understand.

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