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The Forever Invariable Truth | Jim Grant on War, Inflation, and What Comes Next
01:03:20
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- [00:00]
A
K Pop Demon Hunters, Saja Boy's Breakfast meal and Hunt Trick's meal have just dropped at McDonald's. They're calling this a battle for the fans. What do you say to that, Rumi?
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B
It's not a battle. So glad the Saja Boys could take breakfast and give our meal the rest of the day.
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C
It is an honor to share.
- [00:16]
B
No, it's our honor.
- [00:18]
C
It is our larger honor.
- [00:20]
B
No, really, stop.
- [00:22]
A
You can really feel the respect in this battle. Pick a meal to pick a side.
- [00:27]
B
Ba da ba ba ba and participate in McDonald's while supplies last. Inflation is the product of corporate oligopoly, of labor union monopoly. It's the product of greed. It's the product of a sloppy fiscal policy. It's the too much money chasing too few good. So all of those things have been debated and many have been found wanting at certain junctures in the inflation. One thing that is forever invariably true is that war is inflationary. To the extent that everyone doesn't have the same idea at the same time with regard to some particular imagined outcome, that if those things are in tune, I guess we are looking at stability. But when everyone has the same idea, for example, that stocks are going to the moon, or that there's no such thing as inflation, or that. War can be waged on the cheap, those things tend to be disruptive.
- [01:40]
C
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. Our guest today, creator of Grants, interest rate observer, who also is to blame for forever lodging the metaphor of Bitcoin as Kenny G. In my brain. Yes, pleasant background noise that's ultimately annoying. Jim Grant, welcome back to Access Returns.
- [02:02]
B
Yeah, nice to be here, Matt. Thank you. Hey, Justin. Yeah. What's a good word, man?
- [02:07]
C
Well, I want you to start us here. The economy's been a little exciting lately, even though the forecasts and the data haven't changed much. Where do you think we are?
- [02:16]
B
Yes, I. Well, we are not quite in heaven. I saw something just now across the tape, which is that everybody's unhappy. It was a survey of consumer confidence and it has plumbed lows and inflation expectations I think are above 4%. So there is some discontent in the land. It's hard, you know, this concept of the economy I find awfully elusive. You know, 5,300 million people get up in the morning and try to do better and the extent to which their efforts are coordinated through reasonable fiscal and monetary policy and to the extent that everyone doesn't have the same idea at the same time with regard to some particular imagined outcome. That if those things are in tune, I guess we are looking at stability. But when everyone has the same idea, for example, that stocks are going to the moon or there's no such thing as inflation, or that. War can be waged on the cheap, those things tend to be disruptive. And I think we have a lot of disruptive ideas in circulation. And I'm giving a very poor answer to a relatively straightforward question. By the numbers, everything is kind of fine, right? Unemployment as measured is low. Prices as measured are rising. Inflation is problematic, but nothing like the problematic inflations of yesteryear. And. One might be accused of carping by being too negative on a state of affairs that by the figures is kind of okay.
- [04:15]
C
Do you think we're slowing down? Do you think this is. Do you think we're ignoring. Sorry, do you think we're ignoring. Is this a matter of. Again, by the numbers, you would say stuff is fine. If you put your hand over all the headlines, nobody would take issue with the underlying number.
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B
Right.
- [04:33]
C
What do you think is being missed?
- [04:35]
B
Well, I think there are troubles in the land and one of them is a state of war. People have developed all manner of theories about inflation over the years, indeed over the centuries. And inflation is the product of corporate oligopoly, of labor union monopoly, it's the product of greed, it's the product of a sloppy fiscal policy. Is the too much money chasing too few good. So all of those things have been debated and many have been found wanting at certain junctures in the inflation. One thing that is forever invariably true is that war is inflationary. War overstrains the productive apparatus. It is. Its purpose is to destruct and kill and to print money to finance those activities. That's the essence of inflation, right? It could be called. So a 49 day war would not necessarily strain the productive apparatus for any significant amount of time. But all big wars start out as small wars and the world seems to be at each other's throats. Nations do. Why do the nations so furiously contend? Asks the good book. And I don't know, but they are. You know, once Greenland, and I'm reading this morning and somebody says that fool, Greenland's not the problem, it's the Baltic Straits. If you worry about blocks of ice, worry about the one off Alaska. So geopolitics is front and center. And so I think that inflation was problematic even when the central bankers were not trying to foment it, which they are. We tend to Overlook this, but it is a fact that in Orwellian fashion, the Federal Reserve has defined price stability as a 2% debasement of the currency parameters, like a tax that the Fed has unilaterally imposed. All right, Everybody chip in 2 cents out of every dollar every year. I don't know. Do we, do we, do we vote for that? Nope. No. It's what Janet Yellen said and everybody said, yeah, yeah, good asset. That's what the bank of New Zealand, the Bank of New. The commercial Central bank of New Zealand said that was a good idea. And then Aussies agreed and everyone. Okay, 2% a year. So inflation is. Is steady state and is only. The only as debatable is how much is to the extent it might rise above that and get people's attention. And I think we are, that is in fact, in progress right now.
- [07:30]
C
I always love your history lessons and I'm curious, especially with regards to war and it causing sustained inflation. Not just an inflation shock, but something sustained at a broader scale, not just using what's happening in front of us right now. What's the historical framing that you can give us for how war leads to sustained inflation?
- [07:55]
B
Well, one way of approaching this question is the simple observation. Until the mid to late 1960s, people in this country assumed there was no inflation. There could be no inflation without war, nor had there been. The wholesale prices between like 1820 and 1930 had been declining. You could pick your beginning and ending dates. But Chairman of The Fed William McChesney Martin invoked that particular statistic in testimony in 1958 or so concerning the inflation that was beginning to alarm people. The inflation rate had poked above 3%. So inflation until this generation or two was always and everywhere a wartime phenomenon. Well, what happened to make that a secular problem? Well, what happened was the paper dollar and the PhD standard of improvisational monetary policy. So this is a somewhat fraught and to many people tedious and tangentious discussion about why aren't we on the gold standard. We haven't been for about 500,000 years. So why are we talking about it? Well, we're talking about it because the monetary regime that supplanted it, that replaced it, has given us the present. The present propensity of inflation to materialize without warfare. Warfare is just the rancid whipped cream on top of this unappetizing sundae of monetary mismanagement, in my opinion. But we have war now and we have the preparation for war. And it seems to me this is going to be the marginal bid for production and for Manpower and for money that will perpetuate inflation well above the Fed's 2% target. So you ask what is it about warfare that makes it inflation? Well, it's just printing money to blow things up.
- [10:16]
C
Can't put rancid whipped cream on top of that and make it anything better.
- [10:20]
B
Yeah you can, but just don't eat it.
- [10:23]
C
Okay, what about then? Same question with oil price shocks, oil price increases. We've seen several of these over the years. We've seen them in the recent past. We've seen them in the not so recent past. How do we think about those? Should we think about oil shocks as transitory in relation to inflation or in some other way?
- [10:45]
B
I don't think you need inflation, you don't need oil shocks for inflation. But they have been part and parcel of inflation and of inflationary scares for many decades. Here's a quote from Paul A. Volcker. Let me see if I can find this. This is the. The date is 1971 and what Volcker said was January 14, 1971. The momentum of inflation has clearly been checked. The speech of the conference board. That was eight months before the United States backed out of the Bretton woods monetary system and launching the pure paper dollar. So what was Paul Volcker who certainly was a formidable thinker about every topic we'll discuss this morning. What did he miss? Well, he missed. The Middle east wars of the early 70s. He missed the subsequent oil shock in the later 70s. He missed the ratcheting up the Vietnam War which actually was not so great a contributor to the inflationary problems of that era. But he missed the timidity of the Arthur Burns regime at the Fed. He missed the uninformed wandering of monetary policy under G. William Miller whom, who preceded Volcker. So energy. So we have to be careful with this one price. I remember so well in 2008. In the summer of 2008, the credit markets were, were visibly falling apart. I mean there's a failure of a Bear Stearns hedge fund in June of 2007 which turned out to be the kind of the starting pistol on the great credit problems of 2007 and 8. But in the summer of 2008, oil worked above $100 a barrel.
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C
That was the peak oil thing, right? That was the whole peak oil.
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B
Yeah, yeah. And I remember so well the how can you have an inflation with the bottom falling out of the mortgage market and the corporate debt markets? It was a more curious juxtaposition of inflation and deflation or inflationary and deflationary symptoms that I've ever seen. It was very confusing. So that, so oil alone is not necessarily dispositive. You know, we have a hundred dollar barrel oil now, but we have also, we have, we have a billion dollar a day war in progress and we have, which is going to be resolved in Pakistan. That's New Geneva, Karachi isn't. You have to keep up, Matt. You just can't look past any chocolates.
- [14:20]
C
Do they have a good scheme there?
- [14:23]
B
I don't know. You ask a good question for which I've given another meandering answer.
- [14:30]
C
Well, you bring to mind though another meandering point. Like we talk about inflation. You can go on a Bloomberg or whatever your clod coated Bloomberg is of choice these days and you can pull up inflation. And it looks like a continuous data set, like a continuous series where it's just, here's another number on a chart that goes up over time and how we understand it and when it goes up and goes down and goes sideways. I get the sense, and as you talked about it, especially through Volcker's lens, it's a mistake to look at inflation as anything that's continuous.
- [15:06]
B
Well, but it is continuous. The whole point of the Fed now is to perpetuate, is to make it continuous at the measured rate of 2% a year. But here is, here is one of the questions that you sent, is a very good question, all good questions. But you asked me to think about, you know, what are the risks that people aren't considering. I said, was the last question to be so this is called rushing ahead. But here's a quote from, from William McChesney Martin, the aforementioned. He was chairman of the Fed from 1951 to or 70. And Martin said the following in August 1955, the date is important. What he said was, quote, we can never recapture the purchasing power we have lost and never recapture the purchasing power we have lost. And the reason why the date's important is in August 55, something striking happened in that month. The CPI registered a 0.4% decline. So deflation, deflation, right in the middle of the Dodgers championship World Series season, 1955. But what didn't happen was the central bank falling apart and declaring a deflation emergency and laying on the qe. On the contrary, everyone was, was focused, mostly everyone was focused on the risk of, of, of the decline in purchasing power because the country had been through World War II, big inflationary event, been through Korea, another inflationary event. And you think that now this generation having been exposed to Ben Bernanke's Kind of obsessive harking back to the Great Depression and the Fed's mistake and just allowing the money supply to contract. We as a generation have been preoccupied with the 1930s, whereas the people only 20 years removed 1930s were preoccupied by something else. By the risk of the debasement of the currency and by the stripping of purchasing power from working people. So inflation is in fact, so we never do recapture the purchasing power, which explains a lot of the social unrest. I think people only Wall street worries about the adjusted super core reading of the PCE upcoming for May. That is not the mainstream concern. The main concern is the purchasing power that people have lost since 2020. It's a ratchet. It never goes back, it always goes up. And here is the Fed tisk tsking about inflation when IT engineers a 2% rise in inflation. That's a decline in the purchasing power of your hard earned money every year. To me it's a striking example of people just not thinking things, thinking things through. Volcker Jerome Powell was at Harvard a couple of weeks ago. I was giving a talk to the economics undergraduates and oddly enough, by coincidence, they were all straight A students, 600 of them. They all got only A's. And Powell said yeah, we have to worry about inflation. And he said, also, he said that quantitative easing, there's no unintended side effect, it's all upside. So that's, so we, we have so the, the whole approach to, to monetary affairs, the Fed's approach to it's undergone a radical revision gradually to be sure, which rather strips the radical shock from it. But if you compare Martin's preoccupation in 1955 with the Fed's complacency in 2026 is, it's, it's quite a journey.
- [19:54]
D
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- [20:22]
A
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E
with all those A students. I clearly wasn't in the audience for that one.
- [21:00]
B
All you have to do is sign up at Harvard and you get an A. I'm told I myself is a big ten man. We also got A's.
- [21:13]
E
Yeah, I wanted to pivot slightly here and ask you about trust and trust in the markets and in, in the economy is kind of foundational to yeah things functioning. But you know, just in my sort of adult lifetime, you know, there's been these bouts of mistrust. You can go back to the financial crisis and then you had Occupy Wall street come out of that. Maybe bitcoin came out of that whole sort of thing. But I'm, I'm kind of thinking like on like a sovereign level with sort of actions and decisions and things that have happened over the past few years around the world is, is falling trust. What, what type of risks do you see? I guess you can talk about it at a macro level but also maybe at a micro level like there's some more mistrust in just institutions maybe in certain ways. So I'm just wondering of. About this concept and the importance of trust and sort of how you see that in market.
- [22:22]
B
Yeah, trust is, well, it's the foundation of the credit markets. Confidence is the, is the currency. Remember the famous episode JP Morgan testifying before the so called money trust investigations in 1910 or 1913. And his line was often repeated, the inquisitor was trying to draw him out and trying to get him to admit something that Morgan wasn't about to admit. And, and at one point Morgan says that trust is everything in, in the world of lending and borrowing and, and the. His counterparty says really trust. So yeah, trust, he said, I would not lend money to a man I didn't trust against all the bonds in Christendom. That was Morgan. And so without. And Robert Morris who was the great financier of the American Revolution, said something almost exactly along the same lines as the 1780s. So this is an ancient variety of, of the credit markets. Now when there was no federal deposit insurance, when there was no too big to fail, when there was no expectation that the Fed would implement another, yet another round of QE to forestall the Cyclical bump in the road trust was ever so much more important because you were dealing with individuals who had no recourse really to the public purse to make things better in a market problem, during a market problem. But still, you know, there's, there's. I'm, I'm kind of, I'm surprised that at the amount of, of, of, of double dealing and of, of. Of bad conduct that now is, I think is pervasive in the credit markets especially. You've heard about these liability management exercises, LMEs in which one set of clever lawyers succeeds or at least attempts to remove collateral from one subsidiary of a borrower to another, spiriting that collateral away from the debt holders. The creditors who thought that they had, through the fine print of the loan documents had call in that. An ironclad call. No, you didn't have an ironclad call in that Collateral C, paragraph 4, subsection C, you idiot. You didn't pay enough money for your lawyer. You would have seen this. So throughout the credit markets there is kind of a shell game going on, I think, and partly has to do with, with the lack of rigorous in the loan documents and partly has to do with the suppression of interest rates in 20, 20, 21 and 22. Part of 22 especially. So this is the, gets us into this private credit business. You know what I. So what, what confidence in the Fed and in its promises and in its forward guidance. And what this gives us is a green light for excessive leverage, right? So people avail themselves of it. And now comes the time to take private equity and other private entities public and relique the private equity promoters and the lenders. Or the time comes to roll over the debt at a more advantageous rate because people have assumed that rates would be falling, right? But the markets are not welcoming to new equity issues from highly leveraged. For example, software companies are not open to refunding debt at lower rates because there aren't lower rates. So we are up against a very interesting prospect in the credit markets of a, of a, of a, Of a big problem. The credit is cyclical. It's forever cyclical. You know, the credit cycle begins with after a recession or after a panic or something. And all the letter lenders are chastened and contrite and they all. It's like a. The morning after the night before they can only muster the strength to utter the word, no, no, no, not lend, no. God, what a head. No, no, no lending. So the time goes and it turns out you can lend. And opportunities are in fact prevalent. And they do lend and it works and they lend more. So the cycle works on and on. And at the length somebody does something too much, but there's no adverse consequences for that. One example of excess and other examples duly follow and at length we go too far. Boom. There's another event and it's back to the time of the Katzen Jammer and New Year's resolutions never to do it again. That's the credit cycle. That's technical definition of the credit cycle. I could give you a lay definition, but I don't want to waste your time with it.
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C
Only if it involves Cats and Jammer.
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B
Yeah, but we are in a protracted period of very easy money and of deeply entrenched complacency. If complacency can become entrenched, I suppose certainly it become, can become habitual.
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E
One of the things I saw yesterday was that the Post Office is suspending payments to its pension plan because basically it's going to run out of money like in the next 12 months or something like that. And it's also raising the price of the stamp again. But it just kind of makes me like worried that, you know, here we have, I listen the Post Office, obviously there's operational and financial issues that every organization has, but it's just like it's a US Post Office running out of money, needing to be probably backed by the federal government at some point. And you know, it's just like, how far can this, can this continue, can this go? I mean, the Post Office is just one little, you know, example of US funding something that's not profitable. And when does the market sort of wake up? Going back to that question of trust is, you know, how good is the US Government for its payments on its obligations?
- [29:38]
B
Well, you know, years and years ago, indeed many years ago, Adam Smith was in correspondence with some young person. And the young person, during the American Revolution, the young person was fretting about the state of the British Exchequer. And Adam Smith, there's a great deal of ruin in a nation. Ruin. So what he was telling his young correspondent was, if you worry now, you're early because the King's resources are vast and this is a great mighty empire, the British Empire. And don't worry, it's going to be fine. So that was that. Okay, so let's fast forward to the present day and recall in March 2020 when the, the bug bit and the federal government reacted with fauciism and with, with Paulism and Fauci brought us into the lockdown and the Federal Reserve Under Chairman Powell gave us massive QE and buying of Treasuries and junk bonds and what have you and 0% funding costs. But was interesting about that juncture was that Treasuries did not rally. The market was kind of locked up. And so Treasuries were not a port and a storm, but kind of the opposite storm and a port. And we've seen a couple of episodes like that since the days now. But recently treasury yields have been kind of sticky. To the downside, 10 years is a 430 or 440 or 425, but it's not, that's not three and a half. And in times past perhaps people would have, nations would have sovereign wealth funds would have fled into the dollar and into long dated U.S. treasury securities for the undoubted safety they afford. Well, perhaps Justin, the world is twigging on to the likelihood that, that there will be no resolution of our fiscal difficulties and that all of the little boys who are crying wolf are going to get their day of vindication and would that day please come sooner rather than later. None of us are getting any younger. We have some impatient lord, but in, in 1980, Ronald Reagan orders up some TV time and gets in front of the American public and says all you have to know about the state of our public credit or worse, this effect is that we have just passed the $1 trillion mark in public debt. $1 trillion. It turns out there was a great deal of ruin in a nation. President Reagan, you should not have worried that well, we have passed the trillion dollar mark and as a percentage of the gdp, the gross public debt as opposed to the net is well over 100%. Net is creeping up to 100%. And some of these auctions of long data securities are getting a little bit, Are not attracting the enthusiastic attention that the treasury might prefer. Once in a while you'll find a 20 year issue, for example, that's very lightly bid for. And you can make the case that we are therefore entering a period in which the public credit is no longer an empty phrase but rather an actionable tradable concept. And that the public credit of the United States is going to have a tangible expression in rising yields, especially for longer duration securities. Again, the road to these, to the, to the validation of the worry wars, this road is long and winding. There's a Treasury auction failed in 1976 or 77. It was a 20 year auction and it wasn't even the worst part of the bond market. The bond market was going through period of great Great. It was a ferocious bear market starting mostly in the late 70s. But this was a little bit before the rise in yields became something like exponential. And the 20 year auction was orphaned and the Fed came in the next day and it looks like the Fed was the one that, that bid for the bonds the next day and the auction was a great success. So at the time it looked. Aha, aha. The treasury suffered a failed auction. Well, that was, that was, that was almost 60 years ago. I guess about 60 years ago. So you have to be like for example, is the President well advised or not well advised to declare victory over Iran just now? He is ill advised to do that. Right. We can all agree. Was one ill advised or well advised to declare a crisis in the public credit in 1976? No, that was early. So you have to be careful about projecting your own. I say this to myself as much as to anyone who's listening your own expectations or worries or hobby horses onto current events. Sometimes it's got nothing to do with what you thought was going to happen. It just happened. You know, it's not part of a pattern. It just, you know, it's like the, like the Yankees lost against the athletics. Well, why? I don't know. They played. It happened.
- [36:37]
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- [37:22]
A
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- [37:38]
E
When you see the hundreds of billions of dollars, trillions of dollars going into the AI CapEx build out, what do you think history would teach us about what we're seeing today?
- [37:59]
B
Two things. One is that be careful about financing, especially debt financing with marginally profitable businesses and data centers look as if they are not very profitable enterprises. And the second thing is that a new technology delivers initially more splash than macroeconomic results or even microeconomic. But the technology was any good will Pay off later. So first comes the bubble, then comes the payoff. Saw it uranium in the 1950s or air conditioning in 1950s. Air conditioning is a. It's an interesting episode because it. Here was a technology that changed human migration patterns. It was profoundly important. I mean can you, as Joe Biden said, can you imagine. Imagine living in places people habituate now in Houston, Montgomery and Washington D.C. in summertime with. Think how unproductive the government would be if it had to work in shirt sleeves with fans and. No. Huh. It's an idea, isn't it? But you know, so the, the air conditioning companies had never. The margins. Margins were good and the, and the valuations of the stocks were okay, but they were nothing. Never ran away to the upside, but. But the, the benefit of the invention was widely distributed among consumers, among the businesses that employed it and among the manufacturers that produced it. So the first movie theater that was air conditioning became immensely profitable until others caught on and then it was not so profitable anymore. Its costs were higher. That's all. Everybody else was doing the same thing. Montgomery Ward chose not to air condition its doors. Sears did. Montgomery Ward lost and never regained its so. And more recently, of course, the dot com stuff, it paid off finally. You know, gosh, we, if we heard of the Internet, it's here. But 1997, 98, 99, there was a lot of hurrah and a lot of bidding for securities and then a lot of remorse. But the. The visionaries were validated as. As they just knew they would be, but just not when they thought they would be.
- [40:37]
C
The connection between. I don't want to call it the AC bubble of the 50s, but the connections between the build out for air conditioning and the build out for AI Are there more parallels than just that surface level?
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B
What just the surface level? Just the too clever by half analogy. We wrote something rance did in 1997 and the headline was on the economic consequences of air conditioning. And Mac, just because we're friends, I'm going to send this to you and to Justin and you can forward it to any reader who cares. But it was. I can't remember exactly what we said or precisely the figures, but that was the thesis. It was a little bit more than superficial. Sure it was, but the provocation was the. With sock puppets and too much fiber optic cable and of all the flyaway action in the nasdaq. So Grant had to look back to something. To put in perspective. And we did. And we were slightly early, Not for the first time.
- [41:55]
C
That's okay. You're in an air conditioned office.
- [41:59]
B
Yeah. In New York City in August.
- [42:02]
C
It counts. It counts as much as it does for Joe Biden. Scrin. I can assure you too, I want to talk about, you were talking about the treasury before and specifically like the treasury and the Fed and the place they're in right now because in the context of this broader whatever the AI situation is, whatever the inflation situation is, whatever the war in Iran is, what's the lay of the land that you see both the Fed and the treasury independently operating in and then as a unit? Because I think it's important that we look at them, how they operate together.
- [42:34]
B
Yeah, well of course with respect to the Fed's independent, it's kind of mythical because the Fed is deeply in debt to the Treasury. You know the story about the Fed paying these interest rates to commercial banks so that the money the Fed created would not get out into the economy and precipitate inflation. That was a story of the Fed's operating procedure in the teens and the early twenties and indeed a little bit until present day. And the Fed bought a lot of fixed rate securities to implement QE 1234 and rates rose and those securities began to lose. The Fed lots of money. The Fed presently was paying out more to its counterparties in the commercial banking world and it was earning on its portfolio and therefore posting massive operating losses. And these losses the Fed chose not to post on its income statement but rather to wash away by saying that the treasury is absorbing them and we will resume paying dividends to the treasury when we are good and ready, when the arithmetic works again. So the Fed is by any standard except its own DIY accounting. The Fed is broke and the treasury is the holder of the, of the insolvent party's debt. That's the, that's the story of the, that's the independence of the Fed as seen through the gap lens. There ain't no independence. It is a, a supplicant. Okay. But of course that doesn't really matter to Scott Bessant or to Jerome Powell. They think that each, they, they are quite sure the Fed is not broke or if it were, it wouldn't matter and nor does it seem to matter to the world. So how do they operate independently? Well, the. I, I think no matter how you look at it, they are hand in glove. The Fed has taken more than $6 trillion worth of securities off of the market, thereby allowing the Fed to continue to the treasury to continue to borrow at rates that the nation can, can tolerate and to pay that's the way to look at the Fed's portfolio, in my opinion, is to look at this great big clump of interest paying obligations and to realize that it's not out there in the market having to compete with other borrowers. It is nestled into the warm welcoming arms of the Fed nearby, disguising the true fiscal condition of the Treasury. If the Fed suddenly had to liquidate $6 trillion of securities, of course it would be a problem for the treasury market and indeed for the solvency of the government. No, but we do have a Treasury, we do have a Fed and they operate as they do. And we have suspended judgment and, and most of us have suspended criticism of the way things are managed. And the treasury gets through the day and it borrows. And rates are certainly not yet at a catastrophically high level. Although you read the Congressional Budget Office and it says watch out when coupon yields are higher than the rate of growth in the economy. That is the road to, to a terminal fiscal crisis. But we've heard that and the world wags on. Yeah.
- [46:48]
E
How do you think about portfolio positioning, asset allocation and I guess gold, you know, where gold sort of could fit into someone's portfolio and what you're writing about at Grants?
- [47:06]
B
Well, we don't set up as professional consultants on asset allocation. We look at securities kind of ticker by ticker and Q sip by Q sip and Evan Lorenz who was the deputy editor. And it's a terrific securities analyst, just opportunistically looks for longs and shorts. And we don't pretend to have any great original ideas on asset allocation. You know, whether 60, 40 is a thing or whether it's yesterday's great permanent idea in managing money. As to gold, I think that it is an indispensable part. It's like they say in the old Saturday morning cereal advertising, part of this, part of this, part of a healthy breakfast or something.
- [48:03]
C
So gold is complete breakfast something.
- [48:05]
B
Yeah. Right. So gold occupies, it seems to me that a little bit of that position in a portfolio. It's kind of your monetary base. A friend of ours calls the gold in his portfolio as monetary base. So what purpose does it serve? It serves well, it serves not so much as a hedge against monetary disruption, but investment in monetary disruption. And we know that monetary disruption is ongoing because the central bankers tell us that they're in the business of disrupting. What are they disrupting? They're in the business of creating sufficient credit, such as the value of money forever diminishes. That's what they do. For a living. And they make no bones about it. They call it their congressional mandate, although Congress never told them to debase the currency by 2% a year. That's their original idea. And every once in a while, gold will sit there for 15, 20 years and disappoint its fans and nearly bankrupt the miners who had expanded too much during the last prior bull gold market. Gold will catch a bid and the world will think, wow, these dollars there certainly are prolific and the Fed certainly does create them with the greatest of ease. There's hardly any expense in creating these dollars. And the United States is seemingly over its skis fiscally. We should perhaps lay in some gold. We central bankers, we central bankers ought to diversify outside of the dollar. And that's what happened in 2024 and 25 and less so this year because Treasury Turkey was actually selling the gold it had laid in to fund its own needs, domestic needs. But this is one of these eruptions that can be put down to a loss of faith or trust or confidence in the fiscal and monetary regime of the United States. Or it might just be a one of these mysterious preference cascades. You know where it comes from. But every once in a while that people say, oh yes, we, this is the idea, this is the idea. And that's what happened with gold. I'm inclined to see it as a more continuous thing. We have been on record as saying that the debasement trade is in fact about 100 years old. And for many of those decades, for some of the decades it was scarcely, you know, visible. The so called great, great moderation of 1990s. You had to be a terrifically contentious hard money guy to pick a fight with the trend in monetary affairs and with the measured rate of inflation. It was all kind of perfect, But it actually wasn't perfect.
- [51:18]
C
The dollar. Tell me about the dollar, both as it stands inside of the US and for the us but then I'm curious on the perspective, if you were outside of the country looking at the dollar, how you would think about it?
- [51:31]
B
Question to put to any secular, grizzled, hardened dollar bear is would you stop and pick up a five dollar bill on the sidewalk? Yeah, it's sure I would. How about a dollar like I partly depends on how old you are. A sidewalk is a long way down. But the dollar, to give it its credit. This is extraordinary. It's extraordinary creation, right? It's America's greatest export. Costs nothing to produce. The world still wants it. Since August 15, 1971, or latest since 1973, has been without collateral, uncollateralized. It's a faith based currency purely and yet it has come to dominate the world. American securities denominated dollars have dominated, come to dominate world portfolios. So I am as hardened and as grizzled and as set in my ways as a dollar bearer as anyone. But I do respect. What the world's embrace of this faith based piece of paper means for the dollar's respect for the United States. You know, the. Declaration of Independence and the Bill of Rights and the Constitution are mighty document. I think they are. Perhaps they're as much responsible for the ascendance of the dollar and the dominance of the dollar as anything the Fed has ever done or anything that even the virtuosic American military witness its extraordinary feats of arms in Iran. Actually they're plucking away of this flyer. So to what do we attribute the dominance of America in both geopolitical, political terms and in financial terms? Well, you know, I think it's the idea of America and I hope that never goes away. But as for the solvency of the treasury, that is a slightly different thing. But still it's still, still, it still is armored, it's still armored by the idea of America. That's, that's the armor plate of the dollar and securities denominated in dollar and the sovereign credit of the United States split, rated as it is. It's the credit of a nation that can claim the ideals that this country can claim.
- [54:31]
C
Survey question, lowest denomination of American currency you would bend over to pick up.
- [54:39]
B
It has to be age adjusted.
- [54:41]
C
Okay, where do you, where do you want to put this curve?
- [54:45]
B
Five spot.
- [54:46]
C
A five spot.
- [54:47]
B
Okay, okay. So here's, here's what it's like, gentlemen, to knock on the door of 80. You didn't ask this, but I might as well come out with it. It's just a fact. So you happen to drop something on the sidewalk, might be a book, might be a five dollar bill, maybe. And before you can muster the will and the flexibility to retrieve that object, somebody under the age of 40 comes along and plucks it off the sidewalk as if it required no effort at all and present it to you with a smile. That's kind of a lovely thing. It's like, it's like a young woman giving up her seat in the subway to you. It's a charming thing and you get used to it, but it all plays into the propensity to pick up things off a walk. But I'm a, I guess I've reached the Five dollar bill stage in life.
- [55:46]
C
I, I'll take that and I'll gladly scoop while I'm able to scoop.
- [55:52]
B
You get the singles, any job, the twos, let's not forget the shoes or the threes that there'll be a. Now that Donald Trump is going to sign his $3 bills, who knows what the that'll fetch in secondary market?
- [56:05]
C
Who knows. Well, this was not intended to be connected to any ageist statement here, but four decades. How many years is Grant's interest rate observer been running now?
- [56:17]
B
Four decades. We're in our 43rd year. We'll be completing. 43rd. Yeah.
- [56:25]
C
Do you feel like, does now all periods feel different in their own way? Does this feel like the most complicated or complex period?
- [56:33]
B
They are. They all are.
- [56:34]
C
They all are. They all are equally or just.
- [56:36]
B
Yeah, I mean everything is everything in retrospect you can say, well, that wasn't so hard. Yeah, it was. Well, so we started in 1983 and I'll tell you what looks so easy in retrospect but was so hard in prospect. We'll shift now to the spring of 1984 and the continental Illinois bank had just failed. It was kind of the first of the two big to fail wave and treasury yields were backing up. The great Bond Bear Market, 1946-81 had ended, as we can see in retrospect, but yields were rising as if to retest those highs and perhaps make new ones in yield, that is. And Milton Friedman said they were on their way to making new highs. Henry Kaufman of Salomon Brothers, the great Doe, there was no greater authority than he on the credit markets, on the debt markets. So there was a heavy and well informed concentration of bearish opinion in the market. When treasury yields briefly touched 14% in the spring of 84, the CPI was printing at 4% plus but not 14%. There were about 9 percentage points of real yield on offer in U.S. treasury securities. And I'm telling you that there was no stampede to get them. And you look back on it, what could have been simpler than locking in an Equity return for 25 years Non call without equity risk?
- [58:35]
A
Good.
- [58:36]
B
Stop. That's why. Okay, simple, right? Except. Except in the front of the mind of the market, not the back of the mind, the front of the mind of the market was the preceding three decades plus of rising bond yields culminating in 15% in 1981, from 46 to 81. Ah, okay, so the present day we'll get, well, what I know. What have we got? We got. What will our posterity Think that was so easy. Well, here's one thing they could think. They could think. Didn't you see it? That Trump was right, that the destruction of the theocracy in Iran was going to open the gates to a wonderful age of peace and prosperity in the Middle East. Oil was going to return to the levels $30 and $40 of apparel. No more war, at least in that section of the world. And AI was going to deliver results that destroyed this nascent secular bond bear market because it enhanced productivity to the extent that the treasury deficit matter anymore, that we were embarked on an era of 4% real growth. And why did you waste all that ink on the Fed's insolvency and on the Treasury's embarrassing riches of debt? Why did you do that? It's always hard. It's always hard. And you know, and, and, and knowledge of history is, is, is helpful. Unless it isn't. Historical analogies can be so facile. And you can, and you can pridefully, you can realize that the only person in the world who has read certain arcane books on the financial history of the K and, and kind of parade that knowledge as if it were the key to the future, which I'm here to tell you it's sometimes is not. So it's, it's all about judgment. And did I mention luck at some of that too? And it's what makes it all so fascinating, you know, in such a, and such a, an adventure to get out of bed in the morning and see how wrong you were. You know, it's, it's, it's a, it's an interesting way to make a living. Or as a friend of mine used to say, when we get up from lunch, let's return to what we laughingly call work. He was in Wall street too. All right.
- [61:31]
E
And I are looking forward to getting that issue with the air conditioner.
- [61:36]
B
Oh, yes, send that to you.
- [61:37]
E
Okay, so you send that to us. And just in closing here, and it kind of ties nicely into what you were just talking about. But, you know, if you were giving advice to someone in the newsletter business, what would you say? I mean, what would be, and you've been doing this for, as Matt mentioned, you know, over 40 years at this point. Obviously, the newsletter business has changed a lot. But the one thing that, you know, you've shown is that it can be a legitimate business and you can employ people and make money off of it. So what would you say to an up and coming newsletter writer in this day and age?
- [62:16]
B
Don't. I don't need any more competition from you kid. What has changed since we started we used to you know in 80, 83 I. I had the option of producing it with hot type with Linotype machine. That was the printer. The printer was just then converting to the option of. Of what we now know is desktop publishing was but I kind of it was leaning as you might have expected to the beauty of hot metal type. There's nothing like it but instead we got a PC and but what is different now is I think the world is rather less inclined to to read than it had been which I must say is discouraging if you're in the business of writing for the world. Things for the world to read. The competition is ferocious. There's so much good stuff and it is posted on substack for the unbeatable price of free. And we have a kind of a fancy product and a fancy price and we are competing against very smart people who have a very different business model. And you know. So what do you do about your terms of service when you're carefully drafted and exquisitely researched and edited and copy edited piece winds up in somebody's AI mixing bowl and is distributed throughout the firm to enhance the dislocation of what you do for a living. It's an interesting business problem. I hope doesn't sound like whining but even as it's always complicated with respect to the moment in finance, it's always competitive in a properly functioning market economy. You never supposed to have a permanent franchise. You know we were. It was one time I walked into a big hotel meeting room and give a talk to the crowd and I was greeted by somebody in the same line of work and he says hi, are you right about to be wrong or are you wrong about to be right? Which is it with you that kind of sums, you know, you, you go through periods of. Of being very smart and then not at all. And so there's a non answer to that question.
- [65:06]
E
That's great.
- [65:07]
B
Yeah, go into it if you want to. Okay fellas, thank you for the invitation and for the encouragement and. And I'll give you all the single dollar bills you want. Just keep your eyes on the sidewalk.
- [65:23]
E
Nice. Jim, thank you very much.
- [65:24]
B
Appreciate it. So long fellas.
- [65:26]
E
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this podcast
- [65:46]
B
should be considered construed as investment advice.
- [65:49]
A
Securities discussed in the podcast may be
- [65:51]
B
holdings of the firms of the hosts or their clients.