The Thunderclap That Ends the Cycle | Jim Grant on the Risk No One Sees

Summary

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Podcast Episode Summary

Excess Returns: "The Thunderclap That Ends the Cycle | Jim Grant on the Risk No One Sees"

Date: December 4, 2025
Host(s): Matt Zigler, Justin Carbono
Guest: James Grant

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Episode Overview

This episode of Excess Returns features James Grant, famed financial historian, interest rate expert, and founder of Grant’s Interest Rate Observer. The conversation dives deep into long-term investment cycles, interest rate trends, inflation, central bank actions, and the risks and opportunities currently lurking beneath the surface of global markets. Grant also unveils his enduring contrarian views on gold and the cyclical nature of financial excess, threading his signature wit and historical anecdotes throughout.

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Key Discussion Points & Insights

Understanding Investment Cycles

• Pattern Recognition over Precision:
  Grant explains that forecasting market tops and bottoms is not a precise science, but about recognizing historical patterns of collective human folly.

  "It’s a matter of very unscientific pattern recognition...there’s nothing precise about us." (02:05)

• Historical Anecdotes:
  He shares stories from 1933 and the financial crisis to illustrate how contrarian, cycle-aware thinking often runs against consensus and how cycles can last “longer than you think.” (04:23–06:20)

Interest Rate Cycles: The Long Arc

• Generational Cycles:
  Grant underscores how interest rates trend higher or lower over generations, with notable swings since the 19th century.

  "Interest rates are unusual if not unique in their proclivity for trending higher and lower...over the course of generations." (07:11)

• Modern Rate Extremes:
  He details the most recent cycle: a 40-year bond bull market from 1981 to 2021, which peaked with trillions of dollars in negative-yielding debt.

  "That was the great bull market in bonds...it ended in 2021, about 40 years later with some ungodly number of securities worldwide priced to yield less than nothing." (08:39)

Inflation: The Tangible Twenties and Cyclical Threats

• Inflation from Tangible Investment and Conflict:
  Grant suggests renewed inflation will likely be driven by war preparation and heavy investment in physical assets—"the tangible twenties."

  “There is one almost fail safe cause of inflation and that is armed conflict or the preparation for the same.” (13:04)

• Persistent, Mysterious Inflation:
  He likens inflation to an underground coal fire—latent and ready to resurface for unpredictable reasons.

  "Inflation did not visit us all on the same day...there were several cycles of acceleration and deacceleration." (18:37)

Central Banks and Monetary Policy

• Federal Reserve Independence – An Illusion:
  Grant dispels the myth of true central bank independence, noting political and economic ideologies always exert influence.

  “The Fed is never actually independent. It is always a creature of some ideology, some political meme.” (20:51)

• QE and Its Long-Term Consequences:
  He acknowledges the Fed's 2008 response may have been necessary but blames lingering interventions for breeding risk and complacency.

  "The long term consequences...include especially a financial community that has been spoon fed easy credit for many years..." (30:38)

• Strange Effects in Markets:
  He observes bizarre speculative behavior among retail investors and even the military, a side effect of prolonged easy monetary policy. (31:28)

Private Markets, Credit Risk, and Cyclical Excess

• Opacity and Risks of Private Credit & Equity:
  The lack of transparency in private markets and the widespread erosion of lender protections signal late-cycle excesses.

  "The marks on private credit are somewhat arbitrary...the cycle is very far advanced. Optimism is the dominant emotion..." (33:42, 35:43)

• Life Insurance as a Hotspot:
  He warns about feedback loops in private equity-owned insurers investing heavily in private credit, forecasting potential crisis in the next downturn. (36:59–37:15)
• Market Timing and Humility:
  Grant shares lessons on the futility of precise timing (with personal stories from Japan), reinforcing that markets can resist rationality for decades.

  “Longer than you’d think...sometimes you have a bad decade.” (37:44, 40:22)

Where Are Opportunities Today?

• Scarcity of Value:
  Despite periodic bargains (e.g., Japanese equities, some French bank stocks), true long-side opportunities are rare; the best opportunity may simply be "the patience to be liquid" awaiting the next thunderclap downturn.

  “…the prevalent area of opportunity is the patience to be liquid. Come the thunderclap that will define the end of this cycle.” (44:32)

Rethinking the 60/40 Portfolio

• Potential for Simultaneous Declines:
  Grant notes stocks and bonds now increasingly move together, warning that stagflation could undermine the traditional 60/40 allocation.

  “We’ve seen bonds and stocks do the same thing together...it might just be that an episode of stagflation will be our lot in which bonds depreciate as stocks depreciate.” (47:00)

Decline in Freedom and Investment Risks

• Autocracy and Narrowing Freedoms:
  The past 20 years have witnessed a decline in both economic and personal freedoms, something Grant finds deeply troubling for social and investment climates.

  "I feel, as I suspect you do, a great narrowing in the bounds of permissible, socially permissible and legally permissible action. And I think it's a very bad thing." (54:00)

Gold: The Legacy Money

• A Contrarian View:
  Grant remains steadfast that gold is (and will be) money again, especially as confidence in “paper currency managed by central bank” recedes.

  "The price of gold is the reciprocal of the world's confidence... I think gold will have its day again as a form of money that is acknowledged as such." (55:52, 58:16)

• Personal Lesson:
  He recalls buying a Krugerrand at the very top in 1980, cautioning against following crowds or lining up for investments (58:42–59:36).

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Notable Quotes & Memorable Moments

• On Cycle Extremes:
  “What defines a major top or a major bottom is some particular absurdity that you can hardly imagine the human race is capable of inflicting on itself.” — James Grant (00:00, repeated at 09:33)
• On Gold’s Role:
  “Gold is the reciprocal of the world's faith in the paper currencies managed by central bank.” — James Grant (55:41)
• On Market Timers:
  “Longer than you’d think...sometimes you have a bad decade.” — James Grant (40:22)
• On Investment Patience:
  “The prevalent area of opportunity is the patience to be liquid. Come the thunderclap that will define the end of this cycle.” — James Grant (44:32)
• On 60/40 Portfolio Risks:
  “If we are in a long term bear market in bonds and if the stock market is indeed as overvalued as the numbers say it is...an episode of stagflation will be our lot in which bonds depreciate as stocks depreciate. The 60/40 portfolio would not do much good.” — James Grant (47:00)
• On Central Bank Independence:
  “The Fed is never actually independent. It is always a creature of some ideology, some political meme.” — James Grant (20:51)
• On Being Contrarian:
  “Don’t stand in line to make an investment.” — James Grant, on buying a gold coin at the peak (58:42)

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Timestamps of Key Segments

• Cycle Extremes & Pattern Recognition: 00:00–02:50, 09:33–10:30
• Historical Perspective on Interest Rates: 07:11–09:29
• Inflation – Tangible vs Digital Era: 13:04–17:02
• The Coal Fire Analogy for Inflation: 17:49–19:44
• Central Bank Policy & Independence: 20:00–24:27
• The Lasting Effects of QE: 25:49–31:28
• Private Credit & Insurance Risks: 33:22–37:15
• Market Timing & Japan Experience: 37:44–42:20
• Opportunities & Value Scarcity: 43:06–44:46
• 60/40 Portfolio Risks: 46:27–47:31
• Decline in Freedom: 51:03–54:44
• Gold’s Role & Grant’s Belief: 55:31–58:24
• Closing Investment Lesson: 58:42–59:36

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Takeaways for Long-Term Investors

• Patience and a contrarian mindset are more valuable at cycle extremes than chasing the hot trade.
• Recognize the risk that years of intervention and low rates have sown the seeds for the next crisis, especially in opaque, private markets.
• Inflation may surge from unexpected sources (war, tangible investment), and market cycles are, as ever, beyond precise timing.
• Gold remains an underappreciated insurance against a loss of faith in fiat money.
• True investment opportunity may lie in waiting for the next “thunderclap” rather than acting rashly amidst late-cycle euphoria.

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Summary prepared for listeners and investors interested in deep, cyclical thinking about today’s markets.

Transcript

[James Grant]

It seems clear to me that what defines a major top or a major bottom is some particular absurdity that you can hardly imagine the human race is capable of inflicting on itself. Interest rates are unusual, if not unique in their proclivity for trending higher and lower. Not in fiscal quarters or years or.

Even a single decade, but they have exhibited this tendency to rise and fall over the course of generations. Gold is coming back. Not like the old south, not like the Brooklyn Dodgers, not like the cutthroat razor, not like the sextant.

But I think gold will have its day again as a form of money that is acknowledged as such. The prevalent.

Area of opportunity is the patience to be liquid. Come to thunderclap. That will define the end of this cycle.

[Matt Zigler]

You're watching Excess Returns. I'm Matt Zigler. Justin Carbono, he's in the driver's seat today with me, extra special guest. Mostly because for all of us financial media nerds, we've got one of the OGs with us today, one of the greats, you know him for observing interest rates. I remember getting my newspaper style copy of the letter, you know, passed to me in an office almost 20 years ago and thinking, how cool, how cool is this? He's got a new book out which has nothing to do with buying low or selling high friends until the end. That's the latest, but today we're talking about all sorts of things. James Grant, welcome to Excess Returns.

[James Grant]

Well, thank you, Matt, and thank you, Justin.

[Matt Zigler]

So let's talk a little bit about this buying low and selling high business you've talked about. Ohistory helps us.

[James Grant]

It's a living, you know, it's a living.

[Matt Zigler]

You've talked about how this helps us spot cycles. Can you talk about the process of looking at cycles and what you think it tells us about the current cycle we're in.

[James Grant]

Yeah.

It'S a matter of very unscientific pattern recognition. And there's nothing, God, is there ever nothing precise about us. You know, we started to observe, as is our line of work, that house prices were moving way out of line in the year 2001. And let me say that timing was not exactly pinpoint. And we kept developing that thesis and.

It wasn't until 2000 and what was it, 2006, that a gigantic document came into our hands that described one of the.

Mortgage.

Structures, you know, the.

Very leveraged and very opaque and very forbidding.

Mortgage structure. And I gave it to.

To my colleague Dan Gertner. I said, here, Dan, Dan was a, is a An alumnus of.

The Purdue Engineering School. And I said, dan, make sense of this. And he came back a day later. He said, I can't figure it out. I said, aha. And ourselves a story.

So.

That illustrates only that the recognition, if that recognition is correct, of an excess of an actionable.

Wrinkle in the matrix.

To us it's a matter of identifying the wrinkle and then sticking with it and building the thesis so that a reader can follow along. And if he or she disagrees, we open to that cancellation of that subscription.

I've spent a lot of time in public libraries and done a fair amount of reading and writing over the past half century here, and some of these episodes.

Stick with me. One is have is to do with the year 1933 and the American Banker, which was then published like a newspaper. It wasn't until not so long ago, 15 years ago, the American Banker was a daily paper catering to you know what. And the editors of the Banker addressed its readership. Back in 1929.

Bankers were speculating whether they knew it or not in credits that proved to be quite speculative. And time has passed and there are many fewer banks and bankers around today. But we observe, said the banker, the American Banker, that BAA kind of bonds are trading at huge spreads to Treasuries and to investment rate. And wouldn't it make sense.

Because Franklin D. Roosevelt was then on the record as declaring his determination to lift the price level back to the levels of like 1926 or something. Franklin Roosevelt was then an avowed inflationist. Wouldn't it make sense to build a small portfolio of these friendless, high yielding, but evidently money good securities in a bank portfolio. And it put the question to its readers and the readers replied two to one, you must be crazy. Stop it. Do not ask that question again. So it shows that. What does it show? It shows that people, when they are bullish, often when they ought to be bearish, and vice versa. It shows that markets are inherently cyclical, that the human factor is over almost always foremost. And it shows that cycles can last longer than you think.

So we continue to look for.

Patterns that offer some promise of.

Of presenting us with an investable thesis.

And one such pattern is the observed long trending, decades long cycles in interest rates up and down.

You two sent along a cheat sheet. This episode of your excess returns is not exactly unrehearsed because I have had advanced notice about the question. So it's a little bit phony, right?

[Matt Zigler]

It's a little bit phony, yeah. But not a lot of bit phony because I didn't know you were just going to tell that story about the American bankers. I mean this is, this is great. This is great.

[James Grant]

Interest rates are unusual if not unique in their proclivity for trending higher and lower. Not in fiscal quarters or years or.

Even a single decade. But they have exhibited this tendency to rise and fall over the course of generations. This goes back to the middle of the 19th century.

They fell for the final several decades of the 1800s, then rose in the first two decades of the 1900s.

And then fell from about 1921 until 1946. And then embarked on a bear market that became legendary and defined the unconditioned the investment expectations of a whole generation of people. That was the bear market that began in 1946 and ended in 1981. It began at two and a quarter on the long dated treasury and ended in 1981 at 15% on that same security.

The range of that were just extraordinary but not so extraordinary as a cycle that succeeded it. That was the great bull market in bonds that began in the autumn of 81. Nobody issued a press release but there it was.

And I think it ended in 2021, about 40 years later with some ungodly number of securities worldwide. Price to yield less than nothing between $15 and $20 trillion. Bloomberg had this feature that will tell you how many. So how many. What's the dollar value of bonds today.

Priced at negative nominal yields. And it was 15, 20 trillion. So what you want. This is again, this is art. Maybe it's hope. It's hard sometimes to disaggregate one's hope and expectations and forecasting agenda from an objective appraisal of the evidence. Right. That's what we all labor against.

But it is.

It seems clear to me that what defines a major top or a major bottom is some particular absurdity that you can hardly imagine the human race is capable of inflicting on itself.

So.

You know, in.

In 1981 it was, it was a Treasury Security. 1984 better examples we tested the lows and price and highs and yield in 1984 that the treasury yielded 14% in the face of a. A five and a half percent inflation rate like eight and a half percentage points of real yield. And now people are fighting with, with pen knives over 50 basis points of real yield. You know, so then there was eight and a half percentage points on offer. And I can assure you, because I was around and paying attention that not many were so enticed by that.

So that that that is one bookmark or bookend.

And the reciprocal bookend would be the aforementioned many trillions of dollars of bonds priced to deliver a certain loss to the holder because that certain holder had owned bonds. That certain holder was a believer in the deflation thesis that hurt a certain holder. A certain holder was of the conviction that there be a greater bull on bonds about ready to take those securities off his oracle hands.

But that to me, those two bookends defined a complete cycle. And here we are. So it's four years later from that.

Perspective low and the perspective beginning of a major bear market. And you know, so far so bad.

Yeah, but again, this is. If anyone thinks this is has anything to do with physics, they should. They should.

They should. Oh, they should subscribe to grants. On the, on the misapprehension that we're precise about these things. We know it's qualitative and sometimes it works out a lot.

[Matt Zigler]

I'm glad you mentioned it in the context of writing about housing back in 2001 and talking about the interest rate cycle sort of hitting its climax in 2021. Housing. It took a while for markets to catch on. You've been writing about. We might be near some type of recent inflection point, tie those things together. Where, where are we today in 2025, approaching the end of this year?

[James Grant]

Well, I think with respect to bonds, we are in the early phase of a major bear market.

And so the question is.

What is likely to be the driver of this upcycle and rates down cycle and bond prices and say inflation. It's usually the case in the bond market. That is the.

That'S the immediate cause of price movement.

And you know, the.

So what causes inflation? So there are many different theories, almost as many different theories as there are economists, which is not very confidence building.

But there is one almost fail safe cause of inflation and that is armed conflict or the preparation for the same. You know, it's the investing money for the sake of destroying capital. So that answers the definition of, you know, that's like.

Building data centers without really any hope of making money.

So a friend of mine, a guy named Steve Bogdan, investment strategist, propounded a thesis that we echoed in grants a while ago and that is that we're returning to.

An economy of the tangible. There was a book out.

Five, eight years ago, it was called Capitalism without Capital and it argued quite persuasively.

To look at the great businesses today. Look at Facebook as meta that was then called. And note that, you know, it does business with about six people in the office. Right. And cash generation is phenomenal. And that same characteristic held for many other such.

Digital.

Activated businesses, businesses that were made possible by the advances of Silicon Valley.

And the authors of this book projected that the absence of capital would characterize our economic lives for many years to come.

And of course.

That suggests that interest rates.

Would likely remain low, as the expression goes, for foreseeable future.

Ah, there's a phrase, foreseeable future. What do you think? Six weeks? No, no, no, no, no, not that long. Check your phone. Right. Here's Meteorology is a science and their forecasts are good for like five, 10 days.

So Steve thought that we were coming on a cycle of investment, intangible things. And lo and behold, what is more tangible than these data centers, one of which I think meta is chalked into.

Louisiana occupying most most of the state or actually the size of Manhattan, which is. That's about as big as Louisiana. Right. About give or take four season.

[Matt Zigler]

Hand grenades.

[James Grant]

Yeah. So the market's rewarding this and.

Tens and twenties of billions of dollars people are tossing around. So a trillion is now one Elon in this office. A trillion is what Elon's going to make next year, I guess, if things will go well. So how many Elons are we talking about with Data Center? A lot. Right. In Data center now and prospectively. And OpenAI, which is maybe the figurehead of all this, is promising to turn a profit in the year 2030 foreseeable or 2130. I forgot in any case, not, not next year.

[Matt Zigler]

Yeah.

[James Grant]

So, and, and then there is the armed conflict angle. And.

Even casual readers of the papers can see that things are not all well in the geopolitical front. So I think we're getting a lot of tangible investment and I think the surprises in that scale, that investment might come to the upside and therefore pressure on rates might persist to the upside. That doesn't speak for the full perspective. 20, 30 or 40 years to start.

[Justin Carbono]

You've.

[Matt Zigler]

I'm really happy that you, you've threaded the needle the way you did because I think this idea, one of my favorite experts explanations of the 2020 forward period was somebody calling them the tangible twenties. And I'm going back five years. I don't remember who said it.

[James Grant]

That was a good call.

[Matt Zigler]

But I love that framing of, of what this meant was we were so convinced that every business could be asset light that maybe we finally have tilted back to where we have to start adding tangible things back into the world, into business. And the upside pressure in rates Is there. And another analogy I've seen you use, which close to my heart, a few hours west of you in northeastern Pennsylvania here, compared, I think, inflation to, like an underground coal fire, which we're very familiar with where I grew up in.

[James Grant]

Are you, did you, did you feel it in the soles of your shoes as you walked over the, the blazing fire 500ft or wherever it was? No.

[Matt Zigler]

I can give. Actually went to a movie. This would be in the late 90s.

[James Grant]

That doesn't count.

[Matt Zigler]

And in the movie, oh, we had, it was before fancy cup holders and things like that. And leaned down halfway through to pick up the soda and like, all my ice was melted. And I asked my buddy next to me and he's like, hey, mine too. And then we realized we're all stuck to all this melted gum on the floor. We found out that night it was because a mine fire had reignited. It was actually under the theater and all this radiant heat was melting all of our drinks. So close.

[James Grant]

I got close. Yeah. Okay. That counts. Well, that was the case in the 70s.

Inflation did not visit us all on the same day and persist for the full decade and a half or so. That inflation in the 70s was actually got a start around 1966, called 65, 66, and persisted until through 1980. So decade and a half. So over that period, there were. There were several cycles of.

Acceleration and deacceleration. And every time the rate of change of inflation decelerated, there were bound to be several members of the incumbent administration, whether that was Nixon or Carter, saying, well, it's all that's over. But it broke out again. It broke out again for different proximate causes. But maybe the underlying cause was a Federal Reserve that was ever so accommodating until, of course, October 6, 1979, when Paul A. Volcker stepped in. And now we have a Federal Reserve that is under orders to become. To be very accommodating.

Strict orders.

[Justin Carbono]

What are your thoughts on that? I mean, the, the, this, the, the President sort of trying to dictate what the Federal Reserve does and its sort of independence. Does that concern you?

[James Grant]

Well, you know, the.

I, I put this on Congress, you know, the Constitution, as my friend Seth Lipsky puts it.

Assigns somewhere between 99 and 101% of the monetary powers in the this country to US Congress.

And Congress has turned around and delegated the same to the Federal Reserve.

So really, the President.

Ought to have much less to do with things than the Congress, which is seemingly still rather passive in the face of the Executive branch's determination to take over the institution. The the Fed is never actually independent. It is.

It'S always a creature of some ideology, some political meme.

Some, oh mostly I guess an economic meme, you know, as in neo Keynesian models now dominate and monetarist models dominated for just a little while in the early 80s. And.

Presidents have always tried to modern day president going back to Andrew Jackson. Presidents off and on for a century and a half have tried to work their will on the central bank. Jackson actually.

Destroyed the second bank of the United States, the Fed being the third bank of the United States.

So that this business about the Fed loss of independence I think is a little bit of a canard. What we want to know is whether the Fed is going to.

Work even harder to debase the currency than the other Fed the previous Fed was doing.

The American Electric has expressed its.

Disapproval of inflation pretty emphatically at the polls.

And yet very few people put together the fact that the Fed is in the business of generating a 2% rate of rise in prices every single year as if it could refine that 2% and deliver that precise amount of inflation as very imprecisely measured.

So a lot of things don't make sense to me about the Federal Reserve.

And you know.

We devoted a page, page one of our grants a couple of months ago to.

Donald Trump's monologue on the South Lawn of the White House. The headline over the piece was.

Six guys and two flagpoles. This was the day that Trump can't stay away from a construction site. He knows a lot about that. So he wanted a flagpole that was worthy of him and the country in the back of the White House. So he.

Comes on out and engages with the construction workers, gives him a little photo op, hands out caps and he lines up the construction workers behind him and he holds forth with a monologue about.

About Jay Powell.

What a jerky.

Insensate. Oh, that's insensate was not his word. Idiot I think was the word he used. And goes on you're gone for 20 minutes in this vein. And afterwards the Times, New York Times interviews one of the guys who had driven from the crack of dawn is his house to participate in this construction project. And the rigor as they call the kind of construction worker tells the Times reporter who's Jay Powell had no idea what Trump was talking about.

Can you imagine what a great scene it was? What a funny scene. And that's Trump being a little bit winning. He's being utterly have an utterly active Self aware, no self awareness. But you know, neither is the Fed.

None, none.

Which makes for good newspaper, good journalism. I, I, it's, it's, it's funny when you can catch them out, as we always do, in some statement that is patently not actually true, but they are willing to, to tell us that it is. So.

[Justin Carbono]

You had mentioned the financial crisis earlier and I'm just curious on like when you look at the actions the Fed took, Ben Bernanke, and sort of how they came in and rescued the markets and the economy, do you score that as.

You know, you, in thinking back? I think a lot of people think that that was needed during the financial crisis because it was a collapsing confidence the financial system. I mean you're in New York, so that was almost like the epicenter, if you will, outside of the housing market, but you know, with the financials, Lehman Brothers and such. But I'm wondering, was there sort of a downside to that too because you know, you went from less than a trillion on the balance sheet to no, what, whatever it is today, 7 or 8 trillion, and the Fed intervening in markets and sort of creating this almost dependence on the Fed in a bad way. Do you have any perspectives on that?

[James Grant]

Oh yeah, I've probably written a million words on that.

You could make a case that many people have made a very persuasive case that the Fed did what it ought to have done by intervening heavily to stop the panic that.

Culminated in retrospect, culminated with the failure of Lehman Brothers.

But look what happened next.

What is it, 2008 until the present? That's a lot of years.

And the Fed is still trying to get rid of the accumulated treatise and its balance sheet.

That it accumulated in continuing to save us from ourselves in the years following the crisis. And Ben, remember Ben Bernanke made his appearance on 60 Minutes and.

The.

60 Minutes reporters said, so can you, in effect, can you, can you reverse all this? And Rocky said 15 minutes.

No, not in 15 years, actually, not in 15 years. So consider where we are today.

The Fed. Well, this is a big question indeed. So the Fed was arguably, I'm not quite persuading myself, but I think the burden of evidence and of common sense and of the political sensibilities of this country.

Support the contention the Fed was right to do what it did in 2008 and maybe 2000. Okay, I'll accept that. But then the same Ben Bernanke comes out, writes a Washington Post op ed in 2010, I believe, and in it he says.

We are going to buy treasury bills, bonds, mortgages, what have you.

To.

To lend a helping hand to the financial markets to raise up the prices of publicly traded securities. And.

And.

The result will be a wealth effect. And this wealth effect will finally.

Will finally stimulate everyday commerce on Main Street. That was, and in the day.

That was called the trickle down effect. And I think people used it disparagingly maybe during the administration of the first Bush, George H.W. bush. It sounded like something that a lady bountiful would do. We're gonna have a little dinner over here and afterwards.

You people in the village can come by and see what's left. So I don't think that Ben S. Bernanke, Ph.D. made it exactly that way.

But he did mean that the means to the end of new prosperity would be through the agency of the markets.

And.

So what we had is QE1, QE2, QE3, a little respite there, a little QT and more QE. Let's fast forward to 2019. So.

It's the fall of 2019, September 2019, and suddenly.

Without warning, the overnight repo rate spikes from 2% where the Fed wants it to be to 10% where it decidedly did not want it to be. And the Fed intervened and it kind of freaked out because.

The money market has been kind of essentially nationalized since the financial crisis. And the Fed.

Cut the funds rate a little bit and pledged a week or so later, a couple weeks later to buy $60 billion worth of securities every single month. And then said this is not qe, this is just a technical adjustment.

But this, this gets back to the question you asked Justin so long ago about whether the, the intervention of 2008, 2009, whether that was justified and what the long term consequences of it might be. So the long term consequences I think are include especially.

A financial community that has been spoon fed easy credit for many years, credit that sensibly was zero at the wholesale level.

By a Federal Reserve that was almost oblivious to the consequences, adverse consequences that would might take the form of inflation of the.

Of financial assets, otherwise known as a great bull market, or a little bit less benignly that inflation of the cpi that takes the name of inflation period. So I think the consequences have been baneful, very bad.

Although they feel really good. And that's the catch, right? Who's not in favor of a little excess to the upside?

You see the story in the Wall Street Journal the other day about how.

The armed forces are now fully engaged in the crypto and equity culture, which is okay, except they're dealing with live ammunition. They're not trading. Watch it. Are you sure? Watch that five inch shell there, sailor.

That's, that's job one. We'll find. We'll ask about bitcoin later.

[Justin Carbono]

Well, I mean I think the other, this statistic came out just a month ago, which I think for the first time in this country, the average first time home buyer rose to over 40 years old where like five years ago it was like 38. And five years before that it was 33. In the 80s, it was the mid 20s.

[James Grant]

Yeah.

[Justin Carbono]

And so to the point about like when I saw that statistic, I couldn't help but think, you know, keeping those and believe I'm personally a benefit, a beneficiary of those, you know, very low interest rates when I had the ability to finance. But in terms of people now being able to afford houses and household formation, people being willing to move and maybe try to downsize, but they're, they have these ultra low interest interest rates. So I feel like that is a con, one of the consequences that you know has come from those ultra low rates.

[James Grant]

Yes. Along with the demographic problems or at least the, not to characterize it, but the declining birth rate. Although birth rates are declining all over the industrialized world. I'm not sure how much our Federal Reserve has to do with birth rates in Italy. Yeah, come to think of it, they're responsible. I'll blame that. I'll blame that too.

[Justin Carbono]

All right, let's talk about current markets a little bit. This is good, but let's talk about sort of where. Okay, so.

You know, private equity, private credit, these have become a big part of the markets. You've kind of talked about the accounting, the creative accounting, things that they can do and what risks there might be underneath the surface. So when you think about that, what concerns you most?

[James Grant]

There.

A couple things. The opacity of these private markets, you can't see into them.

The marks on private credit are somewhat arbitrary in any case, not observable, not verifiable. Easily the rating agencies that have taken up private credit as their special domain are not the principal ones, but ones that are perhaps more susceptible to the blandishments fees.

There's such a thing as a credit cycle. It begins with.

Lenders saying, having recalled all too well the preceding bust that precedes the start of an up cycle, I am not going to lend against the collateral of treasury bills supplemented by three gold bricks. That's what's collateral I require. So that's the beginning. It is a general aversion to risk and an aversion to lend. That was the case in 1933. And the cycle progresses. And.

At length.

The sphere gives way to.

A tentative optimism and then at length a boldness that takes the form of what we see today. For example, the almost complete eradication of the fine print in lending loan documents called covenants that protects the lender in the event of a default. Almost, those are almost gone. The tightness of spreads against, say, treasuries of corporate securities generally, including.

Private credit loans. So the cycle is, is very far advanced. Optimism is the dominant.

Emotion and.

Due diligence is for the old and infirm. That's basically the way we're rolling and credit. So.

You can see it in. For example, we have. One of our themes today is the risk in life insurance. And it's such an inherently unattractive business for thrill seeking analysts and journalists that we are happy to have it until pretty much to ourselves for the time being. And what we observe is that private credit increasingly is in the throes of private equity and private credit. Private equity owns a great many insurance companies and the insurance companies in turn invest in the private equity promoters and they invest in private credit.

And we think that.

Come the next down cycle, which we have no idea about, which we. About whose starting date, we have no idea come that time that life insurance and the crisis of the failure of life companies to the very heartrending costs of annuitants and pensioners and policyholders, that will be a major political.

Hotspot come that time when again, who knows? But we see excesses building up. They're very, very worrying in the life insurance business.

[Matt Zigler]

Expand on just the tightness and credit a little bit more like we're. How close are we to.

That powder keg catching in something spreading versus how long can it persist in an environment like we're in right now?

[James Grant]

Oh, that's easy, Matt. Longer than you'd think. That's, that's the way it is, you know, it's just the way it is.

To add to my bona fides as a non market timer, the late Alex Porter and I, along with Ken Shirley.

Took an interest in Japanese equities in 1997. They were selling. If you remember the, if you read about in grade school, the market in Japan peaked in 1980.

[Matt Zigler]

I was, I was all over JGBs on the Plaza Accord in kindergarten, my friend.

[James Grant]

So the, the Japanese market peaked actually on New year's Eve of 1990. That was when Tyson got knocked out. Remember that?

[Matt Zigler]

Oh yeah, I Actually do remember that Mike Tyson's punch out all the good stuff around then.

[James Grant]

And so the Japanese market had been in a bear market for 17 or so years when we got. So.

We observed that there were dozens of companies in Japan priced to.

Price so low that their net current assets was greater than their market cap, meaning.

Balance sheet assets, minor liabilities was greater than market cap.

So we thought well what's the downside? Well, the downside. So we got Ken went over there and, and, and visited these companies, met a woman, became his wife and we set up light housekeeping in Japan. And.

So years passed, years passed.

And passed and the companies that were cheap in 1997 were pretty cheap again. About 15 years later one of our limited partners, the elegant.

French investment banker tried.

To console his.

Suddenly guilt stricken general partners. We, you know, we were so confident in the, in the outcome of these profitable outcome of buying these net nets as they're known to trade. So we went to see him and you know, hanged hang dog. He said it's a. Sometimes you have a bad decayed.

And I often think of that and, and thank him for saying it. It's true, you know, decay's gonna fly by, you know and.

But how you. I blame you for this Matt because you asked when was another when story. So another friend of mine.

Describes the. I forgotten what bear. Oh, I was a bear Market in 1970s and my friend was an broker at Bear Stearns when there was a Bear Stearns. And his business partner.

Was a man of not inexhaustible patience even with his best clients. And he had not his best client but a very ignoring one continued to ask him when is this bear market going to end?

I never thought this was going to happen. You never told me it was going to when. And the guy says oh my God. Broken. Okay, you know what's going to end? What? It's going to end when you stop asking.

So neither is that exactly pinpoint or scientifically validated. But you know, so so much of what happens in markets seems to be almost what do we call it maybe a poetic necessity. Right. Some things must happen just to achieve the right poetic denouement.

But we.

End up report. We wound up the Nippon Partners. I forgot the number of years in. It was a lot of years. We had a couple good years and some people made a little bit of money. We made a little bit of money but it never. So now the Nikkei average which we started with I don't know about 8,000 or something, now it's 50,000 plus and Warren Buffett's there and a bunch of very smart people is there. Andrew McDermott is there.

So that's, you know, this is, this is the nature of cycles. They.

They just, they just, they do wear a body out.

[Justin Carbono]

What are.

When you look at the investment landscape, the assets out there today, like where, where do you see opportunity? And by the way, Japan is like implementing all these corporate reforms and so it does seem like there might be an opportunity in Japan. But besides that, like where are you seeing sort of opportunity? And you know, for investors.

[James Grant]

On the long side.

[Justin Carbono]

Yes.

Or short side too. I mean, you know, can go both.

[James Grant]

Well, on the staff of Grant is a man named Evan Lorenz who is a wonderful stock picker. And every other week he finds something to do either long or short. And he is finding it very difficult to find longs that are worthy of the attention of our readers.

And so.

It'S not as if there is nothing to do. One of the.

One of the mottos of the value community, of whom there are like six people left, I guess is this quote. There's always something to do. And.

There are some very cheap bank stops, stocks in France. I mean I don't want to get too deep in the weeds in this because we write about some of this stuff.

But we, we, we, we do find some value laden securities, both debt and equity around the world. But it's fine, it's rather hard to find that. What we find is mostly what we find is.

Really funny examples of excess, whether it's what these zero day options or five levered Bitcoin options or ATF's or whatever. So it seems to me that the.

Prevalent.

Area of opportunity is the patience to be liquid. Come to the thunderclap that will define the end of this cycle.

At the bottom of.

The stock market in 19. No. What was it I said no, no. Something like I have in mind is that of 2007, 8, 9. So that bear market 2007, 8, 9. So in 2009, early 2010 there were dozens of stocks in the S&P 500 that were selling below $5.

And if you bought a basket of those things, some went out of business, but a lot of them were up like Jeffrey fold.

So this requires two things. It requires a bit of cash and it requires mostly, I guess, patience, that cycles are still exist in the world and this is not a one way market and that there will be opportunities galore. In fact, probably too many opportunities, too frightening opportunities available.

More than even the most assiduous value seeker would care to have presented to him or her. That's the nature of the bottom. It's kind of. I was rooting for this.

No thanks. Let's go back to excess. On the outside, you know, 1974 was a beauty. I mean that was full of net nets and, but there was, it was, it was a rather joyless time for even the bulls. The people who were prepared to get bullish got bullish well before the bottom. They had the pleasure of seeing their value laden stocks ever so much more value laden. That's the nature of it. That's the nature of things.

[Matt Zigler]

What do you think in terms of especially with the inability to find opportunities on the long side, per your colleague, where we are with interest rates, there's a lot of people still hanging on to this idea of the 6040 portfolio.

What are your thoughts there?

[James Grant]

Well, it's given pretty good service for a long time.

[Matt Zigler]

It's done a good job.

[James Grant]

But we've seen.

At intervals over the past couple of years.

We'Ve seen bonds and stocks do the same thing together. We've seen bonds go down, stocks go down. And if we are in a long term bear market in bonds and if the stock market is indeed as overvalued as the numbers say it is, it might just be that an episode of stagflation will be our lot in which bonds depreciate as stocks depreciate. The 6040 portfolio would not do much good.

So I, I, I don't mean to sound the way I sound but I blame other people for it. I blame the authors of this mess. It's gone on for so long and the extremes are so.

Extreme that one becomes rather acclimated, one becomes.

Kind of complacent in the face of the most remarkable sightings of overvaluation and speculative daring do.

So we, what we try to do here is to.

Is to look for opportunities such as the they are and to bring them to the attention of our readers and warn them away from such things as.

The bubbly stocks, especially bubbly stocks and the excesses that have developed in the credit markets.

In the credit market. Senior securities.

Something we wrote about this past issue. Senior securities have lost a lot of their, of their.

Of their inherent strength, inherent defensiveness.

Properties owing to.

The way.

Bankruptcies are conducted today and the way.

Corporate balance sheets have been structured today. You know.

So senior securities are not so senior and their recovery rates are not so high as they have been. So of course in capitalism all is in flux at all, all times.

But we are A lot of the movement we are seeing today, a lot of the.

Flux we are seeing is the.

Result not so much of the dynamism of markets, but rather of the consequences of so many years of ultra low interest rates.

And it's my conviction that where rates are going is almost not so important as where rates have been. And I say that because the where rates have been.

Is.

Largely responsible for.

Capital investment put in place beginning in the early 20s, late teens, early 20s.

And for the private equity portfolios have they been structured. And the risks.

Of those very leveraged structures.

Are going to lend a certain.

Propulsive power to the downside come the next recession.

Which again is going to set up for some marvelous opportunities, but.

Opportunities that most people will wish they had never had the opportunity to see.

[Justin Carbono]

Jim, what do you think about.

[James Grant]

The.

[Justin Carbono]

Decline in freedom around the world in the past 20 years, both economic and sort of personal freedom and.

How you would think about that even here, you know, maybe in the US things like tariffs and certain things that may not be, you know, what we're used to or could be considered not really something that, you know, capital, you know, that capitalistic in societies tend to, to do or implement. And so just in general, like how, how would you respond to that decline in freedom and maybe the risks that opposed over the long term for investors?

[James Grant]

I guess there's the freedom that comes from laws and the absence of laws and then there's a freedom that comes from a society that is prepared to live and not live.

And I'm not sure what is the more important.

Branch or department of freedom, the one that rises spontaneously in a well ordered society or that which comes from the doings or the refraining from doing of our legislators.

And.

To get down to. Okay, we're really talking about Trump, right? Okay, so I voted for this guy three times in a row. Three times in a row. Always with the determination to register a short sale in the opposition. I can't stand this guy. I think that he is an autocrat born and, and now in power to do. I think he is a baleful influence on the country and perhaps on the world. He's done some good things. I applaud the good things he's done. He is, you know, he, he is.

You ask about freedom, so he is. Freedom has to do with the lady. Justice was a blindfold to remind us that justice is impartial. So you blow up boats in the Caribbean and then you let this. What kind of junk was the president of Honduras selling? Was it.

Was it heroin or Some kind of drug.

[Justin Carbono]

Yeah, I don't know exactly, but.

[James Grant]

So arbitrariness in the administration of justice is not freedom. The suppression of speech on the college campuses or elsewhere is not freedom that comes from some sort of.

Unholy.

How do we get here? But this alliance of people that say, you can't say that. Well, yeah, I can say that. It says it right here. I can say that. Nope, not you, not now, not here.

So I feel, as I suspect perhaps you do too. I feel that a great.

Narrowing in the bounds of permissible, socially permissible and legally permissible action.

And I think it's, it's a very bad thing.

I think the rise of.

These autocratic states is a bad. I'm uttering commonplaces on your time and mine, but yeah, I'm all for freedom and especially the kind that has nothing to do with Washington D.C. i'm for.

I'm for not worrying about your conversation at dinner being overheard by the people at the table next and registering their disapprobation of you on Facebook, whatever it's called. Now I want. I live and let live. How's that from political pro platform. You think, think, think I could do it? Could pull it off. I'm 70. I'm 79 now. You think it's that, is that old for the presidency?

I can't.

Yeah. So live and let live is my program.

[Matt Zigler]

It's a good program.

[James Grant]

Okay.

[Matt Zigler]

I'll vote three times if I have to.

I, I got one more, one more markets related question just because I'm, I'm very curious about this too. Gold.

[James Grant]

Ah, yeah.

[Matt Zigler]

Give me, give me at least a James Grant soundbite on gold. What's going on?

[James Grant]

Gold is the reciprocal of the world's faith in the paper currencies managed by central bank.

The price of gold is the reciprocal of the world's confidence.

In money.

Money that we carry with us, that we know as money. Not one person in a thousand probably walking around thinks of gold as money. They think of as a collectible or something like Bitcoin, but not as cool. But to me, gold is the legacy money. And it is, I think there's a kind of a preference cascade the world over for gold among the central bankers and among other others in the monetary business, be they commercial bankers or central bankers. I think mostly commercial bank, mostly central bankers. Now.

The Fed is almost alone in not owning any gold as a central bank.

So.

I think that the gold price is going up because I think that confidence deservedly.

In the ideas and in the deeds of our own central bank. That confidence is receding, as I say, as it ought to. Ought to be receding. Yeah.

[Matt Zigler]

So I think it's time for a few of our favorite closing questions. Okay, this first one's a tricky one. Can you name something that you believe about investing that most of your peers would disagree with?

[James Grant]

Yeah. Gold is money.

[Matt Zigler]

Say more. Expand.

[James Grant]

Well, I think that gold has been, is now, and will be money. I think that. I think that here, this is even more. This is even more. Something even more people disagree with. I think that the historical cycle beginning in, say, 1971 or 73 to the present, in which paper money reigns supreme, will be seen as a failed experiment and monetary invention and that gold will reclaim someplace. I don't think people walk around with coins in their pockets. Gold coins in the pockets. I think gold is coming. Gold is coming back. Not like the old south, not like the Brooklyn Dodgers, not like the cutthroat Razor, not like the sextant.

But I think gold will have its day again as a form of money that is acknowledged as such.

And that it'll be good for the gold miners.

It's my story. My story. Matt.

[Matt Zigler]

I'll take that.

[James Grant]

Stick to that.

[Justin Carbono]

And, and, and lastly, Jim, we like to ask all of our guests, what is the one lesson you would teach your average investor?

[James Grant]

Oh, don't stand in line to make an investment. I, I queued up at the office of Nicholas Deke in lower Manhattan, and the very peak of the 1980 bull market ended. Bull market in gold ended in 1980. It was freezing cold. I stood in line, this was in January of 80, to buy a single Krugerrand. With my pitiable Dow Jones salary, It was like 20 years of recovering that price, maybe 30 years. I remember sitting with my wife around the proverbial kitchen table, trying to scrape together money for our fancy private school tuitions in the city of New York. And there was this coin sitting on the table. It was my. It was my lonely Krugerrad and did not cut much of a figure compared to, oh, common stocks.

So, yeah, I told you all my secrets.

[Matt Zigler]

Well, we'll take them. Aside from the new book sending people, it's grantspub.com, right? For the website.

[James Grant]

Yeah. Come take a look. Yeah, no pressure.

[Matt Zigler]

Come take a look. Do you accept payment in Krugerrands or is that a yes?

[James Grant]

Oh, yes.

[Matt Zigler]

Fantastic. James Grant, absolute pleasure to have you on xs.

[James Grant]

Thank you, Matt. Thank you, Justin.

[Matt Zigler]

Like, subscribe all the things below. You're watching Excess Returns. We'll see you real soon.

[Justin Carbono]

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 [e-mail] if you have any feedback or questions, you can contact [e-mail] no information on this podcast.

[Matt Zigler]

Should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.