I had the opportunity to attend the Indianapolis CFA dinner last night with Jim Grant, the author of the well-known Grant’s Interest Rate Observer as the guest speaker. Grant has been writing his newsletter since 1983 after having a column at Barron’s. Ron Paul had once said that if he were to become President he would name Jim Grant as his Fed Chairman. He’s one of my favorite economists and I was glad to have the opportunity to hear him speak.
Below are the key takeaways from Jim Grant’s speech:
– The Fed is waging war against the invisible hand of Adam Smith.
-This has been the largest example of bad risk analysis ever and it’s happening in our life time.
-Insurance companies are getting screwed as they watch their liabilities skyrocket while banks get to be solvent since they are friends of Bernanke.
-Bonds are the fruit of our sins. They rise based on muscle memory, not necessarily due to their value.
-Bonds are perceived as less risky than stocks, which isn’t always the case.
-Bonds have typically followed a 35-year cycle and are currently mirroring past cycle tops.
-To fund a five-year annuity paying 2% many insurance companies have to go to the junk bond market, which is ridiculous and unsustainable.
-Grant likes to step back and think of how people will view the current environment 10 or 20 years from now. He thinks they will note two things: 1. politicians didn’t notice that there were a few extra houses than necessary in 2007 and 2. people didn’t recognize the 35-year bond market cycle top and that bonds were in their last gasp.
-The Fed has beaten deflation and will act like a drug dealer as they sell bonds in the oncoming bond bear market.
-The U.S. economy is an idling race car that’s been improperly maintained.
This was the first time I got to hear Grant speak in public, he’s a good speaker and actually is pretty funny. He is, as the points above show, very bearish on bonds but admits that he’s felt this way for a couple of years now and it hasn’t played out the way he expected. He said he does own physical gold but does not manage his own personal wealth, outsourcing its management to a few hedge funds.
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Bonds are, quite possibly, the biggest one-sided trade in the markets today (at least since Apple has rightfully topped out). And, even with the Fed sticking its dirty, little hands into the pie, there are a finite amount of buyers.
As you cited above with insurance companies having to fund annuities via the high-yield market, many people will end up trapped on the wrong side of a market from which it will not be easy to extricate. And for institutions like insurance companies who trade both in size and in sometimes illiquid markets, this is very dangerous.
It is simply astounding to me that men like Bernanke are given the keys to the car, when they drive worse than a 16 year-old texting on an iPhone. I’ve come to the conclusion that the most useless degree in human history is, in fact, a PhD in Economics from MIT. God, I liked that university so much more when they just built rocket ships…
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