James Grant: The Fed Manipulates Rates All the Time

Saturday, July 14th, 2012

The Federal Reserve and other central banks manipulate interest rates every day, James Grant of Grant’s Interest Rate Observer told CNBC’s “Closing Bell” on Thursday. “The Fed is in the business of trying to manipulate markets, the macro economy, interest rates, unemployment and inflation through various monetary means, including the twisting around of yield curves and interest rates,” Grant said. Grant added, “The Federal Reserve fixes rates on principle. They have ‘operation twist’ that manipulates the credit markets. They have quantitative easing that manipulates bond yields.”

Tags: Bond Yields, Central Banks, Closing Bell, Cnbc, Credit Markets, Federal Reserve, Grant Federal, inflation, Interest Rate Observer, Interest Rates Unemployment, James Grant, Macro Economy, Principle, Quantitative Easing, Yield Curves
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Jim Grant: “The Federal Reserve Is The Vampire Squid Of Vampire Squids”

Friday, May 4th, 2012

Munch’s “The Scream” may be all the rage today, but to Jim Grant, in his latest interview on Bloomberg TV, the record price paid for the painting is not so much a manifestation of modern art as one of modern currency: “This is the flight into things from paper” . Thus begins the latest polemic by the Grant’s Interest Rate Observer author whose topic is as so often happens, the Federal Reserve (for his latest definitive expostulation on why the Fed should be disbanded and why a gold standard should return, delivered from the heart of Liberty 33 itself, read here). The world in which we invest is a world of immense wall to wall manipulations by our friends in Washington. And people get off on Goldman Sachs because it has done this and this, it is pulling wires… The Federal Reserve is the giant squid of squids, it is the vampire squid of vampire squids.”

He continues: “They – the vampire squids - have manipulated virtually every single price and valuation in the capital markets. People ought to recognize when they invest that one of the unspoken risks is the risk that this hall of mirrors, this Barnum and Bailey world that the Fed has created for us is going to vanish one day because they will not be able to hold it any more… It’s not as if there is nothing to do in investing, but one must always keep in mind that the valuations that we see, that the prices that we watch flicker across the tape are prices that are fundamentally manipulated by these well-intended, dangerous people in Washington called the Federal Reserve“. And to think that 3 short years ago Grant would have been branded a loony, tin-foil hat wearing gold bug, while now it has become trendy for hedge fund managers to bash the Fed with impunity. It is all downhill from here.

Tags: All The Rage, Barnum And Bailey, Capital Markets, Federal Reserve, Giant Squid, Gold Bug, Gold Standard, Goldman Sachs, Hedge Fund Managers, Immense Wall, Impunity, Interest Rate Observer, Jim Grant, Manipulations, Modern Art, Squid, Tin Foil Hat, Valuations, Vampire Squid, Wall To Wall
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James Grant Says Bond Market Is “Bubble of Modern Banking”

Monday, March 19th, 2012

James Grant, publisher of Grant’s Interest Rate Observer, talks about Federal Reserve monetary policy, the bond market and investment strategy. Grant, speaking with Deirdre Bolton on Bloomberg Television’s “Money Moves,” also discusses the Chinese economy.

Link if video does not play: Bond Market ‘Desert of Value’

Select Interview Quotes

Grant: The Fed seem bent on suppressing this most elegant thing we have called a price mechanism, the movement of price that determines all manner of things in a market economy. Yet the Fed seems bound and determined to superimpose its will in place of the price mechanism. Take the bond market for example, the Fed has hammered down yields directly and indirectly and in response people are throwing money at things like high-yield or junk bonds. These are the prices the Fed wants, but are they the right prices? No not necessarily.

Deirdre Bolton: How is a bond investor to deal with this current environment? You are calling actually for a bear market in bonds, am I correct?.

Grant: I have forever. So I am no help there. But it seems to me a bond investor is almost better off in cash. If you were to go out 10 years in a US treasury security you earn yield of approximate 2%. To remain in cash and be flexible you sacrifice those 2%. The bond market is a desert of value.

Deirdre Bolton: What does this mean for gold?

Grant: The price of gold is the reciprocal of the world’s faith in the deeds and words of the likes of Ben Bernanke. The world over, central banks are printing money as it has never been printed before. The European Central Bank has increased the size of its balance sheet  at the annual rate of 89%. It’s amazing. The Fed is far behind at only 15%. The Bank of England 67% over the past few months. These are rates of increases in the production of paper currencies we have never seen in the modern  age. It takes no effort at all. They simply tap the computer screen.

Time for an “Office of Unintended Consequences?”

Grant proposes the Fed start an “Office of Unintended Consequences” to study all the things that go wrong with Fed policy.

I believe Grant is speaking tongue-in-cheek. We certainly do not need such an office. Instead, we need to abolish the Fed.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: Bank Of England, Ben Bernanke, Bloomberg Television, Bond Market, Central Banks, Chinese Economy, Deirdre Bolton, Economy Link, Federal Reserve Monetary Policy, Interest Rate Observer, Investment Strategy, James Grant, Junk Bonds, Market Economy, Paper Currencies, Price Mechanism, Price Of Gold, Printing Money, Treasury Security, Us Treasury
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Jim Grant On Gold-Backed Bonds And ‘The Hope Leeches’

Wednesday, February 15th, 2012

James Grant, of Grant’s Interest Rate Observer makes some thought-provoking statements in his must-listen Bloomberg Radio interview with Tom Keene today. While noting America’s exceptionalism (h/t Clint Eastwood?), he perhaps doesn’t mean all Americans as he takes the Fed and Treasury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and follow generational cycles raises concerns for him that government intervention is in fact ‘prolonging the symptoms’ of the recession. In considering Tom Keene’s well-thought-out question of why the US does not take advantage of low rates and issue exceptionally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy.

“Why not issue bonds backed by gold bullion? Gold is a better money and is grounded in something besides the power of the people that print the dollar bills.” The interview goes on to discuss population growth as a more potent ‘fix’ for housing in the US than QE, that the US is a preferable investment environment (given valuations) than Germany or Japan, the drastic drop in NYSE volumes, and the “leeching out of excitement, hope, and expectation of improvement (particularly for the young).” His compare and contrast of the 1920-21 depression to the current Great Recession (which seems not to end), focused on the fiscal and monetary actions, is an eye opener that its just possible the present-day orthodoxy is wrong. Urging that we maintain our sense of shock at the size of our ‘peacetime’ deficits, Grant worries that we are in a secular stagnation.

Click below to listen to the interview…

Jim Grant On Bloomberg Radio by user5452365

Tags: Bullion Gold, Compare And Contrast, Dollar Bills, Drastic Drop, Exceptionalism, Eye Opener, Generational Cycles, Gold Bullion, Government Intervention, Interest Rate Observer, Investment Environment, Issue Bonds, James Grant, Jim Grant, Leeches, Nyse, Peacetime, Population Growth, Radio Interview, Tom Keene
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Hersh Cohen: In Depth on “Good Old Fashioned Value Investing” in an HFT World

Thursday, November 3rd, 2011

Consuelo Mack WealthTrack – October 2011

CONSUELO MACK: This week on WealthTrack, in a market dominated by high frequency, computer driven trading, how does the individual survive and flourish? ClearBridge Advisors’ Great Investor Hersh Cohen takes us back to the basics of good old fashioned value investing, in a TV exclusive next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Investors are spooked. And confidence is key to investing: when you buy a company’s stock, you are counting on growing business prospects, earnings, and in many cases, dividend payments. Otherwise, why take the chance? That’s a question many investors are answering with sell orders. They’ve been pulling money out of domestic stock funds in particular, with large cap mutual funds suffering more than two years of monthly outflows.

Investors are being buffeted by a rotating and repetitive list of worries, political, economic, and global: the budget divide in Washington, government deficits, high unemployment, the European debt crisis. Being overlooked are the positive signs: companies are making money, a recent stream of better than forecast reports in manufacturing, construction, and retailing, the stimulative seeds of recovery being planted by record low interest rates and falling commodity prices- the huge decline in oil prices, which is the equivalent of a big tax cut for businesses and individuals.

Exacerbating the sense of uncertainty and crisis is the nearly unprecedented volatility in the markets. According to a recent Grant’s Interest Rate Observer, published by WealthTrack regular Jim Grant, “at the end of World War II, the average American investor held the average American equity for four long years. By 2000, those four years had dwindled to eight months. By 2008, eight months had shrunk to just two months.” Grant’s speculates that maybe the holding period is down to 20 minutes- who knows? What we do know is that the pace of trading has accelerated to beyond warp speed. According to Grant’s, which sourced a speech by a senior Bank of England regulator named Andrew Haldane – we will have a link to it on wealthtrack.com- computer generated, high frequency trading accounts for as much as 75% of U.S. stock trading. Six years ago, such trading accounted for no more than a fifth of the volume. Human to human interaction has been replaced by computer to computer, and algorithm to algorithm trades, tens of thousands of them happening in micro-seconds, or millionths of a second.
So how can regular long term investors survive in a nanosecond market? That’s one of the many questions I asked this week’s Great Investor guest in a WealthTrack television exclusive.

Hersh Cohen is ClearBridge Advisors’ chief investment officer, senior portfolio manager and co-manager of its dividend strategy portfolios, including the Legg Mason ClearBridge Equity Income Builder Fund. For 31 years, he co-managed the Partners Appreciation Fund, being named finalist for Morningstar’s Equity Fund Manager of the Year in 2008 and to the exclusive Forbes Honor Roll eight times. As you will see, Hersh’s perspective is refreshing and invaluable.

HERSH COHEN: It’s interesting. I used to see a stock fade or be down two points and I’d call our trading desk and say track it down, what’s going on, what’s the news on this thing? And what I learned was there was no news. Now it’s just a function of the fast traders or an ETF wagging the dog and carrying everything down. So I’ve stopped asking and what I’ve learned to do now is just to try- try, I don’t say I always successfully do it- try not to chase strength because the strength can be random and try to wait for periods of weakness to buy the companies that I want to buy. I mean, I don’t know how else to do it.

CONSUELO MACK: What constitutes a period of weakness? Is it actually like a period, or is it, gee, the stock’s down to 34 and this is what I’ve been waiting for and you put your order in right then and then?

HERSH COHEN: Well, I like to use levels. You know, it’s not a science. I like to use levels that I’m willing to buy a stock or stocks at and we keep a list of that and I got over that with my team fairly frequently. So that might be 10% below the market. I mean, the stock might be at a level that we’re no longer interested in buying it, but if it got down to a certain point. So it might not be on a day, but if you get a period, if you get a month of weakness then you do it. So for example, the stock W. W. Grainger is one that we, I missed it all the way up and then it went up to 160 and it came down to 130 in the summer and that was a level that we felt comfortable. So in a period of market weakness, we took a small position for individuals. So there’s no formula. So it can be a matter of minutes or an hour or you have an idea that you want to buy a stock, but you’re just waiting for it. There might be a stock that we’re buying on a regular basis. Let’s say Proctor and Gamble. Let’s say we’re buying it on a regular basis.

CONSUELO MACK: Long time holding of yours.

HERSH COHEN: Long time holding. But you don’t want to be buying it on days when the market is up three percent. You’d rather be buying it, as hard as it is, towards the end of the day like today or tomorrow morning when it’s down. Of course, you never know if you’re right. You might be paying a point too much or something.

CONSUELO MACK: So the point is that approach still works? So far.

HERSH COHEN: Does that approach still work? I hope so, I think so. I don’t know a better way to do it. Is there a better way to do it? If there’s a better way to do it, I don’t know it. I have this line I use on a day like today. I don’t mean to sound glib, but not one of my companies cut their dividend today.

CONSUELO MACK: So that’s a positive, right?
HERSH COHEN: People look at the market too closely. That’s the trouble. And people never stay around for the good gains. It’s hard. I don’t know. There’s no formula. It’s just hard work. You want to own great companies and try to buy them during either a daily or weekly or monthly weakness, and you hope you’re not overpaying, and you have to be willing to trim if they go way above where you think there’s fair value, but of course, that has not been much of a problem recently.

CONSUELO MACK: So have you seen any long term impact of this? That the volatility and the trading on actually the stock’s performance that you invest in, these value high quality stocks?

HERSH COHEN: The moves are accentuated on a very short term basis, clearly. On the long term performance ultimately, define long term. I’ll define long term as decades, which is not really what you’re asking. But long term, what I see is that earnings, dividends, and stock prices- if you graph them, the graphs will super impose. On a 20 year basis that’s probably true; on a ten year basis, clearly, that wasn’t true. Dividends went up. Earnings went up for many companies. Stock prices went down in the last decade. 2008, some dividends went up, some earnings went up, and stock prices could have been down 30 or 40%. So on a one year basis or a three month basis, no, they do affect things, yes; but on a longer term basis, on a very long term basis, which is how I try to think and what I can tell you firsthand from stocks that I’ve owned it does work. It really does work.

So put it this way, look at the overall market. I tell people this. I like to when I talk, I like to talk about this. I say we have all these problems now. They’re very obvious and the market volatility scares people away, but let’s go back to 1973/1974. We had a president and vice-president resign in disgrace. You’ve got oil prices- you had an oil embargo- oil prices went from three dollars, they went up eventually ten-fold and you couldn’t even get gasoline. They had to line up around the block. The country was torn apart by the Vietnam War. New York City tax free bonds were selling at 50 cents on the dollar. It was effectively bankrupt. And then I tell people, I ask people, well, guess what the Dow Jones Average was? Some people, you know, they’ll know. But they’ll say, you know, 3,000, and I’ll say 580 is where it bottomed, 580, not 5,800, 580. So it’s up 20 times. And oh, by the way, there have been all these dividends in that same period of time too. We’ve had a lot of trouble since then too. You know, Mexico went bankrupt. You had an S&L crisis in 1990. You had 9/11. Many, many. You had the crash of ’87.

CONSUELO MACK: And perspective helps, which is why we have you here on WealthTrack to remind us of these things- that things aren’t as bad as we think. So it doesn’t sound like you’re doing a lot differently. Your average holding period has been four years.

HERSH COHEN: Yeah, 20 to 30% turnover. So four to three to five years, I would say. And some holdings forever.

CONSUELO MACK: So that hasn’t changed?

HERSH COHEN: No, no, no. Why would it?

CONSUELO MACK: Only reason is because of the market volatility? Are you finding cycles?

HERSH COHEN: If people would learn to use it for their advantage by taking advantage of the periods of weakness. But what really upsets me is the kind of call that I got today from an old friend whose money I manage who has done really well over the years, who is 63 years old. And he called and said, “I can’t stand this volatility.” I said, “Well, I don’t even know what to sell in your portfolio. Everything is good.” He said, “But I’m really nervous and if things crash.” I mean, so he’s done well. He’s a market veteran. He’s been around forever. He does a little trading on his own outside, but he’s got these great long term investments- when people like that start to feel that way, that makes me nervous about people never meeting their goals. And I don’t mean to sound like a shill for the stock market, but I believe in the stock market. At a time when the savers are earning nothing and stocks give dividends of– high quality stocks give dividends in many instances two, three times the rate of the ten year treasury, then I think you really want to be thinking about some stocks. And yet money has been flowing out of mutual funds at rates–

CONSUELO MACK: Right, stock mutual funds.

HERSH COHEN: Equity mutual funds at a greater pace, I just read, than it was in 2008. And at a time when people should probably be thinking about high quality stocks and thinking about dividend growth, they’re not. They’re going the other way. Even in the last decade, between 2000 and the end of 2009, the S&P 500 dividends went up over five percent compounded, including the travesty in the banks all cutting their dividends at the end. A well managed portfolio of high quality companies where- if you were fortunate you avoided a lot of the collapse in the financials- compounded at somewhere between eight and nine percent. Compounded. You know, that’s a double in your income in ten years.

CONSUELO MACK: Your colleague, Bill Miller- one of the past times he’s been on Wealth Track was talking about how one of the advantages that individual investors have is that they have time. They don’t have the pressure of quarterly performance numbers. They don’t have the pressure.

HERSH COHEN: You can wait for that perfect pitch.

CONSUELO MACK: So the time arbitrage–

HERSH COHEN: But people don’t. People don’t. That’s that the trouble.

CONSUELO MACK: But talk to me about the advantage that individual investors have with time.

HERSH COHEN: Perfect example. In institutional accounts, foundations, endowments, in mutual funds, you’re benchmarked and everybody sees your numbers everyday. I go every morning and I check how my mutual fund is doing compared to all the other funds that I look at.

CONSUELO MACK: Because you have to?

HERSH COHEN: Because you have to because it determines how many stars you have.

CONSUELO MACK: Every day, Hersh, you do that?

HERSH COHEN: Yeah, of course.

CONSUELO MACK: You’re more obsessive.

HERSH COHEN: It’s obsessive, but I’m sure every fund manager does that, I would imagine. And no individual, not a single individual- I think that’s true in my career- has ever said to me, you trail your benchmark by two percent, you’re no good. But I can’t tell you how many institutional accounts I lost in 1999 because I had 25% cash. “We’re not paying you to run cash, you don’t know what you’re doing.” So it’s frustrating. So the individual has a huge advantage. They don’t have to answer to a committee. I love Morningstar. Their write-ups are great. I love Morningstar. But if I were a younger portfolio manager I would have had to be fully invested in Microsoft and GE in 50 times earnings to outperform. It’s hard. As an individual, you can pick and choose, pick and choose. Pick great companies. If you want to speculate, you can speculate with a portion of your money and you’re not beholden. I tell people you can buy anything you want, but if you’re wrong, just don’t forget to sell it because that’s the mistake. Individuals, unfortunately, I think, tend to hold onto losers too long, but that’s a discipline.

CONSUELO MACK: And why do they do that?

HERSH COHEN: Well, you don’t want to admit you’re wrong.

CONSUELO MACK: I see. Or they keep thinking it’s going to come back and you can sell when you–

HERSH COHEN: Yeah, you know that’s what makes, what used to make- I’m not sure fund managers, for example, are any different they just run bigger pools of money. So a stock goes down and there’s a little disbelief and then a stock, you know, you hope it will rally. There’s the hope phase. And then it goes down more and you hope. And then finally you say if I ever get even I’m going to get out. That’s what people, I think, tend to do and then, of course, that’s when the stock improves and often keeps going. It’s crazy.

CONSUELO MACK: So individual stocks?

HERSH COHEN: Individuals can wait. I’m sorry. Warren Buffet said it the best. He said, “You can sit there with your bat on your shoulder and wait for the fat pitch.” It’s hard to do.

CONSUELO MACK: Is the stock market stacked against individuals anymore than it ever has been? What’s your sense of how individuals fare buying stocks themselves?

HERSH COHEN: That’s a great question. Is it stacked against individuals? I think it scares the devil out of individuals. Is it stacked against them? No. I wouldn’t say it’s stacked against them. You still have great companies they can buy. It’s still the most democratic institution in the world. Anybody can plunk their money down and buy stocks. I think, no, it’s not stacked against them. And people can have their money managed. They can manage it themselves. No, it’s not stacked against the individual. I think there’s a huge amount of information available out there.
I was talking to one of our traders today and I said, “Why do you think there’s so much volatility?” And she said, “The information flow is so rapid that people react to it so rapidly.” Individuals don’t have to do that. They can get the information, but they can filter it. I’ve told young colleagues of mine, I said, “I don’t want to make decisions during the heat of the day. Talk to me about buy and sell decisions early in the morning when we don’t have the pressures of the market.” Individuals can do that. It’s hard to do though when you’re sitting there watching things. It’s easy to get carried away.

CONSUELO MACK: So that’s interesting. So you’re saying talk to me before the market opens, essentially?

HERSH COHEN: Yeah, about what our plans are.

CONSUELO MACK: Right. So you’re going to implement–

HERSH COHEN: Don’t make a decision based on what the market’s doing.

CONSUELO MACK: So don’t be reactive.

HERSH COHEN: Right.

CONSUELO MACK: Be proactive. So that’s a novel idea, Hersh, actually have an investment plan. I’m sure it’s a novel idea to a lot of the young people you talk to.

HERSH COHEN: Well, it’s not a daily investment plan, but you should have some kind of outline of what the stocks you want to own, the kind of stocks you want to own, and have some price sets.

CONSUELO MACK: Makes sense to me. So earnings. What are earnings are tell you as far as the market?

HERSH COHEN: Well, that’s the big thing right now. Because earnings have been really good. Dividend payout ratios- that is the percentage of earnings that companies are paying- out is still low. You have dividend yields that are incredibly attractive compared to, I don’t know how else you measure it, compared to fixed income investments. Do I think earnings will be up strongly next year? I do not. Do I think they could be down? I do, but I think the market, that’s why the market was down in July and August. I think the market was understood that earnings were not going to be up strongly next year so the market, you know, the market is a discounting mechanism. I think it knows that earnings are not going to be great.

CONSUELO MACK: Interest rates. So what are interest rates telling you about the market?

HERSH COHEN: You’ve got to buy them. That’s what Bernanke’s telling you. You have to step out on the risk curve. With interest rates at zero, and they’re telling you, what are they telling you? Interest rates are going to be at zero for two years.

CONSUELO MACK: It doesn’t get much clearer that that.

HERSH COHEN: It kind of gives the shaft to savers. And so he’s saying to savers, you need to do something risky.

CONSUELO MACK: Sorry.

HERSH COHEN: Not sorry, but step out on the risk curve. And let me tell you, it’s frustrating because my whole career, for individuals I would always would have some portion in fixed income. It was easy. It was easy. Especially as people would head into retirement or whatever you could get your–

CONSUELO MACK: Just shift them into bonds.

HERSH COHEN: –get your good returns from the bond, kind of get your anchor there and then have the stocks. Actually, dividends now are better than they, the yields are better in stocks than they have been. And I’m telling people now because they’re saying how am I going to retire, what am I going to do? And I say you’re going to have to take out a principle. It’s hard.

CONSUELO MACK: Very hard.

HERSH COHEN: Yeah.

CONSUELO MACK: That’s anathema to a lot of people.

HERSH COHEN: I know, I know, I know.

CONSUELO MACK: So when people come to you, Hersh, and they say, I need income. I’m going to retire. I need income. Where do I go?

HERSH COHEN: I send them to Consuelo Mack’s Wealthtrack.com and tell them to look at my list of dividend stock. I love it. It’s a good list, by the way.

CONSUELO MACK: Which is one of our most popular features.

HERSH COHEN: It’s a good list.

CONSUELO MACK: And so tell me about this list of great balance sheets and high dividend yields.

HERSH COHEN: Growing dividend yields.

CONSUELO MACK: Growing dividends.

HERSH COHEN: So what do I tell people? I say diversification. You know, 25, 30 stocks. Companies that tend to make products that people want or need. The balance sheets are good. There’s a history of dividend increases or the ability for companies to raise dividends or the history of them. I think it’s a really good list. And in fact, I own them all. I own them all myself because we actually have a program that does that. My two biggest investments are that program, the separately managed account, and the Equity Income mutual fund. Those are good. So again, I’m not touting those, but I like them, I believe in it. And why wouldn’t I? So if individuals come and say what do you do? I say these great companies.
So tell me, Proctor & Gamble has been paying dividends for 100 and some odd years and has raised it for 50 consecutive, whatever it is, 50 consecutive. Kimberly-Clark, it’s like a bond with a rising coupon. Kimberly is an incredibly well run company. People are still going to be using diapers, and facial tissue, and paper towels, and disposable hospital things. And it was yielding 4.25% a year ago and they’ve raised the dividend. They’ve raised the dividend every year for 40 years and Tom Falk has done a great job running the company. Johnson & Johnson, even though they stubbed their toe with the consumer products, and it drives me crazy, they still raised their dividend 6% this year and they’ve raised their dividend every year since I don’t know when. 3M has raised its dividend every year for, I don’t know, 45 years, and they make products that everybody uses. Those are good.

CONSUELO MACK: So how do you use that list? I mean, when do you invest in them, when do you–

HERSH COHEN: We set levels on what prices we’ll pay and when they hit it, when they hit those levels, we’ll trigger the buys. And if stocks get too expensive, we’ll maybe nip some off.

CONSUELO MACK: But the point is this is like a core list.

HERSH COHEN: Core list.

CONSUELO MACK: And so as individual investors –

HERSH COHEN: Won’t change that much.

CONSUELO MACK: As individual investors, I mean, should we have some sort of a core list as well?

HERSH COHEN: Yeah. I think so. I mean, I believe there are certain companies- it’s always dangerous to go on camera and say this for posterity, but I mean I think there are certain companies that have proven their ability that one can own forever. Why wouldn’t somebody own Exxon, apart from that people don’t want to own energy and, you know, Exxon is still reviled by some people for Valdez, but you know, Exxon, Chevron. They’re great. They raise their dividend every year. They buy in shares. They do the right thing for shareholders, high return on capital. I think those are kind of hold forever kind of companies. Johnson & Johnson, Proctor & Gamble, 3M. Those are a good list.

CONSUELO MACK: One Investment for a long term diversified portfolio, what are you going to tell us that we should all own some of?

HERSH COHEN: The Consuelo Mack/Hersh Cohen Wealthtrack.com Dividend Grower List. I love it. Yeah. You know, it’s funny. I was asked by our IR people to talk to a magazine and give them our one best stock idea. I said, “We don’t do that.” I said, “Talk to Consuelo Mack. She knows. She asks for one idea, we give 20 or 30 stocks.” There’s this old joke about sports handicappers. You know, they’ll give half their customers one side of the bet and they’ll give half their customers the other side and so they’re always going to have 50% of the people who think they’re really smart. Why would I tell people just one stock? I mean, I could be right or I could be wrong.

CONSUELO MACK: And of course, we will have that on, once again, one of our most popular sections of our website, Wealthtrack.com, Hersh Cohen’s list will be there and I know that people are going to be logging on to get it.

HERSH COHEN: It’s a list that we have put together, but I mean, anybody could put a list like that together, but it requires some work and we do put a lot of work in it. And it’s a lot of years of experience and judgment, I think. So I do want to say it’s a group of really nice companies. And so, you know, I look back at last year’s list. It’s a nice list.

CONSUELO MACK: It is a very nice list.

HERSH COHEN: I think they’ve all raised the dividend.

CONSUELO MACK: I think they have too. Well, Hersh Cohen, thank you so much for being with us.

HERSH COHEN: It’s a pleasure.

CONSUELO MACK: The chief investment officer of Legg Mason ClearBridge Advisors–

HERSH COHEN: This was fun. Thank you.

CONSUELO MACK: –among many other things.

HERSH COHEN: This is fun in a very difficult environment. Thank you.

CONSUELO MACK: It is. You’re such a relief. I love talking to you.

HERSH COHEN: And vice versa. Thank you.

CONSUELO MACK: At the conclusion of every WealthTrack, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point: check out Hersh Cohen’s “Great Balance Sheets and Dividend Growers List.” Hersh talked about buying great companies on weakness. These companies have been suffering along with the rest of the market, and even though large cap stocks have held up better than mid and small cap ones this year, investors have been bailing out of large-cap mutual funds for more than two years now. Their selling has created both price and income opportunities for the rest of us. As mutual fund and hedge fund manager Whitney Tilson told clients recently, he and his fellow value investors have never seen such a disconnect between company prospects and what the stocks are doing.
Next week on WealthTrack, Great Investor and Financial Thought Leader Robert Arnott joins us. He has been correctly bearish on developed world stock markets, but he has some alternatives to discuss with us. And for those of you who want to see our WealthTrack interviews ahead of the pack, we have a new opportunity for you. Subscribers can now see our program as early as Thursday morning on our website along with timely interviews exclusive to WealthTrack web subscribers. To sign up, go to our website, wealthtrack.com. Thank you for watching and make the week ahead a profitable and a productive one.

Tags: American Equity, American Investor, Bonds, Business Prospects, Clearbridge Advisors, Commodity Prices, Consuelo Mack, Debt Crisis, Dividend Payments, Domestic Stock Funds, Government Deficits, Holding Period, Interest Rate Observer, Jim Grant, Low Interest Rates, Oil Prices, Positive Signs, Unprecedented Volatility, Washington Government, Wealthtrack, World War Ii
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Jim Grant: “Investors Wearing Interest Rate Goggles”

Monday, July 4th, 2011

James Grant, publisher of Grant’s Interest Rate Observer, talks about the impact of the Federal Reserve’s policy of low interest rates and quantitative easing on the financial markets and U.S. economy. Grant speaks with Tom Keene on Bloomberg Television’s “Surveillance Midday.”

Source: Bloomberg, June 30, 2011

Tags: Bloomberg Television, Economy, Federal Reserve, Financial Markets, Goggles, Interest Rate Observer, Investors, James Grant, Jim Grant, Low Interest Rates, Midday, Publisher, Quantitative Easing, Surveillance, Tom Keene
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Q&A With Jim Grant: Look For “QE 3 Through QE N”

Sunday, May 22nd, 2011

By now it has been made very clear that Jim Grant is firmly in the (correct, at least according to us) camp that no matter what, the Fed will be forced to proceed with at least one more (and likely many) round of quantitative easing. In his latest must read interview, the author of Grant’s Interest Rate Observer further explains, in simple terms, not only why the Fed is boxed in when it comes to monetary policy (an assessment comparable to that by Marc Faber back in March: “We may drop 10 to 15 percent. Then QE 2 will come, (then) QE 4, QE 5, QE 6, QE 7—whatever you want. The money printer will continue to print, that I’m sure. Actually I made a mistake. I meant to say QE 18.”),  but also refutes the fallacy of counterfactual statements that the world would end if the Fed had not intervened to prevent a systemic collapse in 2008, why a gold standard in our lifetimes is coming, on whether he is buying gold currently, on inflation, on corporate valuation, and where (and more importantly when) investors should be putting money to work.

From AP:

A graduate of Indiana University, Grant, 64, was a Navy gunner’s mate before starting his journalism career at the Baltimore Sun in 1972. He then joined the financial weekly Barron’s before starting Grant’s Interest Rate Observer in 1983. He’s also written seven books, mostly financial histories and profiles. His first book was on Bernard Baruch, the pre-WWI financier and advisor to presidents. His latest is a profile of Thomas Reed, an acerbic and witty Speaker of House over 100 years ago.

As stocks were falling last week, Grant visited The Associated Press in New York to talk about why it’s not just stock investors who should be worried. Below are excerpts, edited for clarity, from a wide-ranging conversation in which he lit into the Federal Reserve for our current troubles, warned of 10 percent inflation and waxed nostalgic for a time when Washington had the courage to let prices fall in crises rather than goose them up and prolong our agony.

Q: What’s your view of the stock market?

A: The Federal Reserve has unilaterally taken it upon itself to levitate asset prices. It is suppressing interest rates. When you’re not getting anything on your savings, you are inclined to go out and buy something, anything, to generate either income or the expectation of capital gains. So the things that we take as prices freely determined are in fact manipulated.

A few months ago, (Fed Chairman) Ben S. Bernanke, Ph.D., the former chairman of the Princeton economics department, stood before the cameras of CNBC and said that the Russell 2000 is making new highs. The Russell! He sounded like another stock jockey. He was taking credit for new highs in the small cap equities index. The Fed, as never before, or rarely before, is now the steward of this bull market. One wonders what it will do if stocks pull back significantly.

Q: Are stocks overvalued?

A: Some big multinationals left behind in the past ten years (like) Wal-Mart, Cisco Systems, Johnson & Johnson appear to be attractively priced. But generally speaking, things are rich.

Q: What would you have done in the financial crisis if you had been in Bernanke’s position?

A: Resign. I don’t know. I have great faith in the price mechanism, in the mechanics of markets. I think there should have been much less intervention and we should have let some chips fall, many chips fall.

Before the Great Depression, there was a great depression (lower case `g’) in 1920-21. Within 18 months, the GDP was down double digits and commodity prices collapsed. Harry Truman lost his haberdashery in Kansas City. It was very painful, but it ended. And the Fed, during that depression, actually raised its discount rate and the Treasury ran a surplus. The reason it ended was the so-called real balance effect — that is, prices came down and people with savings saw things that were cheap and they invested. That’s the fast and ugly approach.

The slow and ugly approach is to mitigate, temporize and forestall to give us time to work ourselves out of difficulties. That’s the current approach. I think it’s intended to be a more humane approach, but I wonder about its humanity. I mean these college kids get out of school and they’ve got nothing. It’s awful — 9 percent unemployment and going nowhere except sideways.

Q: But Bernanke has succeeded by some measures. Big companies are flush with cash, their profits are on track to hit a record this year and the riskiest among them are raising money at the lowest rates ever. Who could have imagined this during the depths of the financial crisis?

A: Let’s go back to the previous cycle of 2002-3. Cisco Systems was for 15 minutes the costliest company on the face of the earth, and digital technology was about to raise every human being out of poverty. OK, so that cycle ends — Bang! — with general disarray in the stock market. What do we do? Well, we press down interest rates and we give residential real estate a little helping hand. What’s not to like? Home ownership rates are rising. Stocks are up. Risky companies are issuing debt at levels never before imagined.

Who would have dreamt such an outcome was possible after the tech bust? And that ended noisily and here we are again and our monetary masters have devised new, even more audacious methods of stimulus. In three or four years we’ll look back and say, `Can you believe we fell for this again?’

Q: You’ve been warning about higher inflation for a while. How imminent is it?

A: I’ve been all wrong on this. I thought that this massive monetary stuff would generate the conventional kind of inflation that would be expressed in much higher CPI readings. Not so far. But all things are cyclical and the seemingly impossible is just around the corner. On September 30, 1981, the 30-year US Treasury bond traded at 14 7/8 percent and I remember some crank, some visionary, was talking about how interest rates were going to zero, you watch. Oh, yeah right. And so it came to pass.

It does seem improbable that the inflation rate would ever get beyond 3.5 percent, let alone knock on the door of 10 percent. But I’m here to tell you it’s going to 10 percent.

Q: Won’t policymakers come down hard if we get even 6 percent inflation and try to lower that?

A: Sometimes they can’t control things. We had 6 percent inflation before. Washington is full of well-intentioned people. Ben Bernanke keeps saying that what we really need is a little inflation. He says we’ll get 2 percent or a little bit more. You shouldn’t even think that, let alone say it out loud. That’s such bad luck to tempt fate by saying that you can calibrate things like that. You can’t do that.

Q: So with inflation ahead, are you buying gold at $1,480 an ounce?

A: I am not buying it now. I have bought it in the past. Gold is a very difficult investment because its value is indeterminate. It is the reciprocal of the world’s confidence in the likes of Ben Bernanke. I think the price will go higher.

Q: When did you first buy gold?

A: Well, my first misadventure with gold was standing in a queue in front of the Nicholas Deak currency and coin shop, which was on lower Broadway. And it might have been January of 1980 at the very peak but if not then, it was late 1979. I almost top ticked it. That was before I learned never to stand in line to buy an asset. You always want to go where nobody else is in line.

Q: Let’s talk about the dollar. Washington says it wants a strong dollar.

A: It’s disingenuous when (Treasury Secretary) Tim Geithner says he’s for a strong dollar. What he means to say is the economy stinks and we need even greater oomph from our exports and for that we would like a much lower dollar in a measured, managed kind of decline. That’s what he wants, and he wants it by November 2012.

Q: What’s wrong with a weak dollar? Caterpillar recently said it is nearly doubling its capital spending because the weak dollar allows it to sell more overseas. It plans to spend much of that on factories in the U.S., paying construction workers to build them and hiring people to work in them.

A: Well, that is the Caterpillar story. The whole manufacturing story in the U.S. is very sunny, and it’s in part due to the state of the dollar. But if (prosperity) were as easy as debasing one’s currency, think of all the countries that would be prosperous that are rather the opposite. Argentina would be booming. And Weimar Germany would not be a story of failure but of success.

If the world were to lose confidence in (the dollar) we would suddenly be in a much less advantageous financial position. The U.S. is uniquely privileged in that we alone may pay our bills in the currency that only we may lawfully print. That’s our prerogative as the reserve-currency country. But it has seduced us into a state of complacency. We never actually pay the rate of interest that we might be expected to pay — the real rate of interest — on Treasury debts.

It’s great for now that we’re paying 2.5 percent or whatever on our public debt. But wouldn’t it be better if there were an accurate price signal that was telling us that we’re borrowing too much?

Q: If investors lose their faith in the dollar, what would replace it?

A: I think there will be a gold standard again in your lifetime, if not mine. It’s the only answer to the question, if not the dollar, then what?

Q: Where should people put their money now?

A: The trouble with the present is that nothing is actually cheap. My big thought is that our crises are becoming ever closer in time. The recovery time from the Great Depression was 25 years. The stock market peaked in 1929. It got back there in 1954. We had a peak in 2000, crash, levitation, then the biggest debt crisis in anybody’s memory. The cycles are becoming compressed. The temptation to become invested at peaks of these shorter cycles is ever greater.

Perhaps one way to proceed is to hold cash at the opportunity cost of not much in Treasury bills. You make nothing, but you want to have this money when things are absolutely, not just relatively, cheap. This time of full or overvaluation shall pass. On recent form, it’ll pass in a thunderclap and there will be a panic and it’ll seem as if the world’s ending. And that’s when somebody who is nimble can get fully invested in a comfortable way.

It won’t feel comfortable, it will feel awful, but I think that’s the way to do it. I mean everything (you could invest in) is either uninteresting or rich, it seems to me.

Q: What about Treasury bonds?

A: I think it’s useful to imagine how things might look ten years hence. What will one’s children, heirs or successors think about a purchase today of ten-year Treasurys at 3.25 percent? They’ll look back and say, `What were they thinking?’ The (federal deficit) was running at 10 percent of GDP, the Fed had pressed its interest rates to zero, it had tripled the size of its balance sheet, and they bought bonds? Treasurys are hugely uninteresting, as is similar government debt the world over.

Q: Any last thoughts?

A: Because the Fed has coaxed or cajoled people into stocks, including many financial non-professionals, I think it has moral ownership of the market in a way that no recent Fed has had. Either the stock market owns the Fed, or vice versa but they are too intertwined now. If stocks pull back by 20 percent, how can Bernanke just sit there and say, `I want a bear market?’ I think he has some moral responsibility for the finances of the non-professionals who bought.

Q: Does this mean the Fed might announce QE 3, a third round of quantitative easing to lower rates and raise stock prices?

A: Yeah, it means QE 3 through QE N.

h/t nobull1994

Tags: Baltimore Sun, Barron, Bernard Baruch, Corporate Valuation, Fallacy, Financial Histories, Financier, Gold Standard, Gunner, Indiana University, Interest Rate Observer, Jim Grant, Journalism Career, Lifetimes, Marc Faber, Qe 2, Seven Books, Stock Investors, Thomas Reed, Wwi
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Wealthtrack: James Grant – Fed’s Easy Money Policies Will Wreak Havoc

Thursday, April 28th, 2011

This week on Wealthtrack, Consuelo Mack talks to James Grant, editor of Grant’s Interest Rate Observer. He explains why he believes the Federal Reserve’s easy money policies will wreak havoc on the economy and markets. Grant discusses the dangers of inflation creep and how to protect portfolios against is. He also mentions Annaly (LY) at the end of the discussion, as a income paying stock he likes.

CONSUELO MACK: This week on WealthTrack, while Federal Reserve Chairman Ben Bernanke reassures us that “inflation is not a problem,” our Financial Thought Leader guest strenuously disagrees. Author, historian, columnist and contrary-minded editor of Grant’s Interest Rate Observer, Jim Grant, on why even a little inflation is a dangerous thing, next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Federal Reserve Bank Chairman Ben Bernanke has told us on numerous occasions that we need not worry about inflation and that he views recent increases in commodity prices as “transitory,” and predicts they will “eventually stabilize.” As far as most of us are concerned, stabilization, if not reversal can’t come soon enough. Just about everywhere you look, the cost of basics- food, energy, medical and rent- are going up. Those headlines about record highs being set in commodity prices including wheat, corn and cotton and accelerating prices of oil and gas are hitting home. Gasoline prices at the pump have surged more than a dollar a gallon over the past seven months.

Then there is the purchasing power of our currency. As you can see from this chart, provided to us by crack technical market analyst Louise Yamada, the dollar has been in a two year decline versus the currencies of its major trading partners. Yamada expects the value of the dollar to continue to weaken. But what about the broad measures of inflation? What are they showing? Depends upon which one you look at. The chart we are about to show you comes to us courtesy of this week’s Financial Thought Leader guest. He is James Grant, editor of Grant’s Interest Rate Observer, a self-described “independent, value oriented and contrary minded journal of the financial markets.” It also happens to be a must read among top professional investors. This chart, which Grant titles “Inflation Webcast” compares the government issued consumer price index, which as you can see has been rising gradually since early 2009, to what’s called the “Billion Prices Daily Online Price Index,” a real-time index created by two MIT professors. As Grant’s reported, web-monitored prices jumped by 3.2% over the 365 days ended April 4th, considerably higher than the government’s 2.1% rise in the CPI over the 12 months ended in February. And according to MIT, inflation has picked up considerably over the last six months.

But what really sticks in Grant’s craw is that the Federal Reserve feels that 2% inflation is not only acceptable, but desirable. Au contraire says Grant, who says what he calls inflation creep is downright dangerous. I asked him why.

JIM GRANT: Well, yesteryear, not so long ago, in the ‘50s and ’60s- that is 1950s and ‘60s- there was a little fashion for the idea of just a little bit of inflation, 2 or 3%, some of these theorists thought, would be just what we needed. It would impart a lilt to our economy; it would make everyone feel a little bit more prosperous. You get up the morning with a little spring in your step because everything was getting higher, and this was called “creeping inflation”, and some of the advocates were of most learned segment of the provisorial class.
So this idea gained wide circulation, and no little credence, but it was met tellingly by the most orthodox central bankers as rank heresy. As a fellow of the Atlanta Federal Reserve, in fact, the president of that regional Federal Reserve Bank named Malcolm Bryan, and Malcolm Bryan regarded the premeditated creation of inflation by the Fed as an act of moral affront. It was a sin in his view, and he spoke in terms of… he spoke it with almost an evangelical fervor against it. So fast forward to the present day, which is not so far forward in the scheme of time, and creeping inflation by another name has been instituted as official policy. We call it “inflation targeting”. Monetary masters seek 2% a year, which in their self-delusion, they think they can deliver.

CONSUELO MACK: So what is wrong with a little inflation, and especially given the fact that we’ve just gone through a period of financial crisis, as a matter of fact, where inflation– there were eight consecutive months at one point of declining prices, and if the Fed’s, one of the Fed’s primary mandates is price stability, if, in fact, prices are declining, don’t you want to goose the pump a little bit, or prime the pump, and actually get prices so they’re relatively stable?

JIM GRANT: Well, I think one thing to ask is what do we mean, or what should we mean by this phrase “price stability”, which is so often heard and glibly spoken? And let us suppose that the modern world has delivered a kind of cornucopia, that with the addition of 200 or so million willing new hands in one country in Asia, and another couple of hundred willing, new eager hands, another country that the world’s labor force expands, that digital technology further makes us productive, and that the world supply curve, as the economists say, shifts benignly, that is to say at a given level of prices, there is more stuff for sale. More things more cheaply priced is, in fact, what you find when you walk into Costco or Wal-Mart. I’m astounded at the sheer volume of merchandise and its accessibility. So that’s one observation.
So that’s every-day low prices, right? It’s every day low and lower prices. Explain again, Mr. Fed, what’s wrong with that, is what many Americans spend all weekend looking for, right? And we are meant to understand our Fed, experts tell us, that this is somehow dangerous. So I would ask us all to reconsider if stable prices in a time of rising productivity growth and of profound historic expansion of the world’s productive apparatus, if stable prices ought not to mean Wal-Mart kind of every-day low and lower prices. So I think the Fed I think does not believe that. So to give us stable prices, it would have to create more credit to compensate for the Wal-Mart effect in retail, right? So it’s creating the dollars with which to lift the price level from what it would otherwise be, and in so lifting, it affects a widespread distortion of prices and structures in the economy.

CONSUELO MACK: But Jim, the other side of that Walmartization of consumer prices, and I can see that is considered to be a good thing, the other side of that is the Walmartization of wages. Address the issue of wage deflation.

JIM GRANT: It’s hard to find good work at a good wage, and a lot of people in this country are hurting, and it will be of little or no comfort then to know that their lot has frequently been the lot of people in a time of great economic and technological upheaval. Late in the 19th century was a time much like ours in that it was a time of almost miraculous advances and productive technology. Just imagine how much more efficient the world suddenly became with the advent, for example, of electricity, telephone, and telegraph. It was a world of wonder, and in this world of wonder many people were displaced from work; fewer people were necessary to produce what had been produced before these advances in technique and technology, and the people who were displaced had to find something else. They found it, and society moved on, the country improved, got richer. We are phenomenally richer than we were then. Again, this is a little sermonette that will please no one who is looking for– you know, this is not to patronize anyone who is suffering by saying that before you, have others gone just like you, but that happens to be the fact.

CONSUELO MACK: Let’s talk about inflation, and the fact that you were talking about this inflation creep, which you believe is dangerous, and the fact is that the Federal Reserve, and Fed Chairman Ben Bernanke, has targeted, and quite openly said that he’s targeted 2% inflation, and that they, the Feds, seem to feel, and a lot of the financial community seems to feel as well, that 2% inflation, it’s benign, and that inflation really isn’t an issue, and they don’t see any signs of inflation. Man, woman on the street, I see lots of signs of inflation. Are the statistics wrong, is their interpretation wrong? I mean, what do you think the given inflation rate is right now?

JIM GRANT: Sometimes I think that our experts make an easy thing hard. I would define inflation not as too much money chasing too few goods, which is arbitrary, but too much money, and the thing that the redundant segment of money chases, varies from cycle to cycle. It could chase skirts during the inflation of the ‘70s when everything went up at the cash register, or it could chase stocks and bonds as in our own day when the form of inflation is called a bull market, a very pleasing form of inflation on Wall Street. But the process of creating more money than is demanded for productive enterprise is inflation by any other name, and the form that it takes, as I say, is variable. And today, we don’t have to look too far to see many forms this inflation takes. The shiniest skyscrapers in our most prosperous coastal cities are priced as they were at the peak of the real estate lunacy of 2006 and ’07 all over again.

CONSUELO MACK: Which was news to me, but that’s an astonishing fact.

JIM GRANT: Commodity prices we know about- new highs in gold, new highs in silver.

CONSUELO MACK: Farmland and …

JIM GRANT: … farmland in Iowa. Grundy County farmland is now, some of these transactions are taking place at $10,000 an acre, which translates into some of the lowest rental returns on record for lease 40 years. So the Fed, I think, is unconscionably complacent about the consequences of what it’s doing, and let us not blink at what it’s doing. It has imposed the lowest money market interest rates that anyone remembers, and indeed, they could hardly go much lower, they being at zero. It has expanded its balance sheet into something grotesque all in the space of a couple of years. You know, these are monetary events that have never before been seen, and indeed, never before imagined.

CONSUELO MACK: The Fed Chairman would say and has said, and what much of Wall Street has said as well, is that the Fed needed to take dramatic action in a dramatic time, and in order to basically, you know, bail us out of an unprecedented financial crisis, or something not as great as we’ve had since the Great Depression, that it needed to do all of these things; and isn’t it great, in fact, that we’ve recovered to the extent that stock and bond prices are going up, and commodity prices are going up, and that, in fact, you know, is a good thing for people who work in those industries, and the household wealth of…

JIM GRANT: Well, Consuelo, you’re right, they do say that, they do say that, and it is certainly great for one class of society. It’s great for the speculative classes. In private testimony before the financial crisis inquest, Ben Bernanke, the Fed Chairman, he said, “I, speaking as a scholar of the Great Depression, I’ll tell you, that the events of 2008 were, in fact, the worst financial crisis is in American history, period. Twelve out of the thirteen largest American financial institutions were on the brink.” Now, we ought to stop and ask why that was so, if it was so. Let’s say it was. Our GDP was down less than 4% top to bottom during our Great Recession. During the Great Depression, our GDP was down in nominal terms, that is to say dollar terms, was down not quite, but almost half, yet most banks did not fail during the Great Depression.
During our piddling Great Recession, by contrast, we hear from the regulator and chief that we’re at death’s door financially, so something has happened to our financial institutions and to our way of doing business, which I think speaks to the monetary arrangements we have elided into. We have socialized risk, we have privatized gain, much to the relief of Greenwich, Connecticut, where our zillionaires live, and the unconscionable and indefensible fallout of this is that savers get zero on their savings balances, and the speculative classes get to borrow in wholesale markets at zero, and make their zillions all over again in commodities, stocks, and bonds. So I think that the Chairman is whistling by the graveyard, and he’s whistling by the graveyard in this matter of a 2%inflation rate being harmless.

CONSUELO MACK: And let’s put some numbers to that harmlessness of the 2% inflation rate.

JIM GRANT: Let’s talk about the Federal finances for a second. In the past five years- I’m using round numbers- the Federal debt is gone from quote $5 trillion to almost $12 trillion, yet during that period, thanks to these little miniature interest rates the Fed has imposed, the interest bill on the public debt has risen hardly at all. The government is paying like 2% plus on these trillions of dollars of indebtedness, and as percentage of federal outlays, interest expenses, like 6 ½ %, it is the lowest it has been in decades.
So if interest rates were to go back to where they customarily were, where they have been for the past five decades, say between 4 and 6%, our interest expense on this debt is going to be enormous. So people who say, “Ah, thank goodness for our federales, thank goodness for our masters in Washington, they rescued us from ourselves.” Well, yes, in a way, but the consequences of this rescue are enormous morally; let us not forget, financially and fiscally, and we haven’t finished reckoning them yet. They’ve barely started reckoning them.

CONSUELO MACK: I was going to ask you, so what are your inflation expectations?

JIM GRANT: So my expectation about inflation is that there will be a lot of it suddenly, and by a lot of it, I mean something that people can’t explain away, that the authorities can’t explain. I say 4 or 5%, let us say. So think about what that would mean. So much of our speculative apparatus is powered on these 0 percent interest rates- hedge funds, and the professionals who borrow…

CONSUELO MACK: Because that’s what they can borrow at, right.

JIM GRANT: Yeah. Why wouldn’t you? I can’t blame them. So they’re borrowing at nothing. Banks are paying nothing on deposits, so banking margins are fat. You know, we are back to rates of return in banking capital we haven’t seen before. We are about on the verge of all-time highs and bank profits thanks in part to this uniquely, this unusually– I use “unique” a little too loosely. Nothing is unique in finance. This astoundingly twisted interest rate structure. So much of the structure of values and prices in financial markets are based upon an interest rate structure that is, you know, beyond strange, and it certainly can’t be supported forever.

CONSUELO MACK: Tell me what this means as far as our investment, investment strategy is concerned.

JIM GRANT: Nothing is going to be good. So think how hard it is to hold back a cash reserve in this time, when cash yields nothing, it yields a negative because the inflation we all see is something more than zero, right? Cash yields zero. That’s hard. It’s doubly hard because your stupid neighbor who doesn’t watch this program is making a lot of money in the stock market. How hard is that not to participate… you can’t not do it.

CONSUELO MACK: Just like the housing market a couple years ago.

JIM GRANT: Right. But stop and think what it would mean if there were 4%, a persistent and undeniable, you can’t explain away this 4% inflation rate. It would mean that the Fed would clear its throat and say in the marble mouth way it speaks, the party is over.

CONSUELO MACK: Right. And they do it pretty quickly.

JIM GRANT: So suddenly, you know, the commodity markets have been the great haven for inflation-fearful people. I don’t think they do very well in this moment of reconsideration of interest rates and leverage. So suddenly everything would fall out of bed, I think. I think gold would ride itself, silver would ride itself because their money, I think, would come into their own at the end of the cycle of disillusionment. But for a time, I think there would be terrific chaos in investment markets, meaning terrific opportunities. People would be selling stuff they shouldn’t sell, so people with liquidity, which again, pays nothing and is impossible to hold when your friends are getting rich without it. The liquidity would come into its own very suddenly.

CONSUELO MACK: So cash would no longer be trash…

JIM GRANT: Right.

CONSUELO MACK: …cash would be precious and valuable.

JIM GRANT: It would. Yeah, even dollar bills, which I’m in a habit of disparaging, because they’re paper.

CONSUELO MACK: So, Jim, the gold standard. You’ve been an advocate of a gold standard for a long time.

JIM GRANT: Yeah. I was an advocate of the gold standard when there actually was a gold standard, in 1914. It would take a terrific collective rethink, and it would take a great unfrocking of the authorities and the experts who now not only, who don’t even disagree with us. It’s worse. They don’t just say, “Grant, you’re wrong”, they say– it’s a smiling condescension one can’t stand.

CONSUELO MACK: Right. They dismiss it.

JIM GRANT: Right. Sorry, right. But I think, if I’m right, and I think I am, if I’m right about the dynamics of the Federal debt, if I’m right about the absence of a check on our continued running of the most profligate deficits, and if I’m right about the social and political immorality of monetary arrangements as they now exist- that is to say savers getting nothing, and the speculators getting most everything- it seems to me not only is the mathematics of a gold standard compelling, but also the politics are compelling.

CONSUELO MACK: So, Jim, you have in the past, when you’ve been on WealthTrack and in other places, have bemoaned the fact that you are viewed as a bear, because in Grant’s Interest Rate Observer, you always have a long idea, and usually have short ideas, as well. So what’s your long idea?

JIM GRANT: I’ll tell you what we’re looking at right now, we’re looking at commercial real estate. What is new and what is really interesting about the commercial real estate market these days is there is enormous spread in returns between what is popular and liquid, and shiny, that is so-called trophy properties in the big cities, that’s on the one hand, versus less liquid, more out-of-the-way properties outside–

CONSUELO MACK: Tarnished?

JIM GRANT: Some of them tarnished, but some of them are just plain fine, but they are not at the corner of Park Avenue and 54th Street. So an office property recently changed hands in Milwaukee, the first such sale in a year, such as the ill-liquidity of the commercial real estate market. It changed hands for a cash on cash return without financial leverage of 8%. This is fully leased, ten years, one tenant, sounds like a pretty substantial property, and 8% versus the 4 or 5%. Increasingly 4% you get on these core properties. So we intend to do a great deal more digging, and try to surface investments that offer good valuations now, and that offer some inflation protection because rents will escalate as the cost of living goes up. So that’s our new idea.

CONSUELO MACK: So what is an accessible investment for individuals, for instance, who can’t buy a building, a commercial building?

JIM GRANT: There was a great income famine in the world, right? You can’t get any return on your savings. You look around, even junk bonds have junky yields.

CONSUELO MACK: Right.

JIM GRANT: High yield isn’t high yield, high yield is low yield. So what to do? So I own this personally, for whatever it’s worth. I’ve been friends forever with the management, I think they’re solid people, something called Annaly, N, as in Nancy, LY is the ticker–

CONSUELO MACK: And we know, we’ve had Mike Farrell on the founding of the CEO–

JIM GRANT: It trades around book value, it yields something in the teens, it buys mortgages with borrowed money. The leverage is conservative as mortgage real estate investment trust. Leverage is reckoned. These people have been through the cyclical mill, they have seen what it’s like to have been on the wrong side of too much leverage, and I think they’ve had the fear of God instilled in them. So they yield in the teens.
So how to get income if you’re an individual. Well, you can go out and buy REITs, yield say 5 or 6 %.You can go out and buy dividend-paying stocks that yield 2 or 3 %, and the stocks are priced reasonably at 15 times earnings. You can go out and buy municipal bonds that yield 3 and 4%. Some of them aren’t so bad, some of them are, in fact, quite good. The municipal bond market is immense. You can get some comfort, a credit quality in municipal bonds. But to do all those things, you’re not talking about a great deal of income.
My idea is that perhaps one goes out and buys rather more of Annaly, and rather less of the other things, keeps a substantial cash reserve for that moment, which I think is coming, in which the realization of a new inflation cycle shakes up valuations and prices across the broad spectrum of financial assets, and you have the liquidity ready to take advantage, to buy things on the cheap.

CONSUELO MACK: Jim Grant, it is such a treat to have you on WealthTrack again.

JIM GRANT: Consuelo, thank you. I’m so delighted to be here.

CONSUELO MACK: It is not only a pleasure to talk to Jim Grant, it is also a treat to read him. He has a new book coming out next month called Mr. Speaker!: The Life and Times of Thomas B. Reed. As one reviewer put it: “No period in American history is more colorful or relevant to our own- for better and worse- than the Gilded Age. James Grant brings it all memorably to life.” As soon as I can get my hands on Mr. Speaker!, it is going on the WealthTrack bookshelf!
Next week we have a double header with an up and coming financial thought leader, Strategas Research’s Jason Trennert, and a highly rated global equity fund manager, PIMCO’s Chuck Lahr. To see this program again please go to our website, wealthtrack.com, and while you are there, check out WealthTrack Extra, where you can listen to a podcast of my recent interview with wealth advisor Chris Cordaro, who has some timely tax tips for this year and next. Thank you for taking the time to visit with us and make the week ahead a profitable and a productive one.

Source: Wealthtrack, April 15, 2011.

Tags: Commodity Prices, Consuelo Mack, Dangerous Thing, Easy Money, Federal Reserve Bank, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Food Energy, Gasoline Prices, Gold, Hitting Home, Interest Rate Observer, James Grant, Jim Grant, Major Trading Partners, Market Analyst, Purchasing Power, Record Highs, Seven Months, Thought Leader, Wealthtrack
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Mr. Market? (Saut)

Thursday, September 9th, 2010

Mr. Market?
by Jeffrey Saut, September 7, 2010

“On the eve of the signing of the Revenue Act of 1951, which lifted the top marginal rate to 91% from 84.4%, George B. Haynes of Evanston, Ill., wrote a letter to the editor of Barron’s excoriating the Truman administration. ‘I am a bear on America for at least the next 10 years,’ Haynes declared. ‘The financial ignorance and recklessness of Congress and the administration, the willingness to sacrifice the country to continue the Democratic Party in power, the enormous Federal debt, the high taxes, the readiness to give billions of taxpayers’ money to foreign countries can have, in my opinion, but one result, i.e., the worst collapse this country has ever experienced, though I do not know when’.”

…Jim Grant, Grant’s Interest Rate Observer

I revisit Jim Grant’s elegant prose this morning due to overwhelming requests to put in writing what I said in my verbal strategy comments early last week. Manifestly, the country has been going to “hell in a hand basket” for years, but the question is – when will it get there? This year, investors’ moods have been particularly dour as most missed the bottoming process of October 2008 through March 2009 and only began to tiptoe back into equities late last year. That strategy left participants pretty disgruntled as Mr. Market has violently see-sawed his way through 2010 with the result being no upside progress. Combine that with a vicious political environment, and a decelerating economic backdrop, and is it any wonder investors don’t want to hear about stocks? In fact, it has not been since the end of 1974 I can recall investors being so unwilling to discuss equities!

In December of 1974 the D-J Industrial Average (DJIA/10447.93) was changing hands at 577.60. That price-point turned out to be THE nominal “price low” for the senior index. Nevertheless, the DJIA remained mired in the same trading range it had been in since 1966 for another eight years. Interestingly, while the “price low” occurred in December of 1974, the “valuation low” did not arrive until 1982 with the DJIA trading below book value, a P/E ratio around 7x, a dividend yield of 6%+, and an earnings yield (earnings ÷ price) approaching 14%. Importantly, however, the December 1974 “price low” of 577.60 was never violated, as can be seen in the nearby chart. Readers may recall that following the Dow Theory “sell signal” of September 1999 I suggested the Dow might be in for a similar pattern to that of the 1966 – 1982 experience. I still feel that way; and so far it’s been a pretty good “call.” If that déjà vu script continues to play, I think that while the DJIA made its current-cycle nominal “price low” in March 2009 (at 6547.05), the “valuation low” won’t happen any time soon.

Accordingly, burned by a manic Mr. Market since 2000, investors have been checking out of the stock market, as from 2007 – 2009 U.S. investors took more money out of stock mutual funds than they put in, the first such three-year skein since the 1979 – 1981 bottoming process. Indeed, faith in equities has all but been lost with investors on track to pull more money out of stocks in 2010 than in any year since the 1980s with the exception of the 2008 “financial melt-down.” As my friend Craig Drill, eponymous captain of Craig Drill Capital, writes:

“Investors have continued to flee equities to embrace the (alleged) ‘safe haven’ of debt instruments. Although the return is low, the probability of the return of capital is high (if held to maturity). . . . The S&P 600 (the small capitalization stock index) fell 10% from (its) peak in late July to Augusts’ close. At the same time, 10-year Treasury yields fell to below 2.5%; Norfolk Southern sold 100-year bonds at 5.95%; and IBM issued 3-year notes at an interest cost of 1%. (It appears) investors are willing to take duration and credit risk, but not equity risk.”

To be sure, Mr. Market is a manic depressive fellow. As Warren Buffett elaborates on Benjamin Graham’s famous Mr. Market analogy:

“An ever helpful fellow, Mr. Market stands ready every business day to buy or sell a vast array of securities in virtually limitless quantities at prices that he sets. He provides this service free of charge. Sometimes Mr. Market sets prices at levels where you would neither want to buy nor sell. Frequently, however, he becomes irrational. Sometimes he is optimistic and will pay far more than securities are worth. Other times he is pessimistic, offering to sell securities for considerably less than underlying value. Value investors, who buy at a discount from underlying value, are in a position to take advantage of Mr. Market’s irrationality.”

Tags: Changing Hands, DJIA, Economic Backdrop, Elegant Prose, Evanston, Excoriating, Federal Debt, Foreign Countries, Going To Hell, Hand Basket, Haynes, Interest Rate Observer, jeffrey saut, Jim Grant, Marginal Rate, Overwhelming Requests, Political Environment, Recklessness, Revenue Act, Truman Administration
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James Grant: Recovery’s Surprising Strength Will “Jar” People

Wednesday, June 30th, 2010

The following is a transcript of a WealthTrack interview with James Grant, esteemed editor and publisher of Grant’s Interest Rate Observer. In this must read/view, Grant argues that today’s pessimism is overdone and believes the economy will recover surprisingly strongly, and will jar people. He also discusses his thoughts on gold and investing in general, and shares a few ideas, making for a thought provoking read.

CONSUELO MACK: This week on WealthTrack, why ballooning government debt, the diminishing value of the dollar, and the rising treasure of gold are all on the mind of contrarian James Grant, the editor of Grant’s Interest Rate Observer. This financial thought leader is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. “Those who cannot learn from history are doomed to repeat it.” Eight decades ago, the Dow Jones Industrial Average plummeted over four trading days, dubbed ever since as black: Black Thursday, October 24th, 1929; Black Friday, October 25th; Black Monday, October 28th; and Black Tuesday, October 29th. Their cumulative 25% Dow decline would deepen to 90% by the time the market hit bottom in July of 1932. It then took until 1954, another 25 years, for the Dow to reach its pre-1929 levels. What relevance do these events of eight decades ago have today, considering the Dow is trading far above its March 2009 low?
This week’s WealthTrack guest is an excellent student of the past, who pays particular attention to the forces that periodically buffet the world economy and markets: bubbles and busts, loose and tight credit, expanding and contracting debt, rampant speculation, and extreme mood swings from euphoria to pessimism and back.

He is James Grant, editor of the biweekly newsletter Grant’s Interest Rate Observer, a self-described independent, value-oriented and contrary-minded journal of the financial markets. A financial thought leader, Jim is one of Wall Street’s most astute, erudite and articulate observers. He is also the author of six books including a wonderful biography of the nation’s second president titled John Adams: Party of One and his most recent Mr. Market Miscalculates: The Bubble Years and Beyond . In an interview conducted last October, before GDP statistics confirmed the U.S economy expanding well above the pace predicted by most economists, I asked Jim why he, a notorious glass half-full kind of guy, had recently gone from economic bear to bull
How zippy is the recovery?

JAMES GRANT: Pretty darn zippy. The finest expression was that of a long deceased economist named Pigou, a Brit actually, sounds French, who said that the error of optimism dies in the crisis; it is followed by the era of pessimism, which is born not an the infant but a giant. Which is a wonderful expression of the human tendency to overdo it. So all of the new era cats find out that they didn’t get the memo. They were all wrong. There was in fact a debt problem. It burst in their faces. What they do now? They are disconsolate, they inconsolable.
Nothing like this has been seen in the history of the world, the patient will not live sadly. So it’s like that. And especially they overdo it on the downside and I think that goes for our esteemed government, especially the Fed, which not only didn’t see it coming but also didn’t comprehend it once it splattered all over its face like a cream pie.

CONSUELO MACK: How robust do you think the recovery will be?

JAMES GRANT: I think it’s going to surprise to the upside and so old am I, Consuelo, I’m not going to give a number, nor am I going to give a date, but I think that it’s going to be surprisingly strong. The consensus is for next year to generate growth in our gross domestic product of about 2.5% after adjustment for price fluctuations. I expect it will be much better than that. Certainly for a couple of quarters which I think will jar people- they’ll say, wait, that was an unauthorized, who said they could do that? And you can see some of this in the making. The earnings call recently from Caterpillar featured the information that the dealers had run down their stocks to half of the usual and if they were only to restock to the little bit of the normal, there would be a big sales boom and CAT was kind of venturing that not implausible outcome next year would be growth of more than 10%. And I could see that throughout the economy, and people are expecting much, much less.

I think that the wisest course for investors is to heed the advice from the scripture of value investing, the Graham and Dodd idea that we can not know the future, therefore seek a margin of safety in investments in the present. That is to say, we can’t know really what’s going to happen in 2010, let alone 2017, but we can observe two things. We can observe the opportunities that are in front of us, in the securities as they are now priced, and two, importantly, they didn’t say this but I will, you can observe how the world is positioning itself for an expected outcome.

Tags: Bill Gross, Biweekly Newsletter, Black Friday, Black Monday, Black Thursday, Black Tuesday, BRIC, BRICs, Canadian Market, China, Consuelo Mack, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Editor And Publisher, ETF, ETFs, Extreme Mood Swings, Gold, Gold Bullion, Independent Value, India, Interest Rate Observer, James Grant, Oil Sands, Rampant Speculation, Thought Leader, Tight Credit, Treasure Of Gold, Wealthtrack, World Economy
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