James Grant, editor of the 35-year-old Grant’s Interest Rate Observer, has been in Sydney this week and on Thursday he put on a lunch for his Australian subscribers, of which I have been one for a long time.
I suppose I identify with him to some extent: he started as a journalist on the Baltimore Sun about the same time as I started on The Australian, joined Barron’s in 1975 before starting his own newsletter in 1983, as I have done twice now.
He said of the 1980s when he started his newsletter: “Where most observers of the 1980s emphasized the rewards, we dwelled mainly on the risks. In the junk bond, in the reckless patterns of bank lending, in the dementia of Japanese finance, in the riot of the Treasury’s borrowing, we saw not the bull markets of today but the comeuppance of tomorrow.”
He hasn’t changed over the years, which means he has foreseen more comeuppances than have actually occurred. Nevertheless he is always worth reading.
He opened his talk this week, as you’d expect, with comment on interest rates: “35 years ago I started a publication devoted to observing interest rates, but the business model has failed. We seem to no longer have interest rates”.
Here are a few other quotes:
“Fixed income securities are inherently less volatile than equities, therefore to equilibrate the risk in a portfolio of stocks and bonds you can prudently lever off the debt portion of that portfolio.
“There have been some very very smart and successful people implementing this strategy – they have done very well by it – and I think that their historical grounding is the observation that rarely do stock prices and bond prices fall in tandem.
“But that has happened, and if it were to happen again there would be a very dramatic shake-out in the bond market as levered bond positions become unwound.
“And I think also by way of umm, just suspicion, I think there is fair reason to assume that with rates so low and with the need for income so high that a lot of people are taking up a lot of leverage and applying it to a lot of low-yielding positions. That’s just an assumption or a suspicion.
“So I think, yes, there is a lot of leverage in the fixed income markets and this will be susceptible to a great deal of distress if there is an uncontrolled rise in rates as opposed to a very deliberate one.”
On crypto currencies:
“For me, crypto currencies are a little bit like rugby – it’s for other people. I see crypto currencies as finally something that makes fiat currencies look really good”.
On bonds and money:
“Bonds are a promise to pay money, but what is money? Central banks have materialised $14-15 trillion since 2007. The cost of production was nothing, the effort is nil. This money, this credit, much of it is digital representations of credit that lies in central bank deposit accounts. It has not ventured out of finance into high street economies.
“So you lend money to almost definitionally improvident governments over the course of decades at a nominal interest rate lower than the … or not much higher than the rate of inflation that the central bankers are straining to attain through the production of this digital scrip.
On real estate:
“Those who are bearish on real estate finance and structuring of real estate credit are wont to ask: ‘can you afford your own house?’ Can a person living in a house afford to buy that now? Increasingly people cannot afford to buy their own houses.
“How does this work in Australia? What is the typically ratio, for example, of loan to value in a mortgage transaction?”
(There were a few attempts to answer this, without much lot of success).