Jim Grant Warns of a Bond Selloff Lasting for Years
The muscle memory of the Zirp era is taking a long time to fade.
Jim Grant founder and editor of Grant's Interest Rate Observer and a long-time financial commentator talks to us about why we're at the beginning of a longer-term trend of higher rates that could last decades.
He argues that investors will struggle to shake off years of "buy the dip" behavior, a ZIRP mentality, and a misplaced faith in the Federal Reserve.
Well, the thing that I keep coming back to as striking is, if you told someone, you know, at the beginning of January, 2022, you know, when rates were at zero, that by spring 2023 we'd be at 5.25% on the Fed funds rate, then everyone’s like you know, the market would've crashed, we'd be in recession, etc. And yet here we are with more than 10 million job openings.
And wouldn't you suppose that the home builders would've taken a big hit. But instead, home builders are right behind Nvidia as the stocks.
Because rates have kind of put interest rate handcuffs on people who are in possession of one of these sweet mortgages, beginning with the numbers two or three or four.
And so there's a bureaucratic dogmatism in the Fed. They've got these algebraic models, my goodness, how formidable they look on a blackboard, but they don't actually function very well so far as the future's concerned.
So existing house prices are down, new house prices are down from their peaks, you know, 8%, 10% of memory serves.
Why do people think that there's something special about private credit?
In science, you know, progress is cumulative. You stand on the shoulders of giants, but financial history is invariably cyclical and recurrent, which helps a lot if you can recognize patterns.
What is the thought process of an investor who says “I'm gonna buy Nvidia when it's up 40% in three weeks?”
Interest rates fell from 1981 until a couple of, actually a couple of weeks ago. It's called 40 years. So that's a lot of muscle memory. Central banks have intervened predictably until fairly recently when markets shuttered. Look what happened in 2019. You know, the repo market, this obscure recondite thing caught a head cold in September and the Fed resumes QE and said it's not QE. Yeah, it was QE.
So naturally people assume that the upside is the side to be on.
I bet still there's like a hundred billion of bonds priced to yield less than nothing worldwide. But there were $18 trillion, I think at the peak.
Because this seems to be the bet that everyone's making, right? That inflation isn't coming down and so the Fed's gonna have to hike and inevitably that will lead to recession and then cuts.
So yeah, we could have a recession and rates pull back and then they resume the rise.
Fed will be revealed as a bunch of well-intended people who are involved in a kind of pseudoscience, and people will wake up one day and say, “yeah, I've noticed that my weather app is accurate for a day or two, but out 10 days, I wouldn't bet my dog's life on it.” And yet we listen patiently, even reverentially to the economists at the Fed to talk about what's gonna happen next month or next year.
They know nothing. I mean, the future is a closed book.
Bloomberg 5 juni 2023
James Grant: “unintended but not entirely unforeseeable.”
https://englundmacro.blogspot.com/2023/05/james-grant-unintended-but-not-entirely.html
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