James Grant: Why Market Risk Is Near The Highest In History

Famed market analyst and historian James Grant is no fan of the current policies of the US Federal Reserve:

Distortion in the cost of credit is the not-so-remote cause of the raging fires at which the Federal Reserve continues to train its gushing liquidity hoses. But the firemen are also the arsonists. It was the Fed’s suppression of borrowing costs, and its predictable willingness to cut short Wall Street’s occasional selling squalls, that compromised the U.S. economy’s financial integrity.
At age 74, having lived through a number of economic booms and busts as well as having authored numerous books on the history of financial markets, Jim sees the degree of speculation, overvaluation and malinvestment in today's markets as about as bad as it's ever been.

He lays much of the blame at the feet of the Fed and its global central bank brethren, who collectively through their intervention have suppressed interest rates to their lowest levels in all of recorded history:

<img class=“aligncenter size-medium” src=“https://peakprosperity.com/wp-content/uploads/2021/09/5763fc8791058423008c9ad1.jpeg” alt="“History of interest rates” width=“969” height=“579” />

This has resulted in all sorts of unnatural distortions and deformations that are hollowing out our economy and social structure.

As Jim recently wrote:

Needing income, investors will take imprudent risks to get it. And if 2% invites trouble, zero percent almost demands it.
Not only do 0% interest rates act as "molasses" on growth by gumming the system up with zombie institutions and toxic malinvestment, but it imperils the social good.

Savers and investors, increasingly desperate for yield, are forced to accept worse and worse choices in attempt to stay afloat.

Under this regime, the rich benefit disproportionately at the expense of everyone else AND it creates a “hyperinflation in the cost of retirement”. This accelerating war on the 99% can not stand for much longer without serious consequences and repercussions.

We are thrilled Jim was gracious enough to come on the program this week. It was a huge honor to finally get to interview him (after years of attempt) and I can tell you firsthand, not only is he prodigiously smart, but he is ridiculously nice. A true class act.

But simply put, he’s one of the most respected market analysts and historians on the planet.

So when an expert like him warns that today’s markets are at one of the most dangerous levels of speculation in history, we all better be paying close attention:

Anyone interested in scheduling a free consultation and portfolio review with Mike Preston and John Llodra and their team at New Harbor Financial can do so by clicking here.

And if you’re one of the many readers brand new to Peak Prosperity over the past few months, we strongly urge you get your financial situation in order in parallel with your ongoing physical coronavirus preparations.

We recommend you do so in partnership with a professional financial advisor who understands the macro risks to the market that we discuss on this website. If you’ve already got one, great.

But if not, consider talking to the team at New Harbor. We’ve set up this ‘free consultation’ relationship with them to help folks exactly like you.


This is a companion discussion topic for the original entry at https://peakprosperity.com/james-grant-why-market-risk-is-near-the-highest-in-history/

Apologies for the audio quality issues on this video, folks.
Murphy’s Law struck, tossing several different technology malfunctions at us when recording this. They’ve been since fixed and shouldn’t happen again (fingers crossed)

Just sayin…

Zero need to apologize! You are landing interview whales and then giving us all one helluva content-data-driven show. Yeoman’s work, sir.

Nice job landing him! I’ve respected him for many years.

This video is very detailed and will take a long time for a rube like myself to fully absorb. It’s great stuff. Initial reaction:
I agree the “low interest rates” conundrum is key. Look at the completely insane CBO predictions for the last 10 years - not just wrong, but crazy wrong. At what point do we finally acknowledge that “this time it really is different”?
Hence I’m extremely skeptical of the endless prediction of a long-term market crash. Hell, I’m skeptical the Fed is even in control anymore, watching them flail around with interest rates…we all know real fiscal stimulus is on the way.
The data I read? We are in a completely different era (e.g. demographics/immigration/US reserve currency status). Thus, I find Grant’s traditional approach quaint in that it has not done a good job of predicting actual results.
People always skim past the disclaimer “Past performance is no guarantee of future results”. I don’t! I think the data proves our inability to predict this market. We have seen many smart and formally successful value investors loose their ass in what may be the largest bull market in history. Why? They are using methods of value that have worked for the last nearly 100 years but clearly no longer do.
Myself, I think it even possible (albeit unlikely) this demographic cohort may never see a “normal” bear market their working lives merely due to continuous monetary expansion and wealth transfer from one cohort to another (punctuated by flash-crashes and inflationary waves to eat away at the USD value). But predicting how all this ends using traditional models is, IMO, proving to be impossible. All one can do is hedge with extreme trepidation and await the endgame.

I’ve been a fan of Jim Grant’s for a very long time, like from the 70s and Wall Street Week with Louis Rukeyser. He was often “set up” then as being “quaint” and not “with it”, as he perpetually tried to point out the long-term consequences of non-market driven interest rates. Trouble is, Wall Street is about instant gratification, and Grant is an historian. Like the Easter Island analogy Chris uses in his current blog, things are great until suddenly they aren’t, because people just don’t see, or want to see, the long-term consequences. The effects are a process, and we’re the frogs in the nice warm water that’s getting warmer. I notice Jim hasn’t lost his self-deprecating humour about where reality is pointing versus the jazzy effects of manipulation. My favourite cartoon on this predicament:

…with Jim Grant I always feel as though I am learning from one of the very best teachers on the planet. He is so well respected and speaks volumes when he does speak. He is a very bright Man so becomes the type of person I gravitate to.
In saying all of this I can’t help but observe he is just a teacher. He doesn’t have a crystal ball and can’t time things with absolute certainty. To be fair no one can but, he is spun as the experts, expert.
I too believe we have a date with destiny but, every generation can say the same thing. That if not greedy you can make tremendous wealth and if you move these gains into areas that can produce a life of certainty, debt free and a self reliance should you stay disciplined and become debt free and resilient and hang onto the jobs that really make a difference.
For us we have taken advantage of this. For the last 10 years we knew that the Fed and Congress would not stop, that they would print out of every correction the necessary funds to make everyone richer or at the very least whole again from previous corrections. It doesn’t take long either to go from the worst Financial crisis in history at S&P 666 to 10 years later to over S&P 3300! That’s real wealth folks so if you were disciplined you have made all your dreams come true and you didn’t need to be a rocket scientist to garner these funds. You just need to plan.
In the moment for us is debt free, combat future inflation by growing our own food and raising our proteins. Then we factor for and plan our property tax liabilities and try and produce optimally the energy we will need for the conservative use of the power we will need months out. So, if I can subsidize my electric bill then that’s a plus. If I can create more than I use then I am way ahead of the game and if I can sell my excess power then even better.
This is why Grant is so important in our lives. He has his beliefs, he expresses the push backs and raises the Red Flags for all to digest but, we still have to react to what is happening on a daily bases. If you do not believe that a Depression or market correction is imminent then you MUST react to what the Fed is doing (printing Trillions) and what Congress is doing which is allocating trillions directly marketing certain areas of the economy. Every dollar has an add on effect and becomes way more as it supports so much in the spin off economy. Combine these two great forces (Fed actions and Congress actions) together and every dollar is being pushed through the system and by definition will end up in my Etrade account in some percentage increase year in and year out.
In the last 10 years (12 actually, but I waited a bit to get back in during the post Financial Crisis) Barb and I have done incredibly well. To you our benefits may be much less than you need but to us we never dreamed for this to happen with such speed and to have had all we planned occur and become our reality that we felt would still be an ongoing process. Truth is we are set except there’s no such thing as set.
Barb is a nurse manager, she works the Ortho-Nuero floor at her hospital. She has 35 years of a distinguished career. She is our bread winner as we can count on her salary and benefits (especially medical and dental) to pave the way forward to something we have dreamed and planned for for the 48 years we have been together. She is the reason, the key, and we have paid ourselves her entire career first. My wages have been the money that is most discretionary, the fun money you could say. The risks in the market are something I enjoy, it creates and amplifies my need for a competitive balance in life. While I made less than Barb over the years it has been the funds that allowed us to risk at the appropriate times. When things seem to be a no brainer and ended up rewarding us many times over than our most conservative viewpoints.
To conclude, it has been the Jim Grants of this world who have taught me that there are two sides to be on when standing in front of the fence. It is up to me on what side I need to be standing. I decide by working hard on my end, to prepare by listening and reacting to the Martenson’s, Grants, Tom Lee’s and all the very best in todays Financial world, too numerous to mention. This gathered information only requires time and focus as the good Lord knows is practically free, all I have to do is study and give a huge assist to my gut that really gets most of my credit. I am not Rich but, I am resilient, will always remain debt free but, sometimes the equity we now have in things is better served turned into the high dollar return, holding tightly onto this cash, and then deploying the cash holdings when times look better to do so. For instance: If I have a home that is worth $250K and I can go get this debt free cash and simply hold it and wait until this now $250k home can be purchased at half the price then I bank an extra $125K just by putting this cash aside then that’s what I’m looking to do, especially at these interest rates… If I set all the equity aside and be conservative then I will benefit in time, no doubts about this. All based on needs of course and because I am 65 now I can see clearly the years pretty much left and I don’t have the desire to do the things I have already done. I want to putts and work on things I enjoy but at a slower pace. Work smarter in other words.
Adam, your work has been just outstanding. My goodness, week after week you have paraded the very best we could ever expect to teach and give mature thoughts too, week in and week out. You have created something that I cannot wait to watch every Sunday morning (usually at 2:30 am as I love the early, early mornings and the quiet to put this week behind me., so thank you for this. Lord knows the teaming up with Chris and your combined efforts have created something very special for such a diverse group of people here at PP. My prayers go out to the Trumps, and all those who have tested positive on this complex Honey Badger Virus. Lots of mistakes were made by the President (I love Trump and I’m an Independent) and his followers. I hope this turns into a wonderful leadership policy switch. Wear a mask, space properly, wash hands, eat vitamin B, C and Zinc. And just chill for this Fall and Winter and then we see a complete change by Spring. It isn’t so much to ask and frankly will save your life possibly. This all boils down to logic, to being cautious and from there all things will work themselves out for the betterment of everyone. It really is time to get ahold of this beast. “it didn’t have to be this way”. So true Chris-Adam.
Peace BOB

You are one of my favorite commenters on this site. Well done. Love the cartoon…so true. Peace

At 9 min Adam lobs an excellent Q about low interest rates, and Grant explains how low interest rates may actually drive the opposite of stimulus if savers start hoarding cash (since there is no interest rate benefit to deploying it).
This has got me pondering. A known driver of our crazy markets that lack fundamental value (since at least the year 2000) is the wild disparity of wealth between generations. Key points: boomers a) are deploying an historically large share of the economy, b) have unique experiences in their formative years of double-digit inflation, c) are arriving at mental “old age” much later than the prior Greatest generation, so are staying invested longer. d) boomers are the last generation to use active investment managers, who are being replaced by index funds little by little, which are lulling the younger generation into investing from their paychecks for retirement without even worrying. Markets go up forever, right?
Out of these, I’ve come to believe “D” is key missing link explaining this insane endless bull market. But now I am wondering how much Grant’s “low interest rates creates malinvestment” has to do with it? I would be interesting in anyone’s thoughts.
UPDATE: Adam, with your uncanny ability to land interview talent to this blog you might keep Michael Green at Logica Capital on your horizon. A theme of this blog since 2009 (when I first followed) is its understanding that true “value” is nowhere in this market and the “everything bubble” (sans perhaps gold & oil) in full swing. Green built his entire investing platform on this understanding and has good rational reasons for “why” it’s all happening.

Interest rates are an example (if not THE example) of popular misunderstandings of economics. The standard theory posits that dropping interest rates a few % in a crisis/recession gooses the economy enough to pull it out of recession sooner and with less damage.
Despite the widespread perception otherwise, people’s response to interest rates is not linear.
At the margin, a drop in interest rates is supposed to make marginal business investments suddenly profitable and hence move forward. But is that the case?
A business has to borrow money at a rate lower than its expected rate of return in order to be profitable. Going from 20% to 18% lending rate has no impact on a business with an expected rate of return of 6%. Both rates are too high, so dropping the rate has no impact.
If the rate dropped from 8% to 4%, suddenly that same business would be profitable, and the venture would move forward.
Lowering 4% to 2% would likely also launch some new ventures, but these are very risky ventures if the expected rate of return is so low. Below that, I wouldn’t expect new businesses to be impacted.
Another tradeoff is for existing businesses between capital investment (borrowing to buy another machine for the assembly line) vs hiring another set of hands to work the assembly line. So low interest rates heavily favor automation over employment.
And as Grant mentioned, savers react as well. If I can get 20% in a AAA bond, I’d pull all capital out of the stock market. Why take on any risk?
Drop the rates below the long-term S&P return (8%?) and it’s worth investing in stocks. But go too low, and savers pull back on consumption because they have to save more, knowing they can’t get safe returns for retirement.
There’s probably a minimum interest rate where investing and consuming are preferred to saving. And that’s probably a function of inflation expectations.
So the bottom line is the Fed and most economists are operating from the wrong model when conceptualizing how interest rates impact the economy. They’re trying to impose a simple, linear model on a complex, dynamic, chaotic system.

A friend recently sent me a video of an incredible display of magic. I could not discern how the magician did what he did. This lead me to thinking. I wonder, if a lone magician can produce such an effective illusion, what kind of illusion and subsequent influence can the monied and powerful PTB produce? That led me to thinking about a document that I had posted in the past, “Silent Weapons for Quiet Wars”, which discussed the concept of economic shock testing.

I typed "economic shock testing" into Google but nothing of significance came up. Then I went to DuckDuckGo and typed in the same words and, lo and behold, first up was the document, "Silent Weapons for Quiet Wars". Coincidence? I think not. Google is not our friend and is ever more tightly controlling the narrative.
Anyway, here's the document. For those who have never seen it before, read it and see if it doesn't apply to the COVID Crisis. For those that have, like myself, it's worthwhile to review the document as a refresher into what may very well be taking place.

What if the stock market doesn’t go down (in nominal value) but just because hyperinflation is just around the corner?
After all many governments around the world are just printing money to give it away to people that aren’t working.
Warren Buffett gold mine investments suggest he may foresee inflation coming so he’s hedging against it.

Redneck, a really interesting paper that addresses your points is The Anatomy of Double-Digit Inflation in the 1970s by Alan S. Blinder, Fed #2 guy in this era.
Blinder shows how Volker, although lauded as a hero for stopping inflation, was actually the both arson and fireman and how said inflation was caused from restricting our production via high interest rates thus driving our industry overseas where they could build the industry needed to service our burgeoning population. What is sad is our current Fed learned all the wrong lessons from this unique time in history and is making the opposite mistake today, trying to drive consumption without the population needed to consume it, creating maleinvestment and bubbles. Grant covers this well in the interview here. Anyway, it’s a fascinating paper, one that flies in the face of the traditional narrative I’m susceptible to, how debt and coming off the gold standard is what caused said 1970s inflation.
BTW, the end of the interview where Grant described the role of gold was awesome. I’ve never heard it said better. He’s a class act.