DiscoverThoughtful Money with Adam TaggartJim Grant: Inflation & Interest Rates Are More Likely To Rise Than Fall In The Years Ahead
Jim Grant: Inflation & Interest Rates Are More Likely To Rise Than Fall In The Years Ahead

Jim Grant: Inflation & Interest Rates Are More Likely To Rise Than Fall In The Years Ahead

Update: 2024-06-02
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Jim Grant, a respected market analyst and founder of Grant's Interest Rate Observer, believes that interest rates will remain higher for a much longer period than anticipated by Wall Street. He attributes this to a secular trend of rising rates over generations, citing historical precedents. Grant expresses concern about the lag effect of these higher rates, particularly on the banking system, which he sees as vulnerable due to its exposure to commercial real estate, especially office buildings. He also highlights the potential for a recession, driven by the weight of higher rates on corporations and households. Grant suggests that liquidity, value stocks, and gold are better suited to this environment. Mike Preston, a financial advisor from New Harbor Financial, agrees with Grant's long-term outlook but anticipates a near-term drop in rates, potentially driven by an asset price crash and a Fed pivot. He believes that the 40-year declining interest rate environment has ended and that higher rates are here to stay, but that a short-term decline is likely. Preston also shares his bullish outlook on silver, highlighting its recent breakout and potential for further gains. He emphasizes the importance of risk management and suggests that investors consider holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities. Both Grant and Preston agree that the Fed is hypothetically broke and that the current monetary system is unsustainable, potentially leading to future economic challenges. Mike Preston, a financial advisor, shares his gut feeling that things are likely to get more interesting before the year is out.

Outlines

00:00:00
Introduction

This Chapter introduces the topic of interest rates and their potential impact on the global economy and financial markets. The host, Adam Taggart, expresses his suspicion that interest rates will remain higher for a much longer period, and he introduces James Grant, a renowned interest rate expert, as the guest for the episode.

00:01:41
Global Economy and Interest Rates

This Chapter delves into the global economy and interest rates. Jim Grant shares his perspective on the global economy, comparing it to a large country with many people. He then focuses on interest rates, expressing his belief that they will remain higher for a much longer period, potentially for generations. He explains that this trend is based on historical observations of interest rate cycles, both higher and lower. Grant acknowledges that this prediction is likely to disappoint Wall Street, which has been anticipating a Fed pivot and rate cuts.

00:04:05
Secular Higher Interest Rate Era

This Chapter explores the reasons behind the current secular higher interest rate era. Grant explains that the recent rise in interest rates follows a 40-year period of declining rates, which began in the 1980s. He argues that this long cycle has culminated in a situation where interest rates are now trending upwards, marking the end of a period of unthoughtful love affair with bonds. He believes that this shift is driven by factors such as persistent inflation, remilitarization of the world, and the Fed's explicit goal of maintaining inflation.

00:09:46
Lag Effect of Higher Interest Rates

This Chapter focuses on the lag effect of higher interest rates. Grant discusses the potential consequences of these higher rates, suggesting that they will eventually start to bite in ways that they haven't yet fully done so. He compares the current situation to the rise in interest rates in the 1980s, which took a 35-year period, and he believes that the current cycle could also last for multiple decades. Grant emphasizes the cyclical nature of finance and the potential for a shift from euphoria to revulsion in asset classes.

00:12:29
Fundamental Explanation for Rising Rates

This Chapter delves into the fundamental explanation for the cycle of prospectively rising rates. Grant attributes this trend to the current period of inflation, which he sees as driven by factors such as remilitarization, costly wars, and the Fed's explicit goal of maintaining inflation. He criticizes the Fed's definition of price stability as a 2% rate of inflation, arguing that it is a sneaky and unworthy deceit. He also highlights the role of fiscal policy, pointing to the record-high deficits in the face of low unemployment as evidence of a determination to inflate.

00:15:53
Fiscal Program and Inflation

This Chapter examines the potential risks of the current fiscal program, which is characterized by wartime deficits in peaceful times. Grant argues that this spending is setting the stage for intractable inflation, as it is not justified by economic conditions. He emphasizes that no sitting politician will ever run on an austerity platform, and that the populace is not likely to demand it either, as they tend to vote for those who offer immediate benefits.

00:16:53
Lag Effect and Banking System

This Chapter focuses on the lag effect of higher interest rates on the banking system. Grant acknowledges that the current interest rates are lower than they were in the 1980s, but he argues that they are still biting more today due to higher levels of debt. He expresses concern about the potential for a lag effect, particularly in the commercial real estate sector, which he sees as a major area of vulnerability for banks. He cites the views of experts like Paul Coupiac and Thomas Hunnig, who are also worried about the banking system's integrity.

00:24:16
Vulnerability of Banking System

This Chapter delves into the vulnerability of the banking system to the lag effect of higher interest rates. Grant highlights the contingent nature of this vulnerability, which is dependent on the performance of commercial real estate. He points to the increasing troubles in the office building sector, particularly in downtown urban areas, as a major concern. However, he acknowledges that not all real estate is in trouble, and that some sectors, such as industrial, retail, and hospitality, are performing better. He warns that a broader real estate bear market or a recession could lead to more trouble for banks, especially smaller and mid-sized institutions with high exposure to commercial real estate.

00:27:38
Recession Odds and Commercial Real Estate

This Chapter discusses the potential for a recession and the impact of higher interest rates on commercial real estate. Grant acknowledges that higher rates are likely to increase the likelihood of a recession, as they weigh on corporations and households. He expresses concern about the future of commercial real estate, suggesting that it is difficult to see a path where significant losses can be avoided. He believes that the passage of time could help, but that cyclical precedents have become less reliable in recent years. He also highlights the potential for inflation to continue, which could further complicate the situation.

00:31:22
Lag Effect and Corporate America

This Chapter examines the lag effect of higher interest rates on corporate America. Grant discusses the potential for a domino effect, starting with the banking system and then spreading to corporations. He highlights the vulnerability of banks to commercial real estate losses and the potential for a strain on the FDIC's resources. He also expresses concern about the Fed's ability to support the banking system, pointing to its own hypothetical insolvency. Grant believes that higher interest rates will make banks more vulnerable, even without considering the commercial real estate risk, due to the weight of these rates on their impaired assets. He also discusses the corporate maturity wall, where a lot of low-yield debt will need to be refinanced at much higher rates, potentially leading to a painful period for corporate America.

00:37:37
Bond Vigilante and Systemic Risk

This Chapter explores the potential role of the bond vigilante in the current environment. Grant discusses the possibility that if inflation remains a problem for longer than expected, the Fed might be forced to keep interest rates higher, or even raise them further. He suggests that this could lead to the bond vigilante stepping in and demanding higher yields on the long end of the yield curve, potentially exacerbating systemic risk. He also raises the possibility of a debt deflation scenario, where falling prices and unpaid debts could lead to a decline in pricing power.

00:40:27
Japan as a Laboratory

This Chapter examines Japan as a potential laboratory for understanding the consequences of interest rate suppression and debt monetization. Grant highlights the Bank of Japan's aggressive policies in these areas and the fact that what was once considered monetary heresy is now becoming mainstream. He points to the recent rise in inflation in Japan, despite persistently low interest rates, as a potential warning sign for the world's bond markets. He suggests that the arrival of the bond vigilante in Japan could have significant implications for global markets.

00:42:19
Fed's Inflation Goal

This Chapter discusses the Fed's goal of achieving 2% inflation. Grant highlights the irony of the Fed's current focus on inflation, given that it previously struggled to achieve this target. He suggests that the Fed's actions have led to the American public getting what it wants, but not necessarily what it needs. He also raises the question of whether the Fed's policies are sustainable in the long term.

00:43:34
Recession and Treasury Bond Market

This Chapter explores the potential for a recession and its impact on the Treasury bond market. Grant acknowledges that the lag effect of higher interest rates could push the economy into a recession, potentially leading to a safety bid in the Treasury bond market. He suggests that while the long-term trend of rising interest rates may continue, a short-term period of lower yields is possible during a recession. He cites historical precedents, such as the 1946-1981 bond market, which saw 35 years of rising rates with periods of false dawns.

00:46:04
Safety Bid and Fed's Independence

This Chapter discusses the potential for a storm in the safe haven of Treasury bonds. Grant raises the possibility that the world might rally around Treasury bonds during a recession, but that there could be a storm in that port. He cites historical precedents, such as the 1931-1932 period, when Treasury bonds experienced a period of volatility due to concerns about the dollar and credit. He also highlights the concept of the Fed's independence, suggesting that its hypothetical insolvency could challenge this notion.

00:47:46
Alternative Safe Havens

This Chapter explores alternative safe havens for capital seeking safety. Grant suggests that gold is one potential destination, but he also acknowledges the possibility of other asset classes emerging as safe havens. He cites the example of corporate bonds, which could paradoxically tighten during a crisis, as investors seek the creditworthiness of companies like Apple. He emphasizes that favored asset classes and currencies can evolve over time, and that the United States' position as the world's reserve currency is not guaranteed.

00:50:44
Economic Growth and Asset Classes

This Chapter discusses the potential impact of higher interest rates on economic growth and asset classes. Grant acknowledges that it is difficult to predict the future of economic growth, but he suggests that liquidity is a valuable characteristic to bring to a portfolio in the current environment. He advises investors to consider fading consensus opinions, such as the compulsion to be fully invested, and to look for out-of-the-way equity situations, value stocks, and gold. He also emphasizes the importance of cash, as it provides a liquid position to profit from future opportunities.

00:55:04
Jobs Market and Recession

This Chapter examines the potential impact of higher interest rates on the jobs market and the likelihood of a recession. Grant acknowledges that the jobs market has been resilient, but he believes that a recession is inevitable. He suggests that the jobs market will eventually turn down, potentially leading to a decline in new jobs numbers and an increase in unemployment. He emphasizes the cyclical nature of the economy and the potential for rapid and frightening shifts in the labor market.

00:58:03
Investing Strategies in a Higher Rate Environment

This Chapter provides investment strategies for navigating a higher interest rate environment. Grant emphasizes the importance of liquidity and suggests that investors consider fading consensus opinions, such as the compulsion to be fully invested. He recommends looking for out-of-the-way equity situations, value stocks, and gold. He also highlights the importance of cash, as it provides a liquid position to profit from future opportunities. Grant advocates for an active approach to investing, as opposed to the passive approach that has become dominant in recent years.

01:06:50
New Harbor Financial's Perspective

This Chapter presents the perspective of Mike Preston, a financial advisor from New Harbor Financial, on the current market environment. Preston agrees with Jim Grant's long-term outlook on interest rates but anticipates a near-term drop in rates, potentially driven by an asset price crash and a Fed pivot. He believes that the 40-year declining interest rate environment has ended and that higher rates are here to stay, but that a short-term decline is likely. Preston also shares his bullish outlook on silver, highlighting its recent breakout and potential for further gains. He emphasizes the importance of risk management and suggests that investors consider holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities.

01:16:58
Market Outlook and Precious Metals

This Chapter delves into Mike Preston's market outlook and his views on precious metals. Preston shares his bullish outlook on silver, highlighting its recent breakout and potential for further gains. He acknowledges that the permabulls are still somewhat skeptical, which he sees as a positive sign. Preston also discusses the potential for gold to hit $2,500 and silver to reach $34 in the near term. He believes that both metals will continue to rise in the long term, with silver offering a better percentage bang for the buck but also carrying more risk. He emphasizes the importance of risk management and suggests that investors consider holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities.

01:26:05
Portfolio Positioning and Market Valuations

This Chapter discusses New Harbor Financial's portfolio positioning and Mike Preston's concerns about current market valuations. Preston acknowledges that the timing of a market crash is difficult to predict, but he believes that a crash is likely. He shares that New Harbor Financial's portfolio is currently 40% general equities and 10% gold stocks, with hedges in place to mitigate potential losses. He emphasizes the importance of risk management and suggests that investors consider holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities.

01:29:15
Short-Term Concerns and Market Timing

This Chapter discusses Mike Preston's short-term concerns about the market and the challenges of market timing. Preston highlights the recent Hindenburg Omen and the narrowing of the market as potential warning signs. He believes that the market has a little bit more to go before it rolls over, but he acknowledges the difficulty of predicting the exact timing. He emphasizes the importance of risk management and suggests that investors consider holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities.

01:31:35
End of Episode

This Chapter concludes the episode with a final discussion between the host and guest. They agree that things are likely to get more interesting before the year is out, and they thank the viewers for watching.

Keywords

Interest Rates
Interest rates are the cost of borrowing money. They are expressed as a percentage of the principal amount borrowed. Higher interest rates make it more expensive to borrow money, while lower interest rates make it cheaper to borrow money. Interest rates are influenced by a variety of factors, including inflation, economic growth, and monetary policy.

Lag Effect
The lag effect refers to the delayed impact of a change in interest rates on the economy. It takes time for changes in interest rates to work their way through the financial system and affect businesses and consumers. For example, a rise in interest rates may not immediately lead to a decline in economic activity, but it could eventually lead to a slowdown in growth or even a recession.

Banking System
The banking system is the network of institutions that provide financial services, such as deposits, loans, and payments. It plays a crucial role in the economy by facilitating the flow of money and credit. The banking system is vulnerable to changes in interest rates, as higher rates can make it more difficult for banks to make money on loans and can lead to a decline in lending activity.

Commercial Real Estate
Commercial real estate refers to properties that are used for business purposes, such as office buildings, retail stores, and industrial facilities. It is a major asset class in the economy and is often used as collateral for loans. Commercial real estate is sensitive to changes in interest rates, as higher rates can make it more expensive to finance property purchases and can lead to a decline in demand.

Corporate America
Corporate America refers to the large corporations that operate in the United States. These companies play a significant role in the economy by creating jobs, producing goods and services, and investing in new technologies. Corporate America is affected by changes in interest rates, as higher rates can make it more expensive to borrow money and can lead to a decline in investment and economic growth.

Fed Pivot
A Fed pivot refers to a change in the Federal Reserve's monetary policy stance. The Fed can pivot from a tightening stance to an easing stance, or vice versa. A Fed pivot can have a significant impact on interest rates and the economy. For example, a Fed pivot to an easing stance could lead to lower interest rates and stimulate economic growth.

Hindenburg Omen
The Hindenburg Omen is a technical indicator that is used to identify potential market crashes. It is based on the observation that a large number of stocks are making new highs while a large number of stocks are making new lows. This pattern is seen as a sign of market instability and a potential precursor to a crash.

Gold
Gold is a precious metal that has been used as a form of currency and a store of value for centuries. It is often seen as a safe haven asset during times of economic uncertainty. Gold prices tend to rise during periods of inflation and economic turmoil.

Silver
Silver is a precious metal that is often used in industrial applications, such as electronics and solar panels. It is also seen as a safe haven asset, although it is more volatile than gold. Silver prices tend to rise during periods of inflation and economic turmoil.

Q&A

  • What is Jim Grant's outlook on interest rates?

    Jim Grant believes that interest rates will remain higher for a much longer period, potentially for generations, due to a secular trend of rising rates. He expects this to have a significant impact on the banking system, commercial real estate, and corporate America.

  • What is Mike Preston's outlook on interest rates?

    Mike Preston agrees with Jim Grant's long-term outlook but anticipates a near-term drop in rates, potentially driven by an asset price crash and a Fed pivot. He believes that the 40-year declining interest rate environment has ended and that higher rates are here to stay, but that a short-term decline is likely.

  • What are some of the potential consequences of higher interest rates?

    Higher interest rates could lead to a lag effect that impacts the banking system, commercial real estate, and corporate America. This could result in a recession, as corporations and households struggle to manage higher debt burdens.

  • What are some investment strategies for navigating a higher interest rate environment?

    Jim Grant suggests that investors consider fading consensus opinions, such as the compulsion to be fully invested, and to look for out-of-the-way equity situations, value stocks, and gold. He also emphasizes the importance of cash, as it provides a liquid position to profit from future opportunities.

  • What are some of the potential warning signs of a market crash?

    Mike Preston highlights the recent Hindenburg Omen and the narrowing of the market as potential warning signs. He believes that the market has a little bit more to go before it rolls over, but he acknowledges the difficulty of predicting the exact timing.

  • What is the outlook for precious metals?

    Mike Preston is bullish on silver, highlighting its recent breakout and potential for further gains. He also believes that gold could hit $2,500 and silver could reach $34 in the near term. He believes that both metals will continue to rise in the long term.

  • What is New Harbor Financial's portfolio positioning?

    New Harbor Financial's portfolio is currently 40% general equities and 10% gold stocks, with hedges in place to mitigate potential losses. They are holding liquidity, cash, treasury bills, and gold, while waiting for better opportunities.

  • What is the overall sentiment about the market?

    Both Jim Grant and Mike Preston believe that things are likely to get more interesting before the year is out. They acknowledge the potential for volatility and uncertainty in the market.

Show Notes

Between February 2022 and August 2023, in order to combat hot inflation, the Federal Reserve rocketed its discount rate from near 0% to 5.25% -- the most aggressive interest rate schedule in living memory.

Since then, the Fed has kept the rate at 5.25% -- the 'higher for longer' era

But despite this, even when paired with Quantitative Tightening, economic growth remains robust, inflation is lower but is proving sticky, unemployment remains under 4%, and the stock market is at all time highs.

In short, the Fed's aggressively restrictive policies haven't cooled things down much. They've been so ineffective that even the Wall Street Journal is asking "Do interest rates really matter anymore?"

To find out, we have the great fortune of speaking today with perhaps the world's foremost living expert on interest rates, James Grant, founder and editor of the highly-respected market journal Grant's Interest Rate Observer.

WORRIED ABOUT THE MARKET? SCHEDULE YOUR FREE PORTFOLIO REVIEW with Thoughtful Money's endorsed financial advisors at https://www.thoughtfulmoney.com

#interestrates #inflation #recession

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Jim Grant: Inflation & Interest Rates Are More Likely To Rise Than Fall In The Years Ahead

Jim Grant: Inflation & Interest Rates Are More Likely To Rise Than Fall In The Years Ahead

Adam Taggart | Thoughtful Money