Central Banks Globally Are Scrambling for More Gold

Mike Maharrey: Greetings. I'm Mike Maharrey, a reporter and analyst here at Money Metals, and I'm thrilled today to be joined by Jim Grant. He's a longtime market observer and a commentator and the founder and publisher of Grant's interest Rate Observer. And honestly, one of my favorite commentators, and I'm trying not to fanboy too much about having him on the show today. How are you doing?

Jim Grant: Good, thank you.

Mike Maharrey: Great. Well again, it's a real pleasure and I want to start off with this. President Trump has been pushing for interest rate cuts and I can understand why, but on the other hand, I think you could also argue that the Fed needs to hold interest rates higher because I'm not convinced that the inflation situation is really as under control as they would have us believe. So what is a Fed person to do in a situation like this? It's almost like they're in a Catch-22, isn't it?

Jim Grant: Right. They should resign is what they should do

Well they rather brought this on themselves. Inflation is after all these years, after all these years after Adam Smith. It's rather a mystery, isn't it? Doctors of economics are dogmatic, each of them in his or her own diagnosis of the cause, but there's no really one accepted model. It has to do with the complexity and inherent unpredictability of human action and behavior. But I find it fascinating and of course quite humbling that Milton Friedman is brilliant as he was. “Inflation is always everywhere. Monetary phenomenon.” John Cochrane, contemporary of ours, no less brilliant. I think inflation approximately, I'm quoting John, I'm paraphrasing him. “Inflation is always in everywhere, a fiscal phenomenon.” And the Fed is approximately saying, or has approximately said, that inflation is always in everywhere of phenomenon of public expectations. So, the physicists can't agree on gravity.

So, the Fed is holding its funds rate above 4% at the time when the market is pushing the two-year note yield below 3% or certainly lower than the federal funds rate, which leads some, including the treasury secretary say that well the market wants an interest rate cut

And yet the brain boxes at the Fed are unconvinced that inflation is under control. So I am, for once with the brain boxes at the Fed, I don't think inflation is under control. I think that everything around us is pointing in general to, if not more inflation immediately, certainly not a great deal less. And I've come to think here, there's only one thing in the whole panoply of human actions that is certainly inflationary and that is war.

Mike Maharrey: True

Jim Grant: Because it brings forth money printing and brings forth borrowing and it sets inflation expectations higher because the demand for goods and services is greater than supplied by definition. And we're in the process of destroying this excess supply. Okay. So would it surprise anyone, Michael, if the Chinese made a move to blockade either Taiwan or one of the outlying contested islands, say tomorrow morning? So I think that the risks of inflation, whether it be from geopolitics or the much discussed effects were secondary effects of the tariffs. And I think the inflation factor, certainly I think it points to more inflation, but certainly it is not settled. And I think Jay Powell wants it to be settled insofar as he can settle it.

Mike Maharrey: I've noted that the money supply has been increasing again almost for a year now. I think it started basically last summer and it did come down some during the early days of the cuts. But wouldn't that seem to indicate that, I mean that is by definition inflation, right? When you see the money supply increasing?

Jim Grant: Yes. That is a very respectable definition of inflation. There's also the question of whether the symptoms of inflation don't reside as much in financial and speculative markets as they do in the measured rate. CPI core CPI, core, PCE, what have you as crypto, as elevated as is that inflationary thing. There's a German mid 20th century economist called Wco Wco, one of my favorites. And he said that that inflation is the straining of the economy's productive apparatus. That strikes me as an appealing description of what goes on.

Mike Maharrey: Absolutely.

Jim Grant: Although you don't see over restraining in the capacity utilization measures. So you can talk yourself to death about this. We'll stop talking myself to death, but I think we are inherently an inflationary insofar as something for nothing is a ruling sociological meme, which I dare say in political meme, I think that is an undercurrent of persistent inflation, something for nothing.

Mike Maharrey: Yeah, you've been watching interest rates for a very, very long time.

Jim Grant: Yes. Before they, I was there at their invention.

Mike Maharrey: I don't think you were quite there then, but it is interesting. So I'm going to throw this question at you and it's a little bit of a loaded question you'll probably pick up on it. But they talk about normalizing interest rates. What is normal?

Jim Grant: 6%? 6% is a normal American interest. It goes back to Alexander Hamilton. He was trying to and succeeding in consolidating the Revolutionary War era debts US was paying 6%, that was the start of things, 6%. And Europe was at three or four. And I'm talking now about a imagined composite of strong investment grade, if not AAA rated corporate debt, investment grade railroad debt. The measured, the historical record is broken at times by the nature of the obligor of the debtor. But five or 6% is the rate I got in the journalism business. Well, the first job when I got the Navy at the age of 20 for a while I was a clerk in a bond desk at Wall Street McDonnell Company. And I remember so well the foreign accords of 92 was the benchmark security at the time. And then along came all these great society and what have you. And he soon it was 5% and 6% tell my father he had to buy the New York telephone sixes, 30 year sixes because we wouldn't see that interest rate for a long, long time. I got this by eavesdropping on the sales force and company. And it's true we didn't see 6% for a long time, but we didn't see it because the rate was then 7%, 8%, 9%. And finally in 1981, like a dozen years after I'd been eavesdropping on the salesman to get the skinny on interest rates, the long dated treasury tops down at 15%

And then wouldn't if there's a 35 year bond bear market 1946 to 81. And then comes what I dare say a few expected, which was a 40-year, 4-0 year bull market in bonds finally arriving to the destination of zero or less than zero. And I'm telling you, Michael, that very few having survived until the days of 15%, 1981 would've answered the question correctly: In your career or your sons or daughter's career, will you or they live to see $18 trillion worth of bonds worldwide price to yield less than nothing? And I think most everyone would say, no.

Mike Maharrey: Right. Are you insane?

Jim Grant: But it happened. It's very humbling, isn't it? It shows you remember Richard Russell, the dear great Richard Russell would say markets can do anything. I think that's so important for us all as we speak, the gold markets doing not what we want it to do, but markets can do the, remember there's a TV show, I think maybe it was an Art Linkletter. Kids can do the darnedest things.

Mike Maharrey: I do remember that, yes.

Jim Grant: And so can grownups, markets especially can leverage grownups and markets do the darnedest things.

Mike Maharrey: Well, speaking of those bonds… those cyclical cycles, I've heard you on numerous occasions say that you think that we are likely in the early stages of a bear market in bonds. And I would love for you to explain to the audience why that you've come to that conclusion.

Jim Grant: Yeah, I'll be happy to try am the bond market is unusual in that it has exhibited since the middle of the 19th century, just after the Civil War, a tendency to rise and fall as interest rates to rise and fall at generation length intervals. So it's down and up, down and up. But over the course not of months or fiscal quarters or a handful of years, but for 20 and 30 years, interest rates fell for most of the last 30 years of the 18 hundreds. And they rose in the first 20 years of the 20th century, 19 hundreds. And that took us to 1921 or so. And they fell pretty much till 1946. They were suppressed during World War ii. But if you look at those were all 25 or 30 year, 20 year cycles. And then comes the 1946 to 1981 affair, that great bear market and bonds, which landed us as improbable heights. I mean utility, decent quality utilities were paying 20% and bonds with call protection were priced. I remember this very well. Were priced almost in a par with bonds without call protection. Such was the settled view that rates would never fall again.

And mind you, these are professional bond people talking here.

We all get conditioned, we all get conditioned by experience. And it's the great teacher and the great confounder. So that 1946 to 81 there went from the depths of two and a quarter to the heights of 15, again, only putting it long treasuries. And then comes this persistent moneymaking and wind in your sales bull market and bonds and drop in interest rates. I think it made, I'm trying to think a way of saying it. Whose career didn't it make on Wall Street? Maybe the short sellers didn't make their careers, but everyone had the benefit of what adhered for been a rarest of gifts. I mean a bull mark at lasting for 40 years. I say as if it ended, I hypothesize it ended bearing in mind the humility that we should all be preaching and living.

But usually I think in speculative markets, you can observe in any hypothesized top or bottom, major, top or bottom. One thing to look for is something that's extraordinary. Most incredulous incredible. So the approximately 18 trillion of securities yielding less than zero to me was the bookend or more than the bookend of long dated treasury yielding 15%. And then the retest of those heights and yield in 1984 when the CPI was printing at like 5% and the long treasury was at 14. And you could have locked that in with zero coupon securities that would deliver you, that makes you cry, doesn't it hit that yield over the course? I think they were 12 five years of maturity would give you 25 years-worth of no-call protection at internally compounding rates of return of 14% or so from the US government. And I'm here to tell you, Michael, that not everyone wanted to partake of that opportunity. They had been conditioned to expect the worst of the bond market. And here the bond market was saying, I am sorry, but don't you want to try again? Nope, we've had it with your certificates of copy. We don't want no stick bonds.

Mike Maharrey: It's interesting because you talk about those in those long cycles, you do become conditioned to it because I vaguely remember, I was a teenager in the eighties, and I remember my parents complaining about interest rates, but really from my entire life that I've been paying attention to financial things, zero has been almost the norm. And so I think maybe you talk about back then people couldn't imagine zero. I think now it's hard for people to imagine 15. I feel like people kind of think zero is now the norm.

Jim Grant: Yeah, yeah. I'm not getting much traction on this idea of a secular bond market in bonds. I'm not trying to, I don't oversell it. I say this is pattern recognition. This is not some big dogmatic call, although Michael, if it works out, I'm going to say that I was as sure of it as the fact that next month is June. Right? But as it is, it is a working hypothesis based upon nothing except pattern recognition and the aforementioned observation that at what may or may not prove to be the lows. In 2020 and 21, I think in one of those two years, the 30 year treasury was below 1%. Bear in mind this was a time when the Fed was aiming for a 2% inflation rate and was just heartsick it couldn't get the inflation rate. And the currencies were of course all paper, right? All paper with a certain historical predilection for depreciation.

And if you look back on it, it was such a setup. So I do believe that apart from pattern recognition, there are reasonable grounds to believe that we have seen the lows for that bull market for what may prove to be decades. And the bull move, the bear move in bonds that began, call it in 2020, 2021, 2022 will be with us for a long time. And people take a long time adjusting to it. The bear market that began in 1946 began say two and a quarter again with reference to the long treasury. And in 19 56, 10 years later, that same security was yielding three and a quarter. So nothing that I said about the presumed bear market that we're in, nothing, doesn't say much about the tempo. It was a terrific, of course, updraft in yields because they've been suppressed for so long. But what happens now would four and a quarter on the 10 year could be with us in five or 10 years. Yeah, I guess, although Ed again here, the question of the public credit of the United States and the notorious debt, which was not, after all, defeated…scarcely dented, its growth by DOGE, which happens to be the name of a phony cryptocurrency.

Mike Maharrey: Well, I think it's interesting too. We look at just the recent stock market sell off when we had the tariffs announced and then unannounced and then announced again. But it was interesting watching the bond market because it did initially show that safe haven appeal. We saw yields drop in the early days of that, but even as the stock market was still falling, we saw yields suddenly rise. So, it does kind of, in my view at least, give a little bit of anecdotal confirmation to the fact that we are in a different era for bonds than we were five years ago.

Jim Grant: I agree with you. And there's a fair amount of academic observation over this very recent phenomenon. There's a couple of guys to NYU that have studied it and others have taken a look at it. We at grants have taken a look at it. And what was striking about the selloff in April in stocks was that long duration treasuries up to from 10 years on out, did not do their accustom thing declining as if to show that they were a port in a storm. Of course, the dollar itself, dollar exchange rate sold off rather than

Proving its metal as a place to go hide. So I take this, I have a few thoughts on this. I think many of us have heard about, if not read a paper by the T named Steven Moran, who was now the President Trump's chairman, the Council of Economic Advisors. And Chairman Moran wrote when he was a civilian, he wrote that he quoted somebody else, but we quoted him Approvingly journals know about that, how you can hide behind the revenue coin. He quoted Zoltan Pozsar, very thoughtful and edgy macro economist saying what the United States ought to do is his, is exact a price for the services we deliver to our creditors. Well what might they be? Well, we protect them against Russians and Chinese maybe, and we allow them to sell in our beautiful market in the United States. And so what we ought to do says, now Chairman Moran, we ought to change the terms and conditions of the bonds that they hold. Now they're holding a 4% sense security. Why shouldn't that be a 3% security? It would really help with the America's p and l is the debt maturing in five years? How about if it matures in a hundred years? A good thing.

There's something in the… it's current in the world of private equity and that is called a liability management exercise except for euphemism. And LME and LME allows the strong to, I think the word is steal from the week and less lawyered up by exploiting the legally permissible techniques that are implicit in the very loosely written loan documents.

So, the covenants these days would formally protect the creditor through very tight lawyerly language. But past five, 10 years, the covenants have basically gone away. So, you're talking about the ability of stronger, better place creditors in a very predatory way to grab collateral was not evidently theirs. And of companies in cahoots with these creditors to carve out special privileges and advantages for themselves at the expense of the weak and meek. If not nobody's meek on Wall Street. Some are weak. Right? Alright. So, that's basically what my friend Mr. Pozsar was saying. He didn't call us to a liability management exercise of the public debt. That's really what he's opposing. And that's what now Chairman Moran was approving in his way. And I saw just the other day, maybe it was on Tuesday, that chairman had kind of walked that back a little bit, but once you say something, you can't really unsay it once you say something. No, after all, no, we're not really thinking about extending you in an involuntary way from five years to a hundred years. Now. That was just a thought bubble, right?

Mike Maharrey: Yeah. If you wanted to have a bear market in Treasuries, that seems like a good way to make one.

Jim Grant: Yes. And so people are always insofar as they pay attention to anything about this long duty, they'll say, well, what's going to cause it? I don't know, maybe more inflation. Well, how about the self-destruction of the public credit of the United States of America that would do a little propelling of rates higher.

So this is, as you know, just listening to this somewhat disjointed narrative of my, this is all very speculative and nothing says that Donald Trump can't go back and read the Alexander Hamilton's essay in the public credit and resolve that.

Oh, as it happens, Michael, I happened to have under on my very eyes right here, the Congress's injunction to Alexander Hamilton when they directed, directed him to write this essay in the public credit quote that an adequate provision to the support of the public credit is a matter of high importance to the honor and prosperity of the United States to the honor prosperity in the United States. So that Hamilton did produce that report and he said that the good faith is the basis of public credit. And this administration is so transactional, so brutal, and it's transactional is and so raw in the way it treats everyone including its creditors. I think there is some chance that these somewhat unappealing behaviors will come back and bite all of this. So again, this for what's worth, that's my view of the risks so far as the bond market's concerned. Yeah, the Fed might cut rates and we might have days as we were speaking today when everything's up, except you know what? Do you have time for a baseball anecdote?

Mike Maharrey: I would love a baseball anecdote. I'm a hockey player, but I'll take a baseball anecdote.

Jim Grant: All right. You don't look like a hockey player. Your face, as I see is entirely intact.

Mike Maharrey: I'm a goalie. I have a nice helmet and mask.

Jim Grant: All your teeth are in.

Alright, so this has to do with Bob Gibson, the legendary imperious kind of scary pitcher for the old St. Louis Cardinals teams won so many games for the Cardinals. This is 1960 something, 30 game winner, like 20 complete games. And there was an infield named Ducky Schofield white hitting infield, a very good glove that's so struck a bat. And one day Ducky was up a bat, and as was his want, he struck out. And Ducky kind of lost patience with himself and stalked back through the dugout and with his bat began to have at the water cooler cussed up a storm until he was summoned to the other end of the bench by the afore imperious Scary Bob Gibson. And Bob Gibson points out to Ducky batting average – .231. And he says, ducky, what did you expect?

What did you expect?

Alright, so in this country we have a gross public debt in excess of what? 120% of GDP, or something. And we have a currency that can be conjured at the whim of the central bank in conjunction with the banking system. And we have a Congress that is even now trying to pull the wall of the eyes of the country with a phony baseline gimmick that will make it seem as if the borrowing is going to be within some arbitrary range. Anyway, it has to do with inside the beltway gimmick that the UN Congress is now working to the advantage of those who would spend more money. So, we have an unhinged spending habit, uncollateralized currency, and a president who, shall we say, whose principle excellence is not circumspection. And I think with all of this, if there is a financial, there's financial trouble of any kind, if there's inflation, it's kind of a financial trouble. If there's a wrinkle perceived in the American public standards of United States public credit, we can't say we were surprised. That will not be a surprising thing.

What did we expect, Michael?

What did we expect?

Mike Maharrey: Well, I think that's a perfect way to wrap up this interview and let folks ponder that very question. But I let you go. I do want you to let folks know where they can follow your work.

Jim Grant: Well, the first, if you type in “grants” in Mr. Google, the first thing you'll see is Grant’s tomb, that's not us. Not yet. But Grant's interest will take you to our home site, a homepage. Grant's interest rate Observer will take you to our homepage. And I think we have a few subscriptions left, but there's plenty to read there committing, just see what we have to say. If you like it. Yeah, read more.

Mike Maharrey: Get on your email list too. I'm on your email list and you send out some good

Jim Grant: Emails with Yeah, and we have something that's FREE and that's not going to attest to its quality because it's written by my son, Phil.

Mike Maharrey: Well, I'm going to assume that it's of the highest quality then. Well folks do that. I really do. Jim, really appreciate you taking the time out of your day. I know you're a very busy man and it's been delightful talking to you. And anytime I can get a sports analogy, I'm a happy man. So I really appreciate it and thank you very much.

Jim Grant: Well, thank you for having me, Michael.