When Jim Grant left Barron's in 1983, after inaugurating the Current Yield column, bonds already had ended their long bear market and begun the great ascent that put 10-year yields around 2% last week. Grant founded Grant's Interest Rate Observer, and in nearly 30 years of publication, his beautifully written musings on the markets have become de rigueur reading among cognoscenti who appreciate big doses of financial history served up with compelling investment ideas. Among Grant's greatest calls: The eye-catching bull market in gold. We caught up with him last week, as gold was fetching $1,800-plus, European banks wobbled, and central banks pumped dollars into the system to avert the crisis.
Barron's: Is gold in bubbly territory?
Grant: A bubble is a bull market in which the user of the word "bubble" has not fully participated. You can think of gold as a stock that went from 2â… to 18 in a dozen years. I'm not sure that's a bubble. It is the nature of gold that its valuation must forever be a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think is gold is simply the reciprocal of the world's faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold.
If a bubble connotes absurdity, what is absurd are the monetary conditions that supported this gold bull market. Gold is an expression of the world's justifiable distrust of the way our central bankers conduct their affairs. The poetry of it is that it can't be quantified. The central banks are unworthy opponents. The Fed has pledged 0% money-market rates for the next two years, so that's not much competition. And the governments of the world are taking under advisement this notion called financial repression—short-circuiting market mechanisms, capital controls, punitive taxes or intrusive taxes and the like.
And I thought you were introducing a Freudian concept.
This is economist talk, made not on the couch, but in the pits. Gold is a desirable asset for people who wish to get out of the way of the fire of financial repression, which is more a threat at the moment than a promise. Governments certainly have it in their capacity to interrupt capital flows and make life difficult for people with wealth.
The gold standard, which you've championed, is now getting its due.
I'm talking about the classical gold standard that ended with the guns of August 1914, not the successors. Indeed, some of the variations are not much better than the present-day paper-money system. One of its essential features is that there is no reserve currency. Markets are distorted by the huge outpouring of paper currencies. With the gold standard, nobody gets a special credit card, everyone gets a debit card, and deficits and surpluses are settled promptly in cash. The essential feature of the current monetary system is procrastination. It's "Oh, we'll get to that, we'll balance accounts later." But it turns out we don't.
What are the Fed's other errors?
Both Alan Greenspan and Bernanke in 2001 to 2003 were on a campaign to anticipate a deflationary threat. They said that we had to act lest we tumble down the stairs that Japan did in the 1990s. But never once did they define this phantom that they held out to be a clear and present danger. Most Americans spend some part of the weekend hunting down everyday lower and lower prices. And in a world blessed with digital technology and with the introduction of great new swathes of territory in which something like market economics are practiced, and with the inclusion of hundreds of millions of willing new hands into the world's labor force over the past 15 years or so, wouldn't you expect a tendency toward falling prices? That is called progress.
Link to the remainder of the article: http://online.barrons.com/article/SB50001424052702303392404576566862208601914.html?mod=BOL_twm_fs#articleTabs_panel_article%3D1
Barron's: Is gold in bubbly territory?
Grant: A bubble is a bull market in which the user of the word "bubble" has not fully participated. You can think of gold as a stock that went from 2â… to 18 in a dozen years. I'm not sure that's a bubble. It is the nature of gold that its valuation must forever be a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think is gold is simply the reciprocal of the world's faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold.
If a bubble connotes absurdity, what is absurd are the monetary conditions that supported this gold bull market. Gold is an expression of the world's justifiable distrust of the way our central bankers conduct their affairs. The poetry of it is that it can't be quantified. The central banks are unworthy opponents. The Fed has pledged 0% money-market rates for the next two years, so that's not much competition. And the governments of the world are taking under advisement this notion called financial repression—short-circuiting market mechanisms, capital controls, punitive taxes or intrusive taxes and the like.
And I thought you were introducing a Freudian concept.
This is economist talk, made not on the couch, but in the pits. Gold is a desirable asset for people who wish to get out of the way of the fire of financial repression, which is more a threat at the moment than a promise. Governments certainly have it in their capacity to interrupt capital flows and make life difficult for people with wealth.
The gold standard, which you've championed, is now getting its due.
I'm talking about the classical gold standard that ended with the guns of August 1914, not the successors. Indeed, some of the variations are not much better than the present-day paper-money system. One of its essential features is that there is no reserve currency. Markets are distorted by the huge outpouring of paper currencies. With the gold standard, nobody gets a special credit card, everyone gets a debit card, and deficits and surpluses are settled promptly in cash. The essential feature of the current monetary system is procrastination. It's "Oh, we'll get to that, we'll balance accounts later." But it turns out we don't.
What are the Fed's other errors?
Both Alan Greenspan and Bernanke in 2001 to 2003 were on a campaign to anticipate a deflationary threat. They said that we had to act lest we tumble down the stairs that Japan did in the 1990s. But never once did they define this phantom that they held out to be a clear and present danger. Most Americans spend some part of the weekend hunting down everyday lower and lower prices. And in a world blessed with digital technology and with the introduction of great new swathes of territory in which something like market economics are practiced, and with the inclusion of hundreds of millions of willing new hands into the world's labor force over the past 15 years or so, wouldn't you expect a tendency toward falling prices? That is called progress.
Link to the remainder of the article: http://online.barrons.com/article/SB50001424052702303392404576566862208601914.html?mod=BOL_twm_fs#articleTabs_panel_article%3D1
