Category: Jim Grant

Yield-chasers line up to buy Bolivian bonds

Under the You-Can’t-Make-This-Up category of sovereign debt insanity, the May 17th Grant’s Interest Rate Observer files this report:

Many these days are picking the poison of foreign places – Bolivia, for instance.  Last fall, the scenic, private-property expropriating, contract-abrogating and formerly hyper-inflating South American nation issued its first international sovereign debt since 1920.  And the Bolivian 4 7/8s of 2022 this year have rallied by 57 basis points, “the most among sovereign bonds with BB-minus ratings tracked by Bloomberg.” [according to Grant’s analyst Evan Lorenz]

The Great Bond Bull Market began in September, 1981 (over 31 years ago) with U.S. T-bond yields over 15%.  Yields on the 10-year now stand just a shade below 2%.

Precisely 2 years ago, Jim Grant was quoted in an Associated Press interview:

I think it’s useful to imagine how things might look ten years hence.  What will one’s children, heirs or successors think about a purchase  today of ten-year Treasurys at 3.25 percent? They’ll look back and say,  “What were they thinking?”  The (federal deficit) was running at 10  percent of GDP, the Fed had pressed its interest rates to zero, it had  tripled the size of its balance sheet, and they bought bonds?  Treasurys  are hugely uninteresting, as is similar government debt the world over.

Today the Bolivian government can borrow for 9 years at 4 1/2%.  Have bond investors completely lost their minds?

Jim Grant on central banking

The ultimate pillar of faith is confidence in the emissions of the world’s central banks. It is as strong today, we judge, as was confidence in the judgments of the ratings agencies only last spring – just that strong. — Jim Grant, “Pillars of Faith”, Grant’s Interest Rate Observer, September 7, 2007

My comment: With investors salivating over Bernanke’s rate cuts, hanging on every word even of the Fed’s regional minions, and snapping up the Maestro’s memoirs by the bucketful, Fed idolatry is unequivocal.

Jim Grant op-ed addresses trouble with Fed intervention

His op-ed, “The Fed’s Subprime Solution,” appeared in the Sunday New York Times.

On who’s to blame for the credit crisis:

Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it.

What sets this crisis apart from others that came before it?

Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.

One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.

A third remarkable aspect of the summer’s troubles is the speed with which the world’s central banks have felt it necessary to intervene. Bear in mind that when the Federal Reserve cut its discount rate on Aug. 17 — a move intended to restore confidence and restart the machinery of lending and borrowing — the Dow Jones industrial average had fallen just 8.25 percent from its record high. The Fed has so far refused to reduce the federal funds rate, the main interest rate it fixes, but it has all but begged the banks to avail themselves of the dollars they need through the slightly unconventional means of borrowing at the discount window — that is, from the Fed itself.

On “socialism for the rich:”

What could account for the weakness of our credit markets? Why does the Fed feel the need to intervene at the drop of a market? The reasons have to do with an idea set firmly in place in the 1930s and expanded at every crisis up to the present. This is the notion that, while the risks inherent in the business of lending and borrowing should be finally borne by the public, the profits of that line of work should mainly accrue to the lenders and borrowers.

Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.

On the trouble with stability:

High on the list of things that no human agency can, or should, attempt is manipulating prices to achieve a more stable and prosperous economy. Jiggling its interest rate, the Fed can impose the appearance of stability today, but only at the cost of instability tomorrow. By the looks of things, tomorrow is upon us already.

On the impact of a century of moral hazard on our financial system:

A century ago, on the eve of the Panic of 1907, the president of the National City Bank of New York, James Stillman, prepared for the troubles he saw coming. “If by able and judicious management,” he briefed his staff, “we have money to help our dealers when trust companies have [failed], we will have all the business we want for many years.” The panic came and his bank, today called Citigroup, emerged more profitable than ever.

Last month, Stillman’s corporate descendant, Chuck Prince, chief executive of Citigroup, dismissed fears about an early end to the postmillennial debt frolics. “When the music stops,” he told The Financial Times, “in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

What a difference a century makes.

My comments: Jim Grant knows credit, understands economics, has a firm grasp of history, and has been one of the few people who connected the dots with regard to the credit bubble years ago. As for Citigroup, when does “too big to fail” become “too big to save?” And more broadly, when does the entire monetary scam become too big to hide from the public?

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