In the wake of the 2008 Global Financial Crisis, central banks drove interest rates down to unprecedented lows and kept them there for the better part of a decade.
The world economy then became addicted, some would say dependent, upon a zero-cost capital world.
But now inflation is forcing interest rates to rise sharply around the globe, at the fastest pace on record. This sea change in rates is depressing economic growth, shocking the financial system, and resulting in one of the worst years in history for stocks and bonds.
To find out where things are likely headed from here, we sit down with the world’s top expert on interest rates, James Grant, esteemed publisher of Grant’s Interest Rate Observer.
Adam’s Notes:
Extreme interest rate suppression down to 0% by the central banks has deformed pricing, resulting in excessive malinvestment & creating the “Everything Bubble”. Now that rates are starting to normalize (i.e. rise), they’re throwing the system into distress.
Rates in the US and much of the developed world have been rising faster than at any point in living history. That is creating shockwaves that are de-stabilizing the system and will keep arriving for some time. So Jim predicts most of the damage that will be done still lies ahead of us.
Jim sees Private Equity as a space ripe for reckoning. Lots of debt has been used to make acquisitions in this space, making the margin for error narrrower and narrower. Now with rates this high (and going higher), it wouldn’t surprise him to see a lot of bankruptcies.
If Jim were in charge, no one would even know the Fed Chairman’s name. He wants the Fed out of the game of trying to influence/guide markets and public perception of the economy’s trajectory. The Fed would stop intervening, except as a very short-term lender of last resort in true periods of crisis. But it would get out of the bailout game. He would back the currency by gold. As for interest rates, the Fed should stop trying to influence any yields beyond the short-term borrowing floor it sets.
Jim thinks stagflation is the likely trajectory from here. History shows that inflation takes a lot longer to peak than our authorities tell us it will. The last great inflation era here in the US, too the better part of 20 years to fully get tamed (despite assurances all along the way is was ‘almost under control’). Jim compares inflation to an underground coal seam fire — it often looks like its out, but is really smoldering below ground, to erupt again.
Jim doesn’t see inflation going back to under 2% anytime soon and that bond yields will remain elevated.
Despite this, Jim thinks good values will start emerging along the way for those investors paying attention.
PART2: [to be posted once video releases tomorrow]
