Jim Grant on Our Crazy Markets

If one does not subscribe to his eponymous newsletter, one feels privileged to learn of the markets analysis offered by one James Grant. Among people who matter on Wall Street, Grant stands out. He has the requisite cranky attitude. He is slightly elderly and wizzened. But we do well to pay attention to his remarks.

So, without burdening anyone with my own comments, here are some excerpts from a recent interview that Grant did. At a time when the markets seem to have lost all semblance of sanity, we turn to James Grant.

We have the lowest interest rates in about 4000 years, or perhaps 3990 years because they have recently gone up a bit. But these are still some of the lowest interest rates on record. At the same time, we have some of the highest equity valuations with perhaps the exception of 1999 and 2000. 

And, we have one of the most speculative Zeitgeists on record. It is a time of disinhibition, of rampant, riotous speculation and of all the accompanying thrills and chills.

Have we seen anything similar in the past?

For instance, the late 1960s anticipated some of this. It was a time of rising CPI inflation and a great boom in new issues and over the counter stocks. During that era, a writer who went by the pen name «Adam Smith» wrote popular books about Wall Street, including «The Money Game». He said what you have to do is to go out and hire some very young people to run your portfolios for you because only they understand what’s happening. I think of this in connection with the novelties of today: 

You want to go out and hire people in the age of perhaps 21 or 22 and give them each a million dollars as they go out and speculate without any pretense of security analysis. They just go out and buy all of the NFTs and cryptos that are going up.

Dare we say, a speculative market led by people who think the world of themselves but are thoroughly lacking in experience is a formula for disaster:

We have lived through them in the tulip mania of course, and the great speculation of the early 18th Century with the Mississippi Company and the likes, and the railroad bubble after that. Speculative episodes aren’t anything but unprecedented. So let me re-emphasize: What is unique today is the intensity, the amount of money, the amount of leverage and the monetary backdrop. All of these things are unique.

Since so many people, in the administration and the Federal Reserve, believe that inflation is transitory, Grant concludes that it is probably here to say for a while:

So we can’t predict the future, but we can observe how investors are setting the odds on the future - and from what I can tell, investors are betting on transitory inflation. They are betting that the central banks are in control, and that today’s low interest rates will prove persistent and that everything is more or less fine. That’s the consensus as one reads it in the marketplace. But I think that it is not a certainty at all, and one is advised to take out insurance on this big bet being dead wrong.

And he remarks that onshoring manufacturing, producing here in America rather than in Asia, will naturally cause prices to rise. It’s far cheaper and more efficient to produce in Asia, ergo….

There is a movement to so-called onshore manufacturing, bringing activity away from the seemingly well protected low-cost Asian centers from where seamless transportation could deliver parts and finished goods reliably and cheaply in the past. It’s a move away from that to bring things back to higher-wage areas. And, as I see it, people are at a much faster pace than in the 1960s reforming their expectations and adapting to what may prove to be a longer duration problem.

As for the Biden administration, Grant is not overly optimistic:

Still, I wonder if the market has taken the full measure of the weakness of the current Biden administration and of the geopolitical stirrings coming from China and the particular risk to Taiwan. That’s why the dollar might be at risk for geopolitical nuisance as well as for reasons having to do with American inflation.

As for his overview, consider this:

Stocks are near all-time high valuations, interest rates near all-time lows, inflation is percolating, leverage high, and the Federal Reserve still in partial denial. People are reaching for yield at acrobatic levels. 

Figuratively speaking, they climb on steep ladders, grasping for returns in the hopes of generating some income to meet the actuarial demand of pension plans or University endowments. This is a setup of great risk and oddly enough of a widespread denial that it is risky.

It all spells trouble, even though Grant has been saying as much-- as the market keeps going up:

I think this juxtaposition of objectively great financial risk on one hand, and the collective attitude of madcap indifference to that risk on the other hand spells trouble. Now, people can say to me: «That’s all well and good, except you have been saying that for a long time, in fact seemingly forever, and yet things go up.» My answer to that is: Yes, correct. All that’s true and I don’t know when things go south. So at «Grant’s», we try to present ideas that have a margin of safety and that can offer people a chance to realize good returns even in the midst of the aforementioned troubles and risks.

So, for your edification, Grant is buying the most out of favor assets-- gold mining stocks. By his calculations, gold will be the last man (or woman) standing when the bleep hits the fan.

Gold is unusual in that it is kind of outside this speculative whirlwind. Gold mining stocks are perhaps at all-time cheap levels with respect to the S&P 500. Whether it’s yield you’re talking about, or free cash flow, or price to earnings, or profit margins: Gold mining shares are perhaps as cheap as they have ever been against the broad market. So gold is a little bit of an island of indifference in a boiling sea of gambling and speculation.