Jim Grant closely tracks Federal Reserve policy and its impact on the economy and markets in his famous newsletter. Subsidy interest rate monitor, for over 40 years. An economic historian who always wears a tie and is often stubbornly skeptical, he made a name for himself by making some pretty prophetic predictions ahead of past financial disasters, including the global financial crisis.
Now, in the interview luck, Grant expresses concern that another potential disaster is on the horizon. He argues that after nearly a decade of near-zero interest rates, the U.S. economy has a debt problem, and with interest rates still high, the debt problem is likely to reach its worst outcome. Grant warns that the inevitable fallout from the end of the “free money era” has not yet been fully felt.
“Everything is a bubble” and its effects
To understand Mr. Grant’s concerns, we need to take a step back to 2008, when he believes Federal Reserve policy became completely illogical.
To help the economy recover after the global financial crisis, the Fed keeps interest rates near zero and purchases government bonds and mortgage-backed securities in hopes of encouraging lending and investment, a process known as quantitative easing (QE). introduced policies. Together, these policies created what is now colloquially known as the “free money” era, injecting trillions of dollars into the economy in the form of low-interest debt.
Mr. Grant has long argued that the Fed’s policies after the global financial crisis helped burst “every bubble” in stocks, real estate and everything else. And even after a tough year for the stock market in 2022, two years of weakness in the real estate market, and the local banking crisis in March, he worries that the bubble has only partially deflated. ing.
Although the banking and commercial real estate sectors have been hit hard by rising interest rates, Grant’s biggest concerns relate to credit markets.
After years of rapidly accumulating debt for businesses (as well as consumers and governments), Grant worries that many people will soon be unable to sustain the debt. . With today’s high interest rates, refinancing becomes a challenge, especially as the economy slows. “I think the credit market will more or less be the result of the proverbial 10 years of free money,” he said. luck.
Mr. Grant cited so-called “zombie companies” as an example of the problem lenders may face.as luck It was previously reported that during the free money era, hundreds of companies managed to stay afloat by using cheap debt to sustain their failing business models. But many of these companies are now facing pressure from a slowing economy and rising borrowing costs. This means you may not be able to repay your lender. “The invitation to indiscriminate lending, the accumulation of errors in lending and credit allocation brought about by the 0% interest rate system, may have been an open invitation to take too much credit,” Grant said. . luckadding, “Assets may still face the consequences.”
Take WeWork, for example. David Trainer, founder and CEO of investment research firm New Construct, said: warned For years, office coworking companies masked unprofitable business models with low debt during the “free money” era.Now, after a failed IPO, years of wasted funds, and a rush to go public with special purpose acquisition companies (SPACs), WeWork has lost millions of dollars in investors and filed for bankruptcy. abandon the lease And lenders will be in a tight spot.
“WeWork is just the first of many other unprofitable or zombie companies that could face bankruptcy,” New Constructs analyst Kyle Gaske wrote in a November note. There is. “The days of free and easy money appear to be over as the Fed increasingly embraces the idea of “higher for longer.” I hope the days of capital investment are over.”
He points out that bankruptcies are already on the rise. According to the report, there were 516 corporate bankruptcies through September. S&P Global That’s more than any full year since 2010. And US corporate bankruptcies in September he increased by nearly 30% compared to a year ago, a federal court announced. data is shown.
Photo by Suzanne Opton/Getty Images
bubble era
Mr. Grant is just one of many prominent figures in the financial world who worry that the free money era has created distortions in the economy that have yet to be corrected.
said Mark Spitznagel, founder and chief investment officer of private hedge fund Universa Investments. luck In August, he announced that the Fed’s post-GFC (and pandemic-era) policies had created “the largest credit bubble in human history” and a “tinderbox” economy.
“I have never seen such total debt and leverage in the system. This is an experiment,” he warned. “But we know that the credit bubble has to burst. We don’t know when, but we know it has to.”
Grant is also known for making some pretty prophetic predictions about past market bubbles. Mr. Grant warned in multiple speeches long before subprime lending destroyed some of Wall Street’s longest-running financial institutions. Newsletter Mortgage lending standards have become too lenient, and the amount of variable rate mortgages in the housing market is putting Americans – and banks – at risk in a rising interest rate environment. He republished some of these columns in his 2008 book. Mr. Market’s Miscalculation: The Bubble Era and Beyond Which financial times was praised That year is said to have shown “a remarkable example of foresight.”
Grant’s fears became reality as home prices plummeted. subprime The floating rate mortgages that Wall Street geniuses packaged into securities collapsed in record time, putting the nail in the coffin of the global economy.
History says: stay high for much longer
Mr. Grant stands out from the Wall Street crowd in another way. While many investment experts are calling for the Fed to start lowering rates at some point in the next year or two, Grant predicts an era of high interest rates that could last a generation.
Federal Reserve Chairman Jerome Powell has repeatedly warned that to truly rein in inflation, interest rates need to be held steady for “a much longer period of time.” But many Wall Street leaders, encouraged by the sharp drop in inflation from its 40-year high in June 2022, believe the peak in interest rates has already arrived.
But Mr. Grant’s reading of the history of monetary policy argues that we are in the midst of a generation of rising interest rates, with some volatility in between. “This phrase is much, much, much longer, but the conditional sentence should be underlined and italicized.If the past is prologue,” he said luck.
Grant noted that from 1981 to 2023, interest rates had been on a continuous downward trend, apart from a few short-term spikes. And for his 40 years before that, they were basically going in the opposite direction, with a few exceptions.
“Intergenerational trends in interest rates are a historical record and pattern,” Mr. Grant explained, arguing that we may have entered a “new regime.”
“Interest rates appear to have reached a major turning point in 2020 and 2021,” he added. Based on history, the new regime should last 40 years, he said. Still, Grant made clear that the generation-long rise is likely not to be linear. If a recession were to occur, there could be a temporary but “significant” drop in interest rates.
If Mr. Grant is correct, it means we may be entering an era of low economic growth, relatively high inflation, and high interest rates, an economic combination often referred to as stagflation. And that’s not exactly the secret to success in investing. There is even a possibility that the credit market will pay the price for being late in the free money era, leading to an environment where corporate debt defaults increase.
But what about deflationary technology?
But there is one significant objection to Mr. Grant’s idea that interest rates will trend upward over the next few decades: It’s quite simple. Cathie Wood, his CEO at technology-focused investment management firm ARK Invest, said: wall street journal Last month’s interview: “Technology is deflationary”
Technologists and Wall Street bulls believe that the emergence of AI and robotics will dramatically increase worker productivity, lower prices for businesses and consumers, or keep the national budget balanced.
Mr. Grant acknowledged that technological advances could cause deflation, but it is not clear whether the current rate of progress is fast enough to bring prices down significantly. Looking back, he pointed out, there have been periods in history when the U.S. economy was undergoing rapid transformation, but prices were still rising, meaning innovation and deflation don’t always go hand in hand.
“I don’t know how to compare the intensity of technological progress between the 1930s and the 1970s,” he says. “But both were characterized by amazing advances in production technology, and one was characterized by deflation, the other by strong inflation.”
It’s certainly possible that technology will drive deflation, but it’s unlikely, Grant said. But the veteran economic historian concluded by emphasizing that history is not a blueprint and that forecasters need to be humble.
“We know how much richer we would all be if the past were a sure and true prologue, especially historians who currently have very little money,” Grant joked. It added that this meant the need to “proceed with caution” when making predictions.