In the world of finance, Jim Grant is known as the founder and editor of the respected Grant's Interest Rate Observer newsletter, as well as for being an ardent contrarian, a gold bug and a bow tie aficionado. He’s made many prescient calls, and has missed on some others. Either way, he doesn’t mince his words.
During a recent webcast on how higher inflation and interest rates could impact the markets and gold, Grant was true to form when he questioned the Federal Reserve’s ability to keep inflation in check following the massive monetary and fiscal stimulus packages put in place to keep the economy afloat during the Covid pandemic. (There are more packages coming.)
Many observers fret that the enormous liquidity flooding the economy, in tandem with the improving job market, will supercharge economic growth and lead to greater inflation. The Fed says it will keep interest rates at current near-zero levels until the end of 2023. It has also stated its belief that any rise in inflation will be temporary, and that it’s sticking to its goal of creating and maintaining an inflation rate of 2%. But Grant—and more than a few others—are dubious the Fed will be able to call the tune in this dance.
“I think the Fed is under the misconception that it controls events,” Grant said. “Sometimes, events control the Fed, and I wouldn’t be surprised if this was one of those times. The Fed thinks that not only can it control events, but it can measure them. It believes it can pinpoint the rate of inflation.”
Inflation, Grant opined, is a complex concept that goes beyond just a bunch of numbers captured by traditional measures and parsed by statistics geeks.
“I think there’s a gale of inflation of all kinds in progress,” he said, adding he believes it will take the Fed by surprise and “overwhelm our monetary masters.”
The webcast’s interlocutor, Michael Arone, chief investment strategist at SPDR State Street Global Advisors (a co-sponsor of the webcast along with the World Gold Council), suggested that the Fed has expanded into another sphere beyond its traditional dual mandate focused on price stability and maximum sustainable employment (however that’s now defined) and perhaps assumed the role of market manipulator. Grant took the bait and pounced on it.
“I think the central banks are highly manipulative in their actions and in their intentions,” Grant said. “Think about their manipulations of expectations. They want us to know that they are there for us—all except the short sellers—in times of difficulty. It introduces a level of confidence or cocksureness you see reflected in the level of margin debt and crazy actions in cryptocurrencies of all types.”
The current zeitgeist of the financial markets perplexes Grant, a man who doesn’t suffer fools gladly and who sees a market where foolishness appears to be running rampant.
“These are strange and unprecedented financial markets that have seemed to have lost moorings with regard to valuations,” he commented, pointing to numerous stocks trading at huge price multiples to earnings and revenue, where $13.5 trillion in bonds worldwide are priced to where they’re yielding less than nothing, and where a feeding frenzy has boosted the price of bitcoin and several other cryptocurrencies into the stratosphere.
Some people posit that the globalization of the labor market and the efficiencies created by technology have made goods cheaper and kept a lid on inflation. And many economists and investors expect these trends to continue.