When Jim Grant, founder and editor of Grant’s Interest Rate Observer and opening keynote speaker for the fifth annual Innovative Alternative Investment Strategies Conference, was asked by Financial Advisor to share his thoughts on interest rates and alternative investments, he immediately quipped, “What interest rates? We don’t have them anymore.”

Grant, who recalls that interest rates could sustain retirees when he launched his newsletter in 1983, describes today’s rates as “scarcely visible,” and he expects more of the status quo.  (He will be the opening keynoter at the fifth annual Innovative Alternative Investment Strategies Conference, from July 31 through August 1.)

“The Federal Reserve has got its thumb on the scale of our finances,” says Grant, “and Miss Janet Yellen wants us to know that as long as she is occupying the chairman’s seat the federal funds rate will remain very, very low indeed.”

Beyond the U.S., central bankers in Japan and Europe seem to be thinking, saying and doing much the same thing, he says. For example, “they profess to believe that ultra-low interest rates stimulate both spending and investment,” he says. “They profess to believe that life is not worth living unless you have an inflation rate of at least 2%.”

Grant disagrees. In 1954–55, the U.S. saw strong annualized quarter-to-quarter economic growth (as high as 11.9% in the first quarter of 1955) despite the Consumer Price Index remaining below zero, he notes. From 1961 to 1966, economic growth often exceeded 5% while the CPI stayed below 2%. He also thinks the Fed is relying too much on the “Phillips curve,” known for its inverse relationship between inflation and unemployment, because the 1970s exhibited a great deal of both.

“So with regard to the theory and with respect to historical evidence, I submit that our central bankers are barking up the wrong tree,” he says.

So how can investors cope with what Grant calls “not only radical but also unprecedented” monetary policy? “It presents a pretty strong invitation for all of us to think about ways of diversifying our investments and imagining different ways of investing,” he says. And that’s where he thinks alternative investments can play a big role.

Grant defines alternatives as unpopular, off-the-beaten-path investments that people generally are not comfortable holding. At present, he is particularly interested in suburban office buildings, gold, private equity, pariah countries and short selling.

Suburban office buildings sport high vacancy rates and are thought to be obsolete since younger people seem to prefer settling in cities and much capital is needed to bring these buildings up to contemporary levels of comfort and efficiency, he says. But suburban office buildings, on average, are changing hands at 9% capitalization rates (net operating income divided by property value), while core office buildings are trading at 4%—a gap that has been called unprecedented.

Grant’s sees value in northern New Jersey. Although net absorption (total square footage leased less total space vacated) has been negative or anemic for a dozen years and vacancy rates top the national average, new construction has been lacking and buildings can be purchased at attractive prices (per square foot) in today’s low interest rate environment. Cap rates are also much higher than in nearby New York City.

Grant is very bullish on gold and gold stocks. This legacy monetary asset is an insurance policy, he says, against the “almost certain failure of our current policies of ultra-low interest rates and of heavy-handed credit creation.” Gold prices snapped in 2013 after rising for nearly a dozen years. Sentiment for gold is low, which he says has been reflected in the deep bear market for gold-mining equities.

Most of his gold stock investments are in the Tocqueville Gold Fund (TGLDX). He says many people are attracted to the SPDR Gold Shares (GLD), the world’s largest exchange-traded fund (EFT) backed physically by the metal. But Grant, a longtime gold lover, prefers investing in Krugerrands, South African-issued gold coins, which he keeps in a safe deposit box in Brooklyn. “For my money, as long as you own the stuff you ought to own it and not have a claim on it,” he says.

In private equity, he remains keen on the Blackstone Group (NYSE: BX) and Kohlberg Kravis Roberts & Co. (NYSE: KKR). “I admire greatly the imagination that the people, especially at Blackstone, bring to looking into areas of the investment markets that most people are not comfortable looking at,” he says.

According to Grant, Blackstone was an early leader in buying single-family houses and renting them out. It has one of the best records, if not the best, in commercial real estate investing. Its hedge funds do very well, and its leveraged buyout operation is quite successful. “If you want one-stop shopping for what most people would define as alternatives, I think Blackstone is a pretty good way to go,” he says. Its shares were trading at approximately 15 times earnings when he spoke, which he did not think were overvalued.

Grant sees plenty of pariah countries, such as China, Thailand and Egypt, shunned for their international aggression or other injustices. “But only one, as far as I can tell, is actually being punished in the financial markets for being a pariah,” he says. And that is Russia.

Year to date through mid-May, the MICEX Index (composed of the 30 most-liquid stocks of the largest and most rapidly developing Russian companies) had fallen 13.2% in U.S. dollars, while the MSCI Emerging Markets Index has gained 1.3%.

In one of its recent articles, Grant’s emphasizes that it is neither bullish nor bearish on Russia. The intentions of the Russian government, it said, are “all rather murky.” But the journal is bullish on Russian stocks, where it sees value.

For instance, Grant’s likes Russian energy companies Gazprom, Rosneft and Lukoil, which in mid-May were all trading at roughly three to six times earnings—well below U.S. and emerging market oil companies—and offered dividend yields of as much as 4.5%. The Russian government owns most of Gazprom and Rosneft but holds no acknowledged equity interest in Lukoil, he says. Jim Grant owns all three names, which are listed on the London Stock Exchange.

Grant’s also likes Sberbank, successor to the old Soviet Gosbank. It holds 45% of the country’s retail deposits, and the Russian central bank holds a 50%-plus share interest in Sberbank. “By the numbers, Sberbank is a picture of good health,” Grant wrote in a recent article, referencing equity capital, nonperforming loans and reserves for loan losses. While the journal says it’s hard to know the true condition of any bank, Grant’s is encouraged that Sberbank survived the 2008 crisis-induced collapse of crude oil prices (to $36 a barrel from $146 in six months).
 

To be sure, investing in Russia is not for the fainthearted. Another one of Grant’s alternative investment strategies, short selling, isn’t for everybody either, he says.

“But if you can identify a moment in which the world seems to be optimistic and uncritical and can’t be bothered to analyze,” he says, “then that might just be the time to put on your bear suit and investigate the possibility of short selling.” As he sees it, it’s that time for junk bonds.

People still buying these high-yield securities (and “high yield” is a misnomer now, he says) are accepting fixed-income returns while bearing equity-like risks. “It’s a very poor deal indeed,” he says. A simple way to short junk bonds, he says, is by shorting the SPDR Barclays Capital High Yield Bond ETF (JNK).

Other stocks Grant’s thinks of as short-sale candidates are “story stocks” and “never-never stocks.” The former are seasonal plantings that flower in bull markets, the journal explained in a recent article, while never-never stocks bear fruit in all seasons but only for the insiders, never for the shareholders.

Tile Shop Holdings (Nasdaq:TTS) is an example of a story stock. It is trading at more than 55 times trailing 12-month earnings in anticipation of huge potential growth in the distant future. Meanwhile, Grant’s calls Amazon.com (Nasdaq:AMZN) a never-never stock. In January 2014, it was trading at 1,454 times trailing 12-month net income.

Investors, Grant says, should remove themselves “as far as possible from the crowd and try to think profitable and contrary and, if necessary, bloody-minded thoughts, and imagine how things are going to look rather than to observe now how things look.” As for all the political yo-yoing on mortgage lending standards and other issues, he says, “The way to invest is not with an eye to Washington; it’s with an eye to value.”

Grant, 67, admits being pretty critical of the Fed for most of his adult life, but says it’s not because of the personalities involved or anything purely political. “I believe the Fed is implementing the wrong policies based upon the wrong ideas,” he says. “My bedrock quarrel is our central bankers seem to believe they have the power to guide and steer the national economy through the manipulation of prices—interest rates being prices.” And price control never works, he says.

What would he do if he were in charge? “First, I would institute the Fed’s first Office of Unintended Consequences to study the unintended consequences of those well-intended acts,” he says. “Maybe later in the morning I would announce that the Fed under my regime is going to get out of the price-fixing department and give free rein to market forces in determining financial asset prices. It’s a busy morning and we haven’t even had lunch yet!”