Full Transcript: Jim Grant on the Thunderclap of Cycle Change

The End of the Decades Long Bond Bull Market

Matt: You are watching excess returns. I’m Matt Zeigler, Justin Carbonneau, he’s in the driver’s seat today with me. Extra special guests, mostly because for all of us financial media nerds, we, we’ve got one of the OGs with us today, one of the greats. You know him for observing interest rates. I, I remember getting my newspaper style copy of the letter, passed to me in an office almost 20 years ago and thinking, how cool, how cool is this?

He’s got a new book out, which has nothing to do with buying low or selling high friends until the end. That’s the latest. But today we’re talking about all sorts of things. James Grant, welcome to Excess Returns.

Jim: Alright, thank you Matt, and thank you Justin.

Matt: So, let, let’s talk a little bit about this Buying low and selling high business.

You’ve talked about o History helps us. It’s a living,

Jim: it’s a, it’s a,

Matt: it’s a living. You’ve talked about how this helps us spot cycles. Can you talk about the process of looking at cycles and what you think it tells us about the current cycle we’re in?

Jim: Yeah, it’s, it’s, it’s, it’s a matter of, a very unscientific pattern recognition.

And, there’s nothing God is, is there ever nothing precise about it? we started to, observe as is our line of work, that, house prices were moving way out of line in the year 2001. And let me say that timing was not exactly pinpoint, and we kept developing that thesis. And, it wasn’t until, 2000 and, what was it, 2006 that, a gigantic document came into our hands that, described one of the, mortgage, structures, the, the very leveraged and very opaque and, very, forbidding.

mortgage structure and, and I, I gave it to, to my colleague Dan Gertner. I said, here, Dan, Dan was a, is a alumnus of, of the, of the Purdue Engineering School. And I said, Dan, I make sense to this. And he came back a day later, he said, I can’t figure it out. I said, aha. Got ourselves a story.

So, so that’s that, that, that, that, illustrates only that, the recognition, if that recognition is correct of, of an excess of a, of an actionable, wrinkle in the Matrix. you have you, to us it’s a matter of, identifying the wrinkle and then sticking with it and, and, and, and building the thesis.

So that a reader can, follow along and if he or she disagrees, we open to, that cancellation of that subscription. the, I’ve spent a lot of time in public libraries and done a fair amount of reading and writing over the past half century. And, some of these episodes, stick with me.

One is, having to do with, the year 1933 and the American Banker, which was then published like a newspaper. It wasn’t till not so long ago, maybe 15 years ago. The American Banker was a daily paper catering to, what, and the editors of the banker addressed its readership, said, done. back in two th 1929, bankers were, speculating whether they knew it or not in, in credits that proved to be quite speculative.

And time has passed, and there are many fewer banks and bankers around today. But we observed, said the banker, the American banker, that, BAA kind of bonds are trading at huge spreads to treasuries and to investment grade. And doesn’t, wouldn’t, wouldn’t it make sense? because Franklin d Roosevelt was then, on the record as declaring his determination to lift the price level back to the levels of like 1926 or something.

He, Franklin Roosevelt was then an avowed inflation. Wouldn’t it make sense, to build a small portfolio of these friendless, high yielding, but evidently money, good securities in a bank portfolio? And to put the question to its readers. And the readers replied two to one, you must be crazy. Stop it. do, do not ask that question again.

So it, it shows that, what does it show? It shows that, people when they’re are bullish, often when they ought to be bearish and vice versa. It shows that, markets are inherently cyclical, that the human factor is over, almost always, foremost. And it, it shows that cycles can last longer than you think.

so we can we continue to look for, for patterns that, offer some promise of, of, presenting us with an investible thesis and one such pattern. Is the observed, long trending decades long cycles in interest rates up and down.

You two sent along a cheat sheet. This, this, this, episode of your excess returns po is not exactly unrehearsed because I have had advanced notice about the, so it’s a little bit phony, right? It’s a little bit

Matt: phony. Yeah. But, but not a lot of bit phony. No, because I didn’t know you were just gonna tell that story about the American bankers.

I mean, this is, this is great. This is great. Jim: so, yeah. I just forgot what I was gonna say, but all I know is brilliant. Something to do with cycle. Oh, yes. interest rate cycles. So, interest rates are unusual, if not unique in their proclivity for trending higher and lower, not in fiscal quarters or years, or, even a single decade.

But, They have exhibited this tendency to rise and fall over the course of generations. This goes back to the middle of the 19th century. they, fell for the final several decades of the 18 hundreds, then rose in the first two decades of the 19 hundreds, and then fell from about 19, 21 until 19, 46, and then embarked on a bear market that became legendary and defined the, or conditioned the investment expectations of the whole generation of people.

And that was the bear market that began in 1946 and ended in 1981. It began at two and a quarter on the long dated treasury and ended in 1981 at 15% on that same security. Right? And, and just the range of that, just extraordinary. Yeah, but not so extraordinary as a cycle that succeeded. It. That was a great bull market in bonds that began in the autumn of 81.

Nobody issued a press release with year. It was, and I think it ended in 2021, about 40 years later, with some ungodly number of, securities worldwide priced to yield less than nothing between 15 and $20 trillion. Bloomberg had this feature that will tell you how many, so how many, what’s the dollar value of bonds today, priced at negative nominal yields, and it was 15, 20, 29.

So what you, what you want, and this is again, this is, art, maybe it’s hope, it’s hard sometimes to, disaggregate one’s hope and expectations and forecasting agenda from an objective appraisal. The evidence, right? That’s what we all. Labor against. but it is, it seems clear to me that, what defines a major top or a major bottom is some particular absurdity that you can hardly imagine the human race is capable of inflicting on itself.

So, in, in, 1981 it was, it was a treasury security 1984 better as examples, retest of the lows in price and highs in yield in 1984 that the treasury yielded 14% in the face of a, like a five and a half percent inflation rate, like eight and a half percentage points of real yield. And now people are, are fighting with, with pen knives over 50 basis points of real yield, so then there.

Eight and a half percentage points on offer, I can assure you. ‘cause I was around and paying attention that not many were so enticed by that. So that, that, that is one bookmark or book end. And the, reciprocal book end would be the aforementioned, many trillions of dollars of bonds priced to deliver a certain loss to the holder because that certain holder had to own bonds.

That certain holder was a believer in the deflation thesis that hurt a certain holder, a certain holder was of the conviction that there’d be a greater bull on bonds about ready to, take those securities off his or her hands. But that, to me, those two bookends defined a complete cycle. And here we are.

So it’s, four years later from. prospective low and the prospective beginning of a major bear market. And, so far, so bad. but again, this is, if, if anyone thinks this is has anything to do with physics, they should, they should, they said, oh, they should subscribe to grants on the, on the misapprehension that we’re precise about these things.

We, it is qualitative and sometimes

Matt: it works out a lot. I’m glad you mentioned it in the context of writing about housing back in 2001 and talking about the interest rate cycle sort of hitting its climax in 2021 housing. It took a while Ah, yeah. For markets to catch on. You’ve been writing about, we might be near some type of recent inflection point.

Tie those things together. Where, where are we today in 2025, approaching the end of this year.

Jim: Well, I think with respect to bonds, we are in the early phase of a major bear market. And, so the, the question is, what, what is likely to be the driver of this, upcycle and rates down cycle at bond prices and, say inflation?

It’s usually the case in the bond market that is the, it’s the immediate cause of, price movement. And, the, so what causes inflation? So there are many different theories, almost as many different theories as there are economists, which is not very confidence building, but there is one almost fail safe cause of inflation and that is armed conflict or the preparation for the same.

it’s, investing money for the sake of destroying capital. So that answers the definition of, that’s like, building data centers without really any hope of them making money. So a friend of mine, a, a guy named Steve Bogden, an investment strategist, propounded a thesis that we, echoed in grants a while ago.

And then as it, this is we’re returning to, an, an economy of the tangible. There was a book out, 5, 5, 8 years ago. It was called Capitalism Without Capital. And, it argued quite persuasively. so look at, look at the great, businesses of day. Look at, Facebook has Met was then called and note that.

it does business with about six people in the office, right? And, cash generation is phenomenal. And, and that same characteristic held for many other such, digital, activated businesses, businesses that were made possible by the advances of Silicon Valley. And the authors of this book projected that the, that the absence of capital would characterize our economic lives for many years to come.

And of course, that, that suggested interest rates were, would likely remain low as the expression goes through a foreseeable future. here’s a phrase. Foreseeable future, what do you think? Six weeks? No, no, no, no, no. Nope. Not that long. Check your phone. Right Here’s. Meteorology is a science and their forecasts are good for like five, 10 days.

So, so Steve thought that we were coming on a cycle of investment in tangible things, and lo and behold, what is more tangible than these data centers? One of which I think meta is, is, is, is, is chalked into, Louisiana occupying most, most of the state or actually the size of Manhattan, which is, that’s about as big as Louisiana, right?

About give or take,

Matt: of course, Houston hand grenades.

Jim: Yeah. So the market’s rewarding this and, tens and twenties of billions of dollars people are tossing around. So a a trillion is now one Elon in this office. A trillion is what Elon’s gonna make next year, I guess, if things will go well. So, so how many Elon’s are we talking about with, with data center?

A lot. Right? And data center and, and now and prospectively and open ai, which is maybe the, figurehead of all this is promising to turn a profit. And in the year 2030 foreseeable, or 2130, I forgot. In any case, not, not next year.

Matt: Yeah.

Jim: So, and and then there is the armed conflict angle and even casual readers of the papers, can see that things are not all well in the geopolitical front.

So, I think we’re getting a lot of tangible investment and I think the surprises in that scale, that investment might come to the upside and therefore pressure on rates might, persist to the upside. That doesn’t speak for the full perspective 20, 30 or 40 years, but to the start,

Matt: you’ve, and I’m really happy that you, you threaded the needle the way you did, because I think this idea, one of my favorite expert explanations of the 2020 forward period was somebody calling them the tangible twenties.

And I’m going back five years. I don’t remember who said it. That was, that was a

Jim: good

Matt: call. But I, I love that framing of, of what this meant was we were so convinced that every business could be asset light, that maybe we finally have tilted back to where we have to start adding tangible things back into the world, into business.

Yeah. And the upside pressure in rates is there. And another analogy I’ve seen you use, which close to my heart, a few hours west of you in northeastern Pennsylvania here, compared I think inflation to like an underground coal fire, which we’re very familiar with where I grew up.

Jim: Oh yeah. Did you, did you feel it in the soles of your shoes as you walked over the uh.

The blazing, fire, 500 feet or wherever it was. No, I can give you

Matt: actually went to a movie, this would be in the late nineties, that doesn’t count. And in the movie, oh, we had, it was before Fancy cup holders and things like that. And, leaned down halfway through to pick up the soda and like all my ice was melted.

And I asked my buddy next to me and he is like, Hey, mine too. And then we realized we’re all stuck to all this melted gum on the floor. We found out that night it was because a mine fire had reignited. It was actually under the theater and all this radiant heat was melting all of our drinks. So close. I got close.

Yeah.

Jim: Okay. That counts. well that was the case in the seventies. inflation did not, visit us all on the same day and persist for the full decade and a half or so that, inflation in the seventies was actually. It got, got start by 1966, call 65 66 and persisted until, through 1980. So, decade and a half.

So over that period, there were, there were several cycles of, of, of acceleration and deacceleration. And every time it, the rate of change of inflation decelerating, there were bound to be several members of the, the incumbent administration, whether that was Nixon or Carter, saying, well, it’s, that’s over.

But it, it, it, it broke out again. It broke out again for different proximate causes, but, maybe the underlying cause was, a federal reserve that was, ever so accommodating until, of course, October 6th, 1979 when, Paul, a Volcker stepped in. And now we have a federal reserve that, is under orders to become, to be very accommodating strict orders.

Justin: What are your thoughts on that? I mean, the, the, the, the, the president sort of trying to dictate what the Federal Reserve does and its sort of independence. Does that concern you?

Jim: Well, the, the, I, I, I put this on Congress, the Constitution is my friend Seth Lipsky puts it, del assigns somewhere between 99 and 101% of the monetary powers in this country to US Congress.

It’s, it’s, and Congress has turned around and delegated the same to the Federal Reserve. So, really the President, ought to have much less to do with things than the Congress, which is, seemingly still rather passive in the face of the executive branches determination too. take over the institution.

Now, the, the Fed is never actually independent. It is, it’s always a creature of some ideology, some political meme, some, oh, mostly I guess, an economic meme. it’s a, Neo Keynesian models now dominate and, monetarist models dominate for just a little while in the early eighties. And, presidents have always, tried to, modern day president all going back to Andrew Jackson.

Presidents often and on for a century and a half have tried to work their will on the Central Bank. Jackson actually, destroyed the second bank of the United States, the Fed being the third, bank of the United States. Um. So the, the, this business about the Fed loss of independence, I think is a little bit of a canard.

What we want to know is whether the Fed is going to, to work even harder to the base, the currency than the other Fed. The previous Fed was doing. The, the, the American Electric has expressed its, disapproval of inflation pretty emphatically in the polls, and yet very few people put together the fact that the Fed is in the business of generating a 2% rate of rise in prices every single year, as if it could, refine that 2% and deliver that precise amount of inflation as very in imprecisely measured.

So a lot of things don’t make sense to me about the Federal Reserve. and, I, this. We devoted a page, page one of our of grants a couple of months ago to, to Donald Trump’s monologue in the south long of the White House. The headline over the piece was, six Guys in Two Flagpoles.

This was the day that, Trump was, Trump can’t stay away from construction site. He knows he knows a lot about that. So, there he wanted a flagpole, that was, that was worthy of him and the country in the back of the White House. So he, he comes on out and, engages the, with the construction workers, gives him a little photo wipe, hands out caps, and, he lines up the construction workers behind him and he holds forth with a monologue about, about Jay Powell.

Anyway, jerky as. S Insensate. Oh, that’s his. Insensate was not his word idiot, I think was the word he used. And, he goes, he gone for 20 minutes in this fame. And, afterwards, the Times, New York Times, interviews, one of the guys who had driven, from the crack of dawn is his house to participate in this, construction project.

And the, the rigor as they call the, this kind of construction worker. Tell us the Times reporter, who’s Jay Powell had no idea what Trump was talking about. Can you imagine what a, what a great scene it was. What a funny scene. And, and that’s, that’s Trump being a little bit winning, being utterly, having utterly active self, lack, no self-awareness.

But neither this a fed, none, none. Which makes for good newspaper good journalism. I, I, it’s, it’s, it’s funny when you can catch them out as we always do in some statement, that it’s patently not actually true, but they are willing to, to tell us that it is. So

Justin: you had mentioned the financial crisis earlier and I’m just curious on like, when you look at the actions the Fed took Ben Bernanke and sort of how they came in and, and rescued the markets and the economy, do you score that as, I mean, in thinking back, I think a lot of people think that that was needed during the financial crisis.

‘cause it was a collapse in confidence, the financial system, I mean, you’re in New York, so that was almost like the epicenter, if you will, outside of the housing market, but with the financials, Lehman Brothers and such. But I’m wondering. Was there sort of a downside to that too, because, you went from less than a trillion on the balance sheet to, whatever it is today, seven or 8 trillion, and the Fed intervening in markets and sort of creating this almost dependence on the Fed in, in a, in a bad way.

Do you have any perspectives on that?

Jim: Oh yeah. I’ve probably written a million words on that. I, I, you could make, you could make a, you could make a case and many people have made a very persuasive case that the Fed did what it ought to have done by intervening heavily to, to stop the panic that, that culminated in retrospect, culminated with the failure of Lehman Brothers.

But look what happened next. It was, it, what is it? 2008 until the present. That’s a lot of years. And the Fed is still trying to get rid of the accumulated, the treatise and its ballot sheet that, that it, accumulated in continuing to save us from ourselves in the years following the crisis.

And Ben, remember Ben Barki made this appearance on 60 Minutes and, the, the 60 Minutes reporters said, so can you, in effect, can you, can you reverse all this? And, Barki said 15 minutes. No, not in 15 years. Actually not in 15 years. So consider where we are today. the Fed, well, this is a big question indeed.

so, so the Fed was arguably, I’m not quite persuaded myself, but I, I think the burden of evidence and of common sense and of the political sensibilities of this country. support the contention. The Fed was right to do what it did in 2008, and maybe two th okay, accept that. But then, the same Benke comes out, writes the Washington Post op ed in 2010, I believe.

And in it he says, we are going to, buy treasury bills, bonds, mortgages, what have you, to, to lend a helping hand of the financial markets to raise up the prices of, publicly traded securities. And, and, the result will be a wealth effect. And this wealth effect, will finally, will finally stimulate, everyday commerce on Main Street.

That was, and in the day that was called. that was called, the trickle down effect. And I, I think people used it disparagingly maybe during the administration of the first bush, the George HW Bush. It sounded like something that a, lady bountiful would do. We’re gonna have a little dinner over here and, and afterwards, you new people in the village, you can come by and, and see what’s left.

So, I don’t think that Ben Esper PhD made it exactly that way, but he did mean that the means to the end of a new prosperity would be through the agency of the markets. And, so what we had is QE one, QE two, QE three, a little respite there, a little QT and more qe. Let’s fast forward to 2019. So.

it’s the fall of 2019, September and 2019. And, and suddenly, without warning, the, overnight repo rate, spikes from 2% where the Fed wants it to be to 10%, where it decidedly did not want it to be. And the Fed intervened and it kind of freaked out because the money market has been kind of essentially nationalized since, the financial crisis and the Fed, cut the funds rate a little bit and pledged a week or so later, a couple weeks later, to buy $60 billion worth of securities every single month.

And then said, this is not qe. This is just, a technical adjustment. But this, this gets back to the question you asked, Justin so long ago about whether the, the intervention of 2008, 2009, whether that was justified and what the long-term consequences of it might be. So the long-term consequences I think are include especially a financial community that has been spoon fed easy credit for many years.

Credit that sensibly was zero at the wholesale level by a federal reserve that was almost oblivious to, the consequences, adverse consequences that would, might take the form of inflation, of the, of financial assets, otherwise known as a great bull market or a little bit less benignly. that inflation of the CPI that takes the name of inflation, period.

So. I think the, the consequences has been, been painful, very bad. although they feel really good. And that’s, and that’s the catch, right? Who’s not in favor of a little excess to the upside. there’s a, you see the story in the Wall Street Journal the other day about, how, the armed forces are now fully engaged in the crypto and equity culture, which is okay except they’re dealing with live ammunition.

They’re not trading, watch it. Are you, are you sure? Watch that Five inch shell, their sailor. That’s, that’s job one. We’ll find, we’ll ask about Bitcoin later.

Justin: Well, I mean, I think the other, this statistic came out just a month ago, which I think for the first time in this country, the average first time home buyer rose to over 40 years old.

Where like five years ago it was like 38 and five years before that it was 33. In the eighties it was the mid twenties. Yeah. And so to the point about like, when I saw that statistic, I couldn’t help but think, keeping those and believe, I, I’m personally a benefit, a, a beneficiary of those, very low interest rates when I had the ability to finance.

But in terms of people now being able to afford houses and household formation, people being willing to move and maybe try to downsize, but they’re, they have these ultra low in yeah. Interest rates. So I feel like that is a con one of the consequences that, has come from those ultra low rates.

Jim: Yeah. So along with the, demographic, problems, or at least the, to, not to characterize it, but the, declining birth rate, although birth rates are declining all over the industrialized world, I’m not sure how much our Federal Reserve has to do with birth rates in Italy. Yeah. Come to think of it.

They’re, they’re responsible. I, I’ll blame that though. I’ll blame that too.

Justin: Alright, let’s talk about current markets a little bit. This is good, but let’s talk about sort of where,

Jim: okay.

Justin: So, private equity, private credit, these have become a big part of the credit markets, well, I guess private equity and private credit markets. So, you’ve kind of talked about the accounting, the creative accounting, things that they can do and what risks there might be underneath the surface.

So when you think about that, what concerns you most there?

Jim: couple things. the opacity of these private markets, you can’t see into them. the marks on private credit are somewhat arbitrary. In any case. Not, observable, not, not verifiable easily. the rating agencies that have taken up.

Private credit is their special domain are not the principle ones, but ones that are perhaps more susceptible to the blandishments fees. there’s a, there’s a, there’s a, there’s such a thing as a credit cycle. It begins with, lenders saying, having recalled all too well the preceding bust that precedes the start of it up cycle, I am not going to lend against the collateral of treasury bills, supplemented by three gold bricks.

That’s, that’s, that’s collateral require. So that’s the beginning. It is a general aversion to risk in an aversion to lend. That was the case in 1933 and the cycle progresses and, and at length these, this sphere, gives way to, a tentative. Optimism, and then at length, a boldness that takes the form of, what we see today.

For example, the almost complete eradication of, the fine print in lending loan documents called covenants that protects the lender in the event of a default, almost. Those are almost gone. the tightness of spreads, against say treasuries, of corporate security is generally including, private credit loans.

So the, so the, the, the cycle is, is, is, is very far advanced optimism, is the dominant, emotion. And it’s the, and due diligence is, for, the old and infirm. That’s basically the way we’re rolling and, and, and credit. So. And you can see it, you can see it in, for example, we have, one of our themes today is, is the risk in life insurance.

And, it’s, it’s such a, it’s such an inherently unattractive, business for thrill seeking analyst and journalists that we are happy to have it until, pretty much to ourselves for the time being. and what we observe is that, private credit increasingly is in the throes of private equity.

And private credit. Private equity owns a great many insurance companies. And, the insurance companies in turn invest in the private equity promoters and they invest in private credit. And, we think that, come the next down cycle, which we have no idea about which we, about whose starting date.

We have no idea come that time. That life insurance and the crisis of the failure of life companies to the very heartrending costs of annu and pen and pensioners and, and, policy holders that will be a, a, a major political, hotspot come that time when again, who knows? But, we see excesses building up.

They’re very, very worrying in the life insurance business.Matt: Expand on just the tightness and credit a little bit more. Like we’re, how close are we to that powder keg, catching in, something spreading versus how long can it persist in an environment like we’re in right now? Oh, that’s easy, Matt,

Jim: longer than you think. That’s, that’s the way it is. that’s just the way it is that, to, add to my bonafide as a non-market timer.

the late Alex Porter and I along, with Ken Shirley, took an interest in, Japanese equities in 1997. They were selling, if you remember the, oh, if you read about in grade school, the market in Japan peaked in 1980. I was, I was all

Matt: over JD b on the Plaza accord in kindergarten, my friend.

Jim: So the, the Japanese market peaked, actually on, new Year’s Eve of 1990.

That was when, Tyson got knocked out. Remember that? Oh, yeah.

Matt: Yeah. I actually do remember that. Yeah. Mike Tyson’s punch out all the good stuff,

Jim: around then. And, so the, the Japanese market had been in a bear market for 17 or so years when we got in. So the, the we, we, observed that there were, dozens of companies in Japan.

Price to, price so low that their net current assets was greater than their market cap. Meaning, balance sheet assets minus liabilities was greater than, market cap. so we thought, well, what’s the downside? Well, the downside, so we got, Ken went over there and, and, and visited these companies.

met a woman, became his wife, and we set up light housekeeping in Japan. And, so years passed, years passed and passed. And the companies that were cheap in 19, 1997 were pretty cheap. Again, about 15 years later, and one of our limited partners, elegant, French investment banker. tried, tried to console his, slightly guilt stricken general partners.

We, we, we were so confident in the, in the outcome of these, profitable outcome of buying these, net nets they know in the trade. So we went to see him and, hang hanged on him. He said, it’s a, sometimes you have a bad decay bad, and I often think of that and, and, thank him for saying it.

And it’s true, decays going fly by, and, and, but how you, I blame you for this, Matt, because you asked when. Oh, there’s another when story. So, another friend of mine, describes the, I’ve forgotten what Bear, oh, I was a bear market in 1970s. And, my friend was a, a broker at Bear Stearns when there was a Bear Stearns and, his business partner was a man of not inexhaustible patients, even with his best clients.

And he had not his best client, but a very ignoring one. Continue to ask him, when is this bear market going to end?

I never thought this was gonna happen. You never told me it was gonna end. When? And the guy says, oh, my guy. Okay. it’s gonna end, wait, it’s gonna end when you stop asking.

so neither is that exactly pinpoint or scientifically validated, but, so, so much of what happens in markets seems to be almost, what do we call it if you’ve got poetic necessity, right? Some things must happen just to achieve the right poetic denu mal. but we, the, we wound up a port, we wound up the Nep PA partners.

I’ve forgotten the number of years in. It was a lot of years. We had a couple good years and some people made a little bit of money. We made a little bit of money, but, it never, so now the ne average, which we started, was about, I don’t know, about 8,000 or something. Now it’s 50,000 plus. And, Warren Buffet’s there and a bunch of very smart people is there, Andrew McDermott is there.

So that’s, this is, this is the nature of cycles. They, they just, they just, they do wear a body out. Yeah. Justin: What are, when you look at the investment landscape, the assets out there today, like where, where do you see opportunity? And by the way, Japan is like implementing all these corporate reforms, and so it does seem like there might be an opportunity in Japan, but, besides that, like where are you seeing.

Sort of opportunity and for investors

Jim: on the long side.

Justin: Yes. well, short side too, I mean, you can go both.

Jim: well, on the staff of grants, a man named Evan Loren, who was a wonderful stock picker and every other week he finds something to do either long or short. And, he is finding it very difficult to find longs that are worthy of the attention of our readers.

And, so yeah, really it’s not as if there is nothing to do. one of the, one of the mottos of the value community of whom there are like, six people left, I guess is this quote. There’s always something to do and. Yeah, there are some very cheap bank stops stock in France. I mean, I, I don’t wanna get too deep in the weeds in this because we write about some of this stuff and I’m, but we, we, we, we do find some value laid insecurities, both debt and equity around the world, but it’s fine, is rather hard to find that.

What we find is mostly what, we find is, is, is really funny examples of excess, whether it’s, what these, zero day options, or five levered Bitcoin options or ATFs or whatever. So we, it seems to me that the, the, the prevalent, area of opportunity is, the patience to be liquid come the thunderclap that will define the end of this cycle.

that the, even if the, at the bottom of the. The stock market in 19, what was it? Was it, no, no. Two. the I have in mind is that of 2007, eight, nine. So the bear market, 2000 7, 8, 9. So in 2009, early 2010, there were dozens of stocks in the s and p 500 that were selling below $5. And if you bought a basket of those things, some went outta business, but a lot of ‘em were up like, 50 fold.

So this requires, two things. It requires a bit of cash. It requires, mostly it gets patients that cycles are still exist in the world and this is not a one way market, and that there will be opportunities galore. In fact, probably too many opportunities, too frightening opportunities available. more than, even the most assiduous.

A value seeker would care to have presented to him or her. That’s the nature of the, of the bottom is God, I was rooting for this. Yeah, no thanks. Let’s go back to excess on the upside. speaking of that, 1974 was a beauty, I mean, that was full of, net nets and, but there was, it was, it was a rather joyless time for even the, the bulls.

The people who were prepared to get bullish got bullish well before the bottom, and they had the pleasure of seeing their value laden stocks had ever so much more value laden. That’s the nature of it. That’s the nature of things.

Matt: What do you think in terms of, especially with the inability to find opportunities on the long side per your colleague where we are with interest rates, there’s a lot of people still hanging onto this idea of the 60 40 portfolio.

Being long stocks being by, what are your thoughts there?

Jim: Well, it’s given, it’s given pretty good service for a long time. It’s done a good job. but we’ve seen, at intervals over the past couple of years, we’ve seen, bonds and stocks do the same thing together. We’ve seen bonds go down, stocks go down.

And if we are in a long term bear market in bonds, and if the stock market is indeed as overvalued as numbers say it is, it might just be that, an episode of stagflation will be our lot in which bonds depreciate the stocks depreciate. The 60 40 portfolio will not do much good. so I I I, I don’t mean to sound the way I sound, but I blame other people for it.

I, I blame the authors of this mess. It is gone on for so long, and the extremes are so, extreme that, one becomes, rather acclimated one, one becomes, kind of complacent in the face of most remarkable sightings of, overvaluation and speculative, daring due. So we, what we try to do here is to, is to look for opportunities, such as the, the r and to bring ‘em to the attention to our readers and warn them away from such things as, the bubbly stocks, especially bubbly stocks and, and the, and the excesses that have developed in the credit markets.

in the credit markets, senior securities. Something we wrote about this past, issue, the senior securities have lost a lot of their, of their, of their inherent strength, their inherent defensive, properties owing to, the way, bankruptcies are conducted today and the way, port, corporate balance sheets have been structured today.

so senior securities are not so senior and their recovery rates are not so high as they have been. So of course, in capitalism, all is in flux at all, all times. But we are, a lot of the movement we are seeing today, a lot of the, the flux we are seeing is the. A result, not so much of the dynamism of markets, but rather of the consequences of so many years of ultra low interest rates.

And that’s my conviction that, where racer going is almost not so important as where rates have been. And I say that because the, where rates have been is, is largely responsible for, capital investment put in place, beginning in, in the early twenties, late teens, early twenties. And, for the private equity portfolios.

Have they have, they, have they been structured and the risks, of those very in leverage structures years. Are going to lend a certain, propulsive power to the downside come the next recession.

which again, is gonna set up for some marvelous opportunities, but, opportunities that most people will wish they had never had the opportunity to see.

Justin: Jim, what do you think about the decline in freedom around the world in the past 20 years? Both economic and sort of personal freedom and how you would think about that?

even here, maybe in the US things like tariffs and certain things that may not be, what we’re used to or could be consider. It not really something that, capital, you, that capitalistic and, societies tend to, to do or implement. And so just in general, like how, how, how would you respond to that decline in freedom and maybe the risks that it pose over the long term for investors?

Jim: Yeah,

I guess there’s the freedom that comes from laws and the absence of laws. And then there’s a freedom that comes from a society that is prepared to live and not live. And I’m not sure what is the more important, branch or department of freedom, the one that rises spontaneously in a well ordered society or that which comes from the doings or the refraining from doing of our legislators.

And. To get down to ca. Okay. We’re really talking about Trump, right? Okay. So I voted for this guy three times in a row, three times in a row, always, with the determination to, to, register a short sale in the opposition. I can’t stand this guy. I think that he is, an autocrat born and, and now in power to do, I think he is a ful influence on the country and perhaps on the world.

He is done some good things. I, I applaud the good things he’s done. He is, he, he is, he ask about freedom. So he is, freedom has to do with, the, lady justice, was a blindfold to, remind us that justice is impartial. So you blow up boats in the Caribbean and then you let this, let, the um.

The, the, what, what kind of junk was the president of Honduras, selling? Was it, was it, heroin or

Justin: it was some kind of drug? Yeah. I don’t know exactly what.

Jim: Yeah, so arbitrariness in the administration of justice is not freedom. The suppression of speech on the college campuses or elsewhere is not freedom.

That’s, that comes from some sort of, unholy, how do we get here? But this, this alliance of people that say you can’t say that. Well, yeah, I can say that says, it says it right here in the kin. I can say that. Nope, not you, not now. Not here. So I feel as I suspect perhaps you do too. I could. I feel that a great.

narrowing in the bounds of permissible, socially permissible and legally permissible action. And I think it’s, it’s, it’s a very bad thing. I think the rise of, these autocratic states is a bad, is it? And I’m uttering commonplaces on your time and mine, but yeah, I’m all for freedom and, especially the kind that has nothing to do with Washington DC I’m, I’m for, I’m for not worrying about your conversation at dinner, being overheard by the people at the table next and, and, and registering their disapprobation of you on Facebook or whatever it’s called now.

I, I want, I live and let live. How’s that from? Political pro, pro platform. You think, think, think I could do it. If you pull it off, go for it. I’m 70, I’m 79 now. You think? Is that, is that old for the presidency? I can’t hear you.

Yeah, so live and let live is my program. It’s a good program. Okay. Okay.

Matt: I’ll vote three times if I have to. Don’t worry. I, I got one more, one more markets related question, just because I’m, I’m very curious about this too. gold. Ah, yeah. Give me, give me at least a James Grant soundbite on gold. What’s going on?

Jim: gold is the reciprocal of the world’s faith in the paper currencies managed by central bankers. the price of gold is the reciprocal of the world’s confidence in, in, in, in money. money that we carry with us that we know as money. Not one person in a thousand probably walking around thinks of gold as money they think of as a collectible or something like Bitcoin, but not as cool.But to me, gold is the legacy money, and it is, I think there’s a kind of a, a preference cascade the world over for gold among the central bankers and among other others in the monetary business, be they commercial bankers or central bankers. I think mostly these commercial bank, mostly central bankers now.

the Fed is almost alone in not owning any gold as a central bank. so I, I, I think that, the gold price is going up because I think that confidence deservedly in the, in the ideas and in the deeds of our. Own central bank, that confidence is receding. Is it? Is it, as I say, is it ought to, ought to be receding?

Yeah.

Matt: So I think it’s time for a few of our favorite closing questions. Okay. This first one’s a tricky one. Can you name something that you believe about investing that most of your peers would disagree with?

Jim: Yeah. Gold is money.

Matt: Say more. Expand. Expand. Do, do you explain that?

Jim: Oh, I think that, gold has been, is now and will be money.

I think that, I think that, here this is even more, this is even more something, even more people disagree with. I think that the, that the historical cycle beginning in say 1971 or 73 to the present. Wow. In which paper Money Reigns Supreme will be seen as, a failed experiment and monetary invention, and that, gold will reclaim some place.

I don’t think people will walk around with coins in their pockets, gold coins in their pocket, but I think gold is coming. Gold is coming back. Not like the old South, not like the Brooklyn Dodgers. Not like the cutthroat razor, not like a sextant. but I think gold will have its day, again, as a form of money that is acknowledged as such.

and that, it’ll be good for the gold miners. Yeah, that’s my story, my story. Matt. I’ll take that. I’ll stick to that one.

Justin: And, and, and, and lastly, Jim, we like to ask all of our guests, what is the one lesson you would teach your average investor?

Jim: Oh, don’t stand in line to make an investment. I, I queued up at the office of Nicholas Deac in Lower Manhattan.

The very peak of the 1980 bull market ended bull market in gold ended in 1980. It was freezing cold. I stood in line, this was in January of 80 to buy a single Kruger ran with my pity of Bo Dow Jones salary, and it was like 20 years and recovering that price, maybe 30 years. I remember sitting with my wife around the proverbial kitchen table trying to scrape together money for our fancy, private school tuitions in the city of New York.

And, and there was this coin sitting on the table. It was my, it was my lonely Kruger brand, and it, it it did not cut much of a figure compared to oh, common stocks. So yeah. I’ve told you all my secrets. Mm-hmm.

Matt: Well, we’ll take them aside from the new book Sending People is it’s grants pub.com, right?

For the, the website. Yeah. Yeah. Come take a look. No pressure. Come take a look. Do you accept payment in Krueger Rams or is that a yes? Oh yes. Fantastic. James Grant, absolute pleasure to have you on excess returns. Well, thank you, Matt.

Jim: Thank you, Matt. Thank you, Justin.