Jim Grant has tracked the ins and outs of Federal Reserve policy and its effects on the economy and markets in his popular newsletter, Grant Interest Rate Monitor, for more than 40 years. The ever committed and often deeply skeptical economic historian has made a name for himself with some pretty predictive forecasts before past financial disasters, including the global financial crisis.
Now, in an interview with luck, Grant states his fears that there is another potential disaster on the horizon. He argues that after nearly a decade of near-zero interest rates, the US economy has developed a debt problem – one that is likely to end badly now that higher interest rates are here to stay. Grant warns that the inevitable repercussions of the end of the “age of free money” have not yet been fully felt.
The “everything bubble” and its consequences
To understand Grant’s concerns, we have to go back to 2008, the year in which he believes Fed policy became completely illogical.
In order to help the economy recover after the global financial crisis, the Fed kept interest rates near zero and instituted a policy called quantitative easing (QE) – where it bought government bonds and mortgage-backed securities in hopes of stimulating lending and investment. Together, these policies created what is now colloquially known as the “free money” era, pumping trillions of dollars into the economy in the form of low-interest-rate debt.
Grant has long claimed that the Fed’s post-global financial crisis policies helped burst the “everything bubble” in stocks, real estate, everything. Even after a rough year for stocks in 2022, a two-year real estate slowdown, and the regional banking crisis last March, he still fears the bubble has only partially deflated.
While the banking and commercial property sectors have been hit hard by rising interest rates, Grant’s biggest concerns relate to the credit markets.
After years in which companies (as well as consumers and governments) have rapidly increased their debt burdens, Grant is concerned that many will soon no longer be able to sustain those debts. With current high interest rates, refinancing will be a challenge, especially as the economy slows. “I think the consequences of more or less the proverbial 10 years of free money will impact the credit markets,” he said. luck.
Grant pointed to so-called “zombie companies” as one example of problems lenders may face. like luck It has previously been reported that hundreds of companies managed to stay afloat during the era of free money by using cheap debt to maintain broken business models. But now, many of these companies are facing pressure as the economy slows and borrowing costs rise. This means they may not be able to repay lenders. “It is possible that the accumulation of errors in lending and credit allocation caused by the invitation to lend indiscriminately — i.e., the 0% interest rate regime — was an open invitation to overvalue credit,” Grant said. luckAdding that “the assets may face the consequences of this even now.”
Take WeWork as an example. David Trainer, founder and CEO of investment research firm New Constructs, to caution For years the coworking company hid its unprofitable business model with cheap debt during the era of “free money.” Now, after a failed IPO, years of bleeding cash, and a rush to go public via a special purpose acquisition company (SPAC), WeWork has lost millions from investors and gone bankrupt, forcing the company into bankruptcy. Abandoning leases Leaving lenders in the lurch.
“WeWork is just the first of many unprofitable companies facing potential bankruptcy,” Kyle Guskey, an analyst at New Constructs, wrote in a November note. “As the Fed increasingly embraces a ‘higher for longer’ mentality, the days of free and easy money are over. Hopefully, the days of billions of capital spent on loss-making companies in hopes of fooling unsuspecting retail investors are over.”
In his view, bankruptcies are already on the rise. There were 516 corporate bankruptcies during the month of September, according to the bank Standard & Poor’s Global — more than in any full year dating back to 2010. U.S. corporate bankruptcies rose nearly 30% in September from a year ago, the federal court said. Data Offers.
Photo by Susan Upton/Getty Images
Bubble years
Grant is just one of many well-known names in finance who fear that the age of free money has created distortions in the economy that have yet to correct themselves.
said Mark Spitznagel, founder and chief investment officer at private hedge fund Universa Investments luck In August, the Fed’s post-global financial crisis (and pandemic-era) policies created “the largest credit bubble in human history” and a “gunpowder” economy.
“We have never seen anything like this level of total debt and leverage in the system. It is an experiment,” he warned. “But we know that credit bubbles have to burst. “We don’t know when, but we know they have to.”
Grant is also known for his predictive predictions about past market bubbles. Long before the subprime collapse of some of Wall Street’s longest-standing institutions, Grant warned on several occasions Newsletters That mortgage lending standards had become too lax and the volume of adjustable-rate mortgages in the housing market left Americans — and banks — vulnerable in a rising interest rate environment. He republished some of these columns in a book in 2008 Mr. Market Miscalculations: The Bubble Years and Beyond, that Financial Times He praised and praised That year he described it as showing “supernatural examples of insight.”
Grant’s fears turned into reality when home prices fell and… Mortgage Adjustable-rate mortgages—which Wall Street geniuses had bundled into securities—collapsed in record time, becoming the nail in the coffin of the global economy.
History says: higher for much longer
Grant stands out from the rest of Wall Street in another respect: Many investment experts are calling for the Fed to start cutting interest rates sometime in the next year or two, and Grant predicts an era of higher interest rates that could last a generation.
Fed Chairman Jerome Powell has repeatedly warned that interest rates will need to stay “higher for longer” to truly tame inflation. But many Wall Street leaders, encouraged by inflation’s sharp decline from a four-decade high in June 2022, believe peak rates have already arrived.
However, Grant takes a historical reading of monetary policy, and argues that we are heading into a generation of high interest rates, with some fluctuations in between. “The phrase will be much louder, much, much, much longer – but we have to emphasize the conditional sentence and put it in italics –If past is prologue,” Tell luck.
Grant noted that between 1981 and 2023, except for some brief fluctuations, interest rates trended consistently lower. In the forty years before that, they had basically headed—again, with some exceptions—in the opposite direction.
“It is the historical record, the pattern, in which interest rates show a tendency to trend over long periods,” Grant explained, arguing that we may have entered a “new order.”
He added: “It appears that we have reached a key demarcation point regarding interest rates in 2020 and 21.” He said that based on history, this new system should last 40 years. However, Grant explained that the rise over a generation likely will not be a straight line. If a recession occurs, there could be a “significant”, albeit temporary, decline in interest rates.
If Grant is right, this means that an era of low economic growth, relatively high inflation, and high interest rates—an economic combination often called stagflation—may lie ahead. This is not exactly a recipe for investment success. It may even constitute an environment in which corporate defaults rise, as credit markets pay the late price of the era of free money.
But what about deflationary technology?
There is a serious counterargument to Grant’s belief that interest rates will trend higher for decades to come, and it is a fairly simple one. As Cathie Wood, CEO of technology-focused investment management firm ARK Invest, explained in an article Wall Street Journal Interview last month: “Technology leads to deflation.”
Technology experts and Wall Street bulls argue that the emergence of artificial intelligence and robotics heralds an era of revolutionary technological progress that will dramatically boost worker productivity, lower prices for businesses and consumers, or And even the national budget balance.
Grant acknowledged that technological progress could lead to deflation, but it is not clear that the current rate of progress is fast enough to reduce prices significantly. Looking back at history, he noted that there were periods when the U.S. economy was undergoing a rapid turnaround but prices were still rising — meaning that innovation and deflation do not always coincide.
“I don’t know how to compare the intensity of technological progress in the 1930s to the 1970s,” he said. “But both were characterized by enormous improvements in productive technology, one by deflation, the other by massive inflation.”
While it is certainly possible that technology could trigger deflation, Grant said he did not see that as likely. However, the veteran economic historian concluded by emphasizing that history is not planned, and forecasters should be humble.
“We know how much richer we would all be if the past were a reliable and true prologue – especially historians who have very little money,” Grant quipped, adding that this meant experts should “proceed with caution” when making predictions.
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