Jim Grant quotes obscure dead economists at length. He pines for an earlier time of gas lights and top hats, when the dollar was convertible to gold. He wears bowties.
Prolific author, gold bug and droll chronicler of Wall Street folly, Grant would be easy to dismiss as an entertaining but irrelevant throwback if he hadn't been proven so right so often.
Now, as small investors are putting more money into markets, the publisher of the biweekly Grant's Interest Rate Observer is warning of new dangers.
He says prices are too high for nearly every asset you can think of -- stocks, junk bonds, Treasury bonds, British gilts and even Iowa cornfields.
As stocks were falling last week, Grant visited The Associated Press in New York to talk about why it's not just stock investors who should be worried.
Below are excerpts from a wide-ranging conversation in which he lit into the Federal Reserve for our current troubles, warned of 10 percent inflation and waxed nostalgic for a time when Washington had the courage to let prices fall in crises rather than goose them up and prolong the agony.
Q. What's your view of the stock market?
A. The Federal Reserve has unilaterally taken it upon itself to levitate asset prices. It is suppressing interest rates. When you're not getting anything on your savings, you are inclined to go out and buy something, anything, to generate either income or the expectation of capital gains. So the things that we take as prices freely determined are in fact manipulated.
A few months ago, (Fed Chairman) Ben S. Bernanke, Ph.D., the former chairman of the Princeton economics department, stood before the cameras of CNBC and said that the Russell 2000 is making new highs. The Russell! He sounded like another stock jockey. He was taking credit for new highs in the small cap equities index. The Fed, as never before, or rarely before, is now the steward of this bull market. One wonders what it will do if stocks pull back significantly.
Q. Are stocks overvalued?
A. Some big multinationals left behind in the past 10 years (such as) Wal-Mart, Cisco Systems, Johnson & Johnson appear to be attractively priced. But generally speaking, things are rich.
Q. What would you have done in the financial crisis if you had been in Bernanke's position?
A. Resign. I don't know. I have great faith in the price mechanism, in the mechanics of markets. I think there should have been much less intervention and we should have let some chips fall, many chips fall.
Before the Great Depression, there was a great depression (lower case 'g') in 1920-21. Within 18 months, the GDP was down double digits and commodity prices collapsed. Harry Truman lost his haberdashery in Kansas City. It was very painful, but it ended. And the Fed, during that depression, actually raised its discount rate and the Treasury ran a surplus.
The reason it ended was the so-called real balance effect -- that is, prices came down and people with savings saw things that were cheap and they invested. That's the fast and ugly approach.
The slow and ugly approach is to mitigate, temporize and forestall to give us time to work ourselves out of difficulties. That's the current approach. I think it's intended to be a more humane approach, but I wonder about its humanity. I mean these college kids get out of school and they've got nothing. It's awful -- 9 percent unemployment and going nowhere except sideways.
Q. But Bernanke has succeeded by some measures. Big companies are flush with cash, their profits are on track to hit a record this year and the riskiest among them are raising money at the lowest rates ever. Who could have imagined this during the depths of the financial crisis?
A. Let's go back to the previous cycle of 2002-03. Cisco Systems was for 15 minutes the costliest company on the face of the Earth, and digital technology was about to raise every human being out of poverty. OK, so that cycle ends -- Bang! -- with general disarray in the stock market. What do we do? Well, we press down interest rates and we give residential real estate a little helping hand. What's not to like? Homeownership rates are rising. Stocks are up. Risky companies are issuing debt at levels never before imagined.
Who would have dreamt such an outcome was possible after the tech bust? And that ended noisily, and here we are again and our monetary masters have devised new, even more audacious methods of stimulus. In three or four years, we'll look back and say, "Can you believe we fell for this again?"
Q. You've been warning about higher inflation for a while. How imminent is it?
A. I've been all wrong on this. I thought that this massive monetary stuff would generate the conventional kind of inflation that would be expressed in much higher CPI readings. Not so far.
But all things are cyclical and the seemingly impossible is just around the corner. On September 30, 1981, the 30-year US Treasury bond traded at 14 7/8 percent and I remember some crank, some visionary, was talking about how interest rates were going to zero, you watch. Oh, yeah right. And so it came to pass.
It does seem improbable that the inflation rate would ever get beyond 3.5 percent, let alone knock on the door of 10 percent. But I'm here to tell you, it's going to 10 percent.
Q. Won't policymakers come down hard if we get even 6 percent inflation and try to lower that?
A. Sometimes they can't control things. We had 6 percent inflation before. Washington is full of well-intentioned people. Ben Bernanke keeps saying that what we really need is a little inflation. He says we'll get 2 percent or a little bit more. You shouldn't even think that, let alone say it out loud. That's such bad luck to tempt fate by saying that you can calibrate things like that. You can't do that.
Q. So with inflation ahead, are you buying gold at $1,480 an ounce?
A. I am not buying it now. I have bought it in the past. Gold is a very difficult investment because its value is indeterminate. It is the reciprocal of the world's confidence in the likes of Ben Bernanke. I think the price will go higher.
Q. When did you first buy gold?
A. Well, my first misadventure with gold was standing in a queue in front of the Nicholas Deak currency and coin shop, which was on lower Broadway. And it might have been January of 1980 at the very peak but if not then, it was late 1979. I almost top ticked it. That was before I learned never to stand in line to buy an asset. You always want to go where nobody else is in line.