Jim Grant

Jim Grant is simply brilliant in this must watch interview with CNBC's Bartiromo, which we won't spoil with commentary, suffice to provide the following pearl of an exchange:Maria Bartiromo: "What are the alternatives?" Jim Grant: "Capitalism is an alternative for what we have now. I highly recommend it." Maria: "We all do." Grant: "No we don't." Maria: "The Federal Reserve may not." Grant: "We ought to be discussing an intelligent move to a sound currency by which i mean a currency that is based on a standard and not at the whim and the discretion of a bunch of mandarins sitting around Washington D.C." In other news, Joseph Stalin is now delighted that Ben Bernanke has decided to shoulder the legacy of central planning and is firmly committed to proving that where Vissarionovich failed, the ChairSatan will succeed.

While much of the focus has been on Paulson & Co., the hedge fund founded by billionaire John Paulson, cutting its stake in the SPDR Gold Trust by 15% in the fourth quarter, possibly of more importance is the fact that PIMCO, the Texas Teacher Retirement System and George Soros all increased their holdings of the biggest exchange-traded product backed by gold. Paulson cut his gold ETF bullion holdings by about 600 million dollars in Q4, a reduction that was likely driven by client redemption needs as he and his fund remain upbeat on gold – primarily due to inflation concerns.  Paulson’s reduction in SPDR was offset by other important buyers such as PIMCO, which oversees $1.36 trillion and is home to the world's biggest bond fund and significant institutional buying from the likes of the Texas Teacher Retirement System and billionaire investor George Soros. ‘Bond King’, Bill Gross recently wrote about gold as a “store of value” and PIMCO’s allocation to GLD may be ongoing as they seek to diversify their portfolios and hedge against inflation. Soros, who once suggested gold was or would be "the ultimate asset bubble," raised his stake in the SPDR Gold Trust (GLD), a gold-backed exchanged-traded fund, to 85,450 shares, up from 48,350 shares in the period. Soros, who had disclosed call and put options on the gold fund in the prior period, reported no such investments in the fourth quarter. Soros’ GLD position is worth a mere $13 million, however it suggests that he is not as bearish on gold as portrayed and that he sees further upside for gold.

James Grant, of Grant's Interest Rate Observer makes some thought-provoking statements in his must-listen Bloomberg Radio interview with Tom Keene today. While noting America's exceptionalism (h/t Clint Eastwood?), he perhaps doesn't mean all Americans as he takes the Fed and Treasury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and follow generational cycles raises concerns for him that government intervention is in fact 'prolonging the symptoms' of the recession. In considering Tom Keene's well-thought-out question of why the US does not take advantage of low rates and issue exceptionally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy. "Why not issue bonds backed by gold bullion? Gold is a better money and is grounded in something besides the power of the people that print the dollar bills." The interview goes on to discuss population growth as a more potent 'fix' for housing in the US than QE, that the US is a preferable investment environment (given valuations) than Germany or Japan, the drastic drop in NYSE volumes, and the "leeching out of excitement, hope, and expectation of improvement (particularly for the young)." His compare and contrast of the 1920-21 depression to the current Great Recession (which seems not to end), focused on the fiscal and monetary actions, is an eye opener that its just possible the present-day orthodoxy is wrong. Urging that we maintain our sense of shock at the size of our 'peacetime' deficits, Grant worries that we are in a secular stagnation.

Can Austerity Work?

To print or not to print: the choice of whether to open the European Pandora's box, which as we suggested two months ago is an interesting but ultimately moot thought experiment, has suddenly become the only talking point for TV pundits desperate for eyeballs and suckers to buy their books, who are now experts not only on monetary policy but European monetary policy. And while 99% of these empty chatterboxes should be promptly muted, one person whose opinion we value in any regard is that of Jim Grant. Earlier today, with Bloomberg TV's Deirdre Bolton, he discussed not only the expected ECB response to the ever worsening contagion (while the ECB bought Italian bonds in the open market, and potentially primary against its charter, it is prohibited from buying French bonds which is why the OAT-Bund spread closed at record wides), but all the other developments in the insolvent continent. Here are some of the key sounbdbites, and, of course, the full clip.

Jim Grant, whose Grant's Interest Rate Observer has been one the world's most informative premium newsletters since 1983, has long been one of Zero Hedge's favorite commentators, not least due to his convergent ideas on monetary policy and the role of central planning in the world, which as Arthemis Capital presented very vividly last week, is the sole marginal decider of risk in the world's capital markets (and thus the most critical shadow political force the world, or rather its bankers, has ever unleashed upon itself). So while we await any news out of Greece, however non-eventful they may be, and at best will see the placement of one Pap ("G"), with another Pap (the "L", who as we profiled is nothing but yet another puppet of the Federal Reserve), here is a compilation of James Grant's best moments on money, banking, central banking, gold and the Federal Reserve System, courtesy of Gresham's Law. It is no wonder that Ron Paul recently said that he would choose James Grant as Fed Chairman if elected.

A fascinating insight from Graham Giller of Giller Investments, who analyzes over 55 years of Treasury data to point to what is the crux of the problems of monetary policy since Greenspan took over the Fed. The Greenspan [and Bernanke] era monetary policy has altered the distribution of changes in interest rates in a way that exchanges a reduction in day-to-day 'normal' variability for a considerably higher (perhaps catastrophically higher as we are finding out this week) likelihood of extreme shocks.

Another must read from one of the "less cheerful" people on MarketWatch. His 7 reasons why "kicking the can" should no longer be the official policy of the ponzi banker syndicate: 1: Capitalism’s now a lethal soul sickness, needs a reawakening; 2. We’re already in the early stages of a Great Depression; 3. Good Depression exposes our self-destruct bubble-thinking; 4. Good Depression will stir outrage, force real reforms; 5. Good Depression forces Wall Street to think outside the box; 6. Good Depression will deflate America’s warring soul; 7. Good Depression now … avoids a far bigger depression later

The European Central Bank President, Jean-Claude Trichet, was not as optimistic as he usually is, when he raised the alarm level on the debt crisis to “red” late yesterday. After the meeting of the European Systemic Risk Board in Frankfurt, Trichet who chairs the ESRB, said that risk signals for financial stability in the euro area are rising and flashing “red”. He said “on a personal basis I would say yes, it is red”. Trichet warned market participants that the crisis is nowhere close to be resolved. Trichet warned of “potential contagion effects across the union and beyond.” Overnight Marc Faber, publisher of the Gloom, Boom & Doom report, told Bloomberg this morning (see interview below) that he still favours gold and silver. He said there could be short term weakness but that he will keep accumulating gold. Faber warned against shorting the precious metals as they are likely to keep going up. He also warned regarding recent incidents of fraud and corruption by newly listed Chinese companies and said this was indicative a bubble. In his usual contrarian and witty manner, he said that “not to own any gold is to trust central bankers and that you do not want to do in your life.”

Considering the only soundbite that was relevant from Ben Bernanke's 45 minute 2:15pm oratory was that "we don't have a precise read on why this slower pace of growth is persisting" America, and the entire civilized world, could have done just as well without it. Instead, we should have listened to Jim Grant, who once again correctly identifies all the things that the Fed chairman should have said (Bernanke certainly focused on the other side): "What we are not going to get is a concession that QE2 has achieved its unintended consequences, namely a lower dollar exchange rate, a higher gold price meaning weaker confidence in the dollar, slower economic growth and a higher measured rate of inflation. Those are some of the things that have come out of this experiment and let us call it by its name money printing...How do we know that this 30% gain in the Russell and 20% gain in Dow since the Chairman spoke in August, how are we to know these are real values. The prices are up, but are people who are buying these stocks on the back of the Fed, are they doing something wise from an investment point of view, and if the market is too high because the Fed has put it there, what does the Fed do when the market comes down, which opens the fate for QE3." And on a far more important topic which we will soon hear much more of, namely extensive US money market exposure in Europe, which will be completely locked up if, pardon, when there is a major liquidity run in Europe snagging American money market liquidity: "The money market mutual funds have nothing to do in this country cause rates are zero, go to Europe. So money market mutual funds investors are taking quite ponderable risks for about a 0% return, these funds are yielding a few basis points only. But to get those few basis point, these funds are crossing the Atlantic right smack dab in the middle of the European banking crisis. This is a prime example of the unintended consequences of this massive intervention by our central bank." Indeed, this is just one simple example of the massive clusterfuck, which certainly does not need Greece's $5 billion notional in CDS, to make the Lehman liquidity freeze seems like a little melting ice cube. And since everyone now agrees that Greece will default, and it is only a matter of time, all the trillions in dollars in the shadow and open banking systems that we have been exposing for years now, will suddenly be locked up in the forms of 1 and 0 in computers belonging to institutions that are no longer operational. And most unfortunately, the man in charge of it all, has a quivering lip problem.

Nothing to worry about here. But I just voted with my feet.

At this point it looks bad for the working middle class and it looks
like they aren’t going to make it through the next banker made financial
crisis. The middle class just wants the chance for a new beginning.
They want jobs. They know the country has been hijacked by the banking
corporatocracy, supported by the corrupt political class in D.C. It is
time for the middle class to channel their inner Josey Wales and get
plumb mad-dog mean. It is not time to lose your head and give up. The
middle class are being pursued by Wall Street bounty hunters and
government crooks trying to finish them off. It is time to make a stand
and fight. It is essential that we know our enemies and how they
achieved their power. It all began in 1913 with the creation of the
Federal Reserve and the implementation of the personal income tax. I’ve
previously detailed how the baby boom generation contributed to our
fiscal plight in Part One – For a Few Dollars More,
how the actions of the Federal Reserve’s over the last few decades have
impoverished the middle class and placed the country at the brink of
collapse in Part Two – Fistful of Dollars and addressed the nefarious creation of a central bank in Part Three – The Good, the Bad, and the Ugly.

Two of our preferred commentators, Jim Grant, of Grant's Interest Rate Observer, and James Turk, of the GoldMoney Foundation, sat down earlier today to discuss the history and mission of the Fed, how mission creep has taken it wildly beyond its initial purpose into the territory of QE, ZIRP and other fiat currency experiments. While not breaking ground on any notably new concepts, they talk about "who benefit from zero interest rates and how savers are penalized by this easy money policy. They explain that the US have been off the gold standard since 1913, Bretton Woods being only a shadow of the classical gold standard." The two also discuss the fiscal profligacy of the US government. Alas, they conclude that every paper currency in history has eventually gone to zero (see earlier piece on Roman hyperinflation). James and Jim also talk about ZIRP and the absence of the bond vigilantes after over 30 years of bull market in bonds. How traders no longer care about fundamentals, like balance sheets, but rather focus on very short time horizons and the spreads between funding costs and yields. How this situation is unsustainable. They see gold still as a very under-owned, misunderstood and marginal asset still shunned by institutional investors, with a few notable exceptions which indicate that the tide could be turning. They see a gold standard in the future, although timing is always uncertain. At the end they talk about the history of US post civil war specie resumption and parallels to a return to the gold standard in the future.

We knew it was only a matter of time before Albert Edwards would follow up to Russell Napier's call for S&P 400 with his own rejoinder. Sure enough, the SocGen strategist (who previously called for an S&P target in the same neighborhood) has just released the following: "Let me re-emphasise our 400 S&P forecast with sub-2% US bond yields" in which he says: "Amid the equity market enjoying yet another Fed induced mega-rally, many commentators have been left grasping (gasping?) for explanations for the continued low level of global bond yields despite the ruination of the public sector balance sheet. Most have latched onto QE2 as the explanation and hence expect a sharp rise in yields from June onwards as the Fed’s buying programme ends. We expect new lows in bond yields." The reason for that per Edwards, is an imminent bout of deflation, which is precisely what the Fed is hoping to create, in order to get the green light for the Jim Grant defined "QE 3 - QE N". Edwards, naturally recognizes this too: "Despite fully acknowledging the ruination of the government balance sheets as years of excess private sector debt are transferred to the public sector, we still expect to suffer another deflationary bust that will take government bond yields to new lows BEFORE government profligacy and the Fed's printing presses take us back to both double-digit inflation and bond yields. For now, we remain heavily overweight government bonds." In other words, just as we have been claiming for a long time courtesy of the Fed's so predictable Pavlovian reaction to always print more in response to deflation, enjoy 2% bond yields... just before they hit 20%.

Conventional wisdom continues to believe that soon enough, as has been paraded by the various Fed presidents, the Fed will commence various tightening steps, commencing with the termination of reinvestments of various maturing securities holdings, a process that would lead to gyrations in the IOER (and thus the IOER-GC spread which as has been discussed recently has gone negative due to the FDIC assessment fee). Following the reinvestment decision, the Fed would next proceed to drain excess reserves using various operations such as reverse repos, term deposits, and SFBs (a process which many doubt would success when the total amount of excess reserves is set to hit $1.6 trillion shortly). The last step in the Fed's balance sheet renormalization would be to proceed with outright asset sales of its $2.6 trillion in Treasury and agency holdings (as for those billions in Other Assets, nobody knows). Barclays' Joseph Abate does a great summary of the pitfalls attendant each and every step in the process: "In asserting the supremacy of the Fed funds rate as the primary policy tool, the minutes outline the central bank’s longer term objective. The Fed hopes to eventually establish a corridor system – where the FF target is set between a lower bound of IOER and an upper bound of the discount rate. This would require the Fed to drain enough and to shrink its balance sheet sufficiently to push the effective funds rate over IOER and not merely eliminate the current -16bp spread. This might take a few years to accomplish. And in the process, the Fed would probably need to restore bank confidence in the discount window, which was shaken after the central bank was forced to disclose who had borrowed from the facility during the financial crisis." Abate concludes: "Taking all these into consideration, the April FOMC minutes indicate the Fed faces a pretty complicated task." Luckily, the Fed is most certainly aware of this complexity awaiting it as things return to normal. Of course, this whole discussion will be moot if and when the Fed, instead of tightening, proceeds with another monetary loosening episode, which as Jim Grant explained will go from QE 3 to QE n, in which case none of the below is even remotely relevant.