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Jim Grant Warns "The Fed Turned The Stock Market Into A 'Hall Of Mirrors'"

Tyler Durden's picture




 

The question we appear to be getting answered this week is, as Grant's Interest Rate Observer's Jim Grant so poetically explains, "how much of this paper moon market is real, and how much is governmental whipped cream?" In this brief but, as usual, perfectly to the point interview with Reason.com's Matt Welch, Grant asks (and answers), "are prices meant to be imposed from on high, or discovered by individuals acting spontaneously in markets?" noting that, while many readers here may know the answer, "they’re regrettably in the minority." The always entertaining Grant then goes on to discuss the underlying causes of the recent market turbulence, why we don’t really "have interest rates anymore."

"One thing to recall is that markets are meant to be two-way propositions - they go up, they go down - but it has been almost four years since we have seen a 10% correction... what's unusual is not the occasional down day but The Great Sedation that preceded."

 

"Confoundingly to me, people have come to be quite accepting of the value attached by fiat to these pieces of paper we call currency."

Well worth the price of admission during a week when financial markets start to show their true colors...

 

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Wed, 08/26/2015 - 17:49 | 6475074 BullyBearish
BullyBearish's picture

No Market...policy tool for remaining in power

Wed, 08/26/2015 - 18:22 | 6475178 junction
junction's picture

"The Lady From Shanghai" (1947) mirror scene

https://www.youtube.com/watch?v=_RdPVtcDeEI

Wed, 08/26/2015 - 18:33 | 6475207 whotookmyalias
whotookmyalias's picture

If you monetize debt with no real consequences, you don't need interest rates.  Interest rates are to encourage others to lend you money.

Wed, 08/26/2015 - 18:33 | 6475221 knukles
knukles's picture

What we need is more government regulation to make sure this doesn't happen again. 

Wed, 08/26/2015 - 18:58 | 6475307 Kprime
Kprime's picture

and higher taxes, much higher, and the criminalization of cash.

Wed, 08/26/2015 - 19:13 | 6475372 Bilderberg Member
Bilderberg Member's picture

You're awesome Jim Grant

Wed, 08/26/2015 - 19:46 | 6475477 rfaze
rfaze's picture

In an insane world the sane man must appear insane.......

Wed, 08/26/2015 - 20:02 | 6475515 OC Sure
OC Sure's picture

Another feit that an established lapdog dare not counter

 

To say the word would be blasphemous, right?

Let alone successfully define it?

 

Guess we can grant here another defender of the faith.

 

To identify the monopoly of the Fed as counterfeiters may be instructive of some certain constitutional restraints???

 

Wed, 08/26/2015 - 17:52 | 6475087 devo
devo's picture

Haha. He said that like five years ago. No shit, but who cares? Buy the market or die holding dollars.

Wed, 08/26/2015 - 17:53 | 6475093 Grandad Grumps
Grandad Grumps's picture

after you ...

Wed, 08/26/2015 - 17:54 | 6475100 johnvallo
johnvallo's picture

This is actually a great piece of financial advice because dollars are probably a lot better to hold in the end LOL

Wed, 08/26/2015 - 19:09 | 6475228 knukles
knukles's picture

Well, YTD, the USD has been the best currency and literally all financial assets and PMs as well as commodities, etc., have Negative Total Returns, so anbody sitting on a big assed stash of currency or 0% bank accounts has been the winner winner chicken dinner

Wed, 08/26/2015 - 19:00 | 6475311 devo
devo's picture

Crap, there goes my popularity. Well whatever, Grant has said the same shit for at least five years, and he's selling his book (literally). Doubt anyone has made money listening to him. Just because he says something you like hearing or something you think should happen doesn't make him right. That's called confirmation bias.

Wed, 08/26/2015 - 20:07 | 6475548 Omen IV
Omen IV's picture

"Grant has said the same shit for at least five years"

ayt least three years before 2009 he said "THE SAME THING"  - i still have the printed newsletters for historical reference - about CDO's including Abacus

 

timing is difficult thing to predict - perhaps your impatience is indicactive of specific knowledge - but i dont think so

Wed, 08/26/2015 - 20:16 | 6475587 devo
devo's picture

Does it really take any insight to know printing money doesn't work? That is the easy part. Timing is the hard part and the part with any value, so if he is going to charge money, he better provide the date and time it happens. Otherwise, what is he providing exactly?

Thu, 08/27/2015 - 01:49 | 6476390 johnvallo
johnvallo's picture

You can hold your short/hedge positions against a crazy market for a long time and only need to be right once for it to pay off huge. Haven't you read The Big Short? 

Wed, 08/26/2015 - 18:10 | 6475149 monad
monad's picture

The power of propagandized State edumsmacation.

Wed, 08/26/2015 - 18:08 | 6475142 monad
monad's picture

Central banks are evil parasites eating through their hosts.

Wed, 08/26/2015 - 18:27 | 6475196 blindman
blindman's picture

some say that the best parasite, the survivor,
is the one that assures the survival of the host.
otherwise, the strategy is self evicting. self
extinguishing, doomed, extinct, kaput.
where are our money masters now?

Wed, 08/26/2015 - 19:20 | 6475397 monad
monad's picture

They aren't the best parasites, are they?

Wed, 08/26/2015 - 19:25 | 6475419 blindman
blindman's picture

not even survivors, kaput.

Wed, 08/26/2015 - 20:14 | 6475577 arby63
arby63's picture

And that is the final question. The host (no matter if the DOW hits 30,000 or not) is dying. It's visible everywhere: Food, Health Care, Vehicles, Etc. Wages are in the crapper and I think getting worse. No way a raging stock market can prop up the economy alone. No way.

Wed, 08/26/2015 - 20:46 | 6475698 blindman
blindman's picture

the human soul appears to be the host?
mine, your's and our's. the host is not
finished, the parasite is.
no?

Wed, 08/26/2015 - 18:16 | 6475156 hobopants
hobopants's picture

Off topic: went to buy some generic rounds from the LCS and they were wiped out of everything except for silver eagles with a +$7 premium. They said October was the earliest they expected more supply and they were already full up on preorders. They told me it's been this way since June. This is a medium size town in Cali. Anybody else experiencing this?

Wed, 08/26/2015 - 19:10 | 6475338 lincolnsteffens
lincolnsteffens's picture

$19.68 for one Eagle at APMEX $18.18 for 500 or more at 7PM Eastern. Plenty of rounds for less.

Wed, 08/26/2015 - 20:12 | 6475570 hobopants
hobopants's picture

Ya I'm not noticing price gouging so much as severe shortage of on hand inventory. I know there has been an increase in shipping times /delay from some  of the online guys. It was just strange to see it first hand in such a tiny town such as this.

Thu, 08/27/2015 - 04:03 | 6476503 August
August's picture

Spoke last week to the Largest 'n' Cheapest PM retailer in Auckland, NZ.

For the first time, ever, they could get no Maple Leafs from the Royal Canadian Mint.

Wed, 08/26/2015 - 18:33 | 6475218 rlouis
rlouis's picture

Thank you for the balance Jim, good insights and observations on the unintended consequences which the Fed has wrought, while utterly messing up the serious business of capital formation. 

Wed, 08/26/2015 - 18:34 | 6475222 you enjoy myself
you enjoy myself's picture

"how much of this paper moon market is real, and how much is governmental whipped cream?"

the answer to that is easily obtained from a single hypothetical - what would happen to the "market" if Jim Grant were announced as the new Fed Chairman tomorrow?

Wed, 08/26/2015 - 18:42 | 6475243 DontWorry
DontWorry's picture

Don't Worry.  Grant has been wrong for "all the right reasons" for years.  The stock market will continue to climb.  Its not a secret formula.  Central bank liquidity has to go somewhere.  Its not going into treasuries at 2.18%.  Its not going into EM for the forseeable future - they are crashing.  Where will you put your money?  The US stock market, thats where.

When China and the Asean countries, and the commodity producers try QE, where will that money go?  Thats right, the US market.  Every modern economy has a central bank.  So far Japan, the US and UK have engaged in QE - that leaves the rest of them.  When they eventually do, and they will, that liquidity will flow into the US market.  So dont worry - this bull market has legs.  There may be some volatility as other CBs are reluctant to try QE, but they all will eventually.

Wed, 08/26/2015 - 18:56 | 6475301 Kprime
Kprime's picture

so  DJIA 30,000?

Wed, 08/26/2015 - 19:30 | 6475430 who cares
who cares's picture

Very good. You just described what a bubble is.

Wed, 08/26/2015 - 21:13 | 6475793 DontWorry
DontWorry's picture

Call it what you will, the stock market will go up.  If the bubble lasts the rest of your lifetime, who cares if its a bubble?

Don't worry.

Wed, 08/26/2015 - 22:15 | 6476034 Rearden-Steel
Rearden-Steel's picture

What mindset you have.

Probably lived on Easter Island in a former life and gave a big thumbs up for over harvesting it because... resources won't run out in my lifetime. It's just the next generation that starves to death and goes extinct. Fuck them, I got mine.

Some of us would like a return to honest money where producers accumulate wealth, not the men behind the curtain.

Thu, 08/27/2015 - 06:14 | 6476581 Minder For Priapus
Minder For Priapus's picture

The worlds children and the planet itself? 

Get a job in congress, tosser!

Sun, 08/30/2015 - 18:24 | 6488325 ginsu2k666
ginsu2k666's picture

Who cares if the stock market represents reality? Obviously, nobody.

Wed, 08/26/2015 - 18:45 | 6475257 themarketflash
themarketflash's picture

The Fed hasn't "Twist"ed in over a year. So the Fed isn't a net buyer of long term bonds, either Treasuries or MBS. So why is James saying the long bond rate is a creation of the Fed? I think Bernanke and Yellen would argue that the long bond rate is where it is because of a global savings glut. What influence is the Fed having on the long bond rates now?

Wed, 08/26/2015 - 18:58 | 6475306 Really20
Really20's picture

Savings glut... LOL. All money is created as debt in some way or another. There is no such thing as a savings glut.

Wed, 08/26/2015 - 19:17 | 6475326 themarketflash
themarketflash's picture

The money supply is managed by the Fed buying and selling Treasuries in the market.  Buying bonds injects high powered money into the system, selling them reduces high powered money.  Normally the Fed deals only in short maturities (< 10 years) to manage the money supply.  They aren't buying long bonds now.   By glut I mean a lot of people all over the world want yield in safe countries, hence driving down interest rates.  I'm arguing that right now the long term risk free rate really is ~2%.  My question stands.  Let Tyler or James answer the question.

Wed, 08/26/2015 - 18:52 | 6475288 q99x2
q99x2's picture

They need to give me more money for free. That's all I know.

Wed, 08/26/2015 - 19:09 | 6475353 atlasRocked
atlasRocked's picture

The Law of Deficit Confusion

This is a critical point: Mass deficit spending ruins economic readings and hides all firm conclusions about how taxes and regulations are working.

One can NEVER conclude a positive GDP print is due to a changed regulation or the counting of the created-and-spent deficit money in the GDP.

Thus the life-critical government role of regulation is guaranteed to fail in a deficit-based economy.
---------------
This law correlates with Keynes' claim about creating money to "cause" economic growth: debauching a currency fools 999,999 out of 1 million people.

The proponents of mass deficit spending cannot be proven right or wrong, so they claim they are right. The opponents claim the deficit creators are wrong, but the short term illusion of improvement makes them look like scrooges, so they are impugned as "haters" or uncaring.

For more best practices:

http://www.amazon.com/Atlas-Shouts-Modern-Patriot-Action/dp/1458217566

Wed, 08/26/2015 - 19:41 | 6475460 gwar5
gwar5's picture

I've seen our future 5 years from now. Just change the name of the country and the name of the currency to 100 USD. What a hell hole.

 

"Venezuela is preparing to issue bank notes in higher denominations next year as rampant inflation reduces the value of a 100-bolivar bill to just 14 cents on the black market.

The new notes -- of 500 and possibly 1,000 bolivars -- are expected to be released sometime after congressional elections are held on Dec. 6, said a senior government official who isn’t authorized to talk about the plans publicly.

Many Venezuelans have to carry wads of cash in bags instead of wallets as soaring inflation and a declining currency increase the number of bills needed for everyday purchases. The situation is set to get worse. Inflation, already the fastest in the world, could end the year at 150 percent, said the official."


Wed, 08/26/2015 - 19:42 | 6475467 bid the soldier...
bid the soldiers shoot's picture

Why are stock prices so high?  Or 'full figured' as we say in the girdle game.

It has to do with M1 or M3.  There are more trillions of dollars flying around in LEO out there than pimples on Nuland's ass.

Why do you think the Fed stopped publishing M3 in 2006?  To save money?  Duh.

Without stock price inflation during a period of prodigious printing, every publicly held corporation in America can be had for a pittance.  

I assume you all agree that that is a no-no.

Wed, 08/26/2015 - 20:03 | 6475499 themarketflash
themarketflash's picture

Describe the exact mechanism that money printing winds up going into the stock market.  A lot of people make your statement but no one has ever said how the fed printing money puts money in the hands of people who buy stocks.  When the Fed buys bonds they put newly created cash on the balance sheet of money center banks and take the bonds.   Those money center banks have risk controls in place and government restrictions on how much money they can put in the stock market.  A lot of people tell me that those money center banks deposit the proceeds with the Fed to get a few basis points of risk free spread.  If you listen to this video James says that low interest rates discount the future cash flows of publicly held corporations.  That's his explanation of why the stock market is high.   So tell me the exact flow of Fed money creation into the hands of people who buy stocks.

Wed, 08/26/2015 - 20:44 | 6475687 rejected
rejected's picture

Who says the Fed has to buy bonds? Of course thats the legal way but how many laws are being broken by the Fed and the government at present. Would one more matter?

Wed, 08/26/2015 - 21:24 | 6475839 bid the soldier...
bid the soldiers shoot's picture

I assume when the Fed raises or lowers reserve requirements, they either sell or buy bonds from the banks.

Wed, 08/26/2015 - 21:11 | 6475771 bid the soldier...
bid the soldiers shoot's picture

I'm not being argumentive, but can you link me to the government restrictions on how much money banks can put in the stock market?

When you consider the idea of banks buying stock with money received from the sale of bonds was not the bank's idea, but the FED's, the rules and regulations of an accomodating Fed take on a different meaning.

Will the Fed allow banks to form syndicates with third party names that skirt the aforementioned limits? Or in troubled times can the Fed simply exempt (good stress test) banks from that limit?

Clearly I don't know.

 But I do know that a few months before he assumed the Chair of the Fed, the Fed announced it was going to cease publishing M3 coincidental with Bernanke's chairmanship early in 2006.   To save money was the reason given.

M3 is M2 plus a little of this and that and repurchase agreements which I assume are instrumental in buying bonds and toxic assets from member banks.  Did M3 take off in 2009?

This is all that I'm aware of and if you have further enlightenments or corrections i'd be grateful. 

*************************************

If the Fed can buy assets from banks, can the Fed buy stock the bank holds?

 

Wed, 08/26/2015 - 23:04 | 6475873 themarketflash
themarketflash's picture

Bid... good comments.  I'm in a bit of a hurry but I wanted to say one thing. I was in a PhD program in economics at a "Chicago" (not Chicago) oriented school a long time ago (early 80's).  At that time they were adamant that the true management of the money supply by the fed was executed by buying and selling treasury bonds (nothing else, not mbs, not stocks)  from money center banks.  Paper money was not nearly as significant as the electronic management.  Things might have changed since but that was the academic consensus at the time. Maybe someone with more current training can enlighten us.

Thu, 08/27/2015 - 03:29 | 6476422 bid the soldier...
bid the soldiers shoot's picture

tmf

I am obsessed by the the fact that the Fed announced on November 2005 that it will cease publication of M3.  A decision obviously made by the Chairman -elect Ben Bernanke and to take effect March 26, 2006 after Bernanke was sworn in.****

 'M3' A measure of money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets.

Short-term repurchase agreements would seem to be a limit of their use in 2009. Except

"Federal Reserve Act

Section 31.  Reservation of right to amend

The right to amend, alter, or repeal this Act is hereby expressly reserved."

http://www.federalreserve.gov/aboutthefed/section31.htm

The accredited FOMC is like the Supreme Court of finance and economics.

It is not bound by previous decision or rules.  The sitting FMOC can change  amend any rule, any regulation on record

The Fed and other central banks have conducted open market operations to ensure member banks have access to funds (i.e., liquidity). These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates charged to member banks (called the discount rate in the U.S.) for short-term loans.[10] Both measures effectively lubricate the financial system, in two key ways. First, they help provide access to funds for those entities with illiquid mortgage-backed securities. This helps these entities avoid selling the MBS at a steep loss. Second, the available funds stimulate the commercial paper market and general economic activity.
https://en.wikipedia.org/wiki/Federal_Reserve_responses_to_the_subprime_...
Maybe general economic activity is Fed speak for the banks buying stock. Anyway, thanks for winding me up on this one again. **** My displeasure with this unquestionable fact is that it suggests that the events after 2008 were known to the Fed board in the Autumn of 2005.  And that opens a can of worms I will be happy to discuss with you later 
Thu, 08/27/2015 - 07:00 | 6476626 Raoul_Luke
Raoul_Luke's picture

By funding the "carry trade" investments of hedge funds, large investment banks and wealthy individual investors all around the world.  They borrow dollars (for next to nothing) and use the money to invest in the various stock (and bond) markets.

Thu, 08/27/2015 - 13:19 | 6478057 themarketflash
themarketflash's picture

That's a well argued thought but that is arguing that low interest rates make the stock market go up, not that the fed printing money is making the stock market go up.  The Fed sets the short term rate.   The Fed can only affect long term rates with things like Operation Twist, where they deliberately buy long term treasuries and mbs.  

Thu, 08/27/2015 - 18:04 | 6479160 bid the soldier...
bid the soldiers shoot's picture

Surely the economies of the world have seen much  better days, yet the DJIA is recently off its all-time high. Until the small retail investor starts buying stock again, the Fed must continue to underwrite the bullish side.

The elusive rate hike that the Fed keeps referring to --  like the proud mother telling of her beautiful daughter whom no one has ever seen and about whom there is some discussion whether she actually exists --  the central bank's rate is like the Oscar Wilde remark: "It is always nice to be expected and not to arrive." 

The Fed wants to raise rates to prove that the economy is growing. It doesn't want to raise rates and give nervous stock investors a place to park cash at twice the interest. 

Wed, 08/26/2015 - 20:09 | 6475551 Alexandre Stavisky
Alexandre Stavisky's picture

"What is money and who says so?"

The imposition of tokens of exchange, the threat of confiscation of property, liberty, life.  The imposition of cultural imperatives which demand consumption beyond the capacity of the accumulated years/savings of one's years.  Thus debt.  Thus slavery or enforced obedience in order to obtain that small token which pays minimally down the greater sum of consumed forward demand given at exorbitant interest.

It is creating HORSes or HOR(u)Ses, fast-moving, flighty, prone to rashness and indecision, easily bridled and led.  It is the dominion of OLD EGYPT.  Their symbols of rule aren't the globe and crucifix (affixed a baton of punishment), but the crook and flail.  The CROOK for admonishing the slave or chattel to reprove and put them back in the way.  The FLAIL for extreme chastisement sometimes leading to death (which is regrettable because all that a slave is and will be AND MAY PRODUCE, is extinguished forever.)

The better system is honorable money and exchange among freemen, self-pruning (if you will), self-governing, generally high-minded and of orderly constitution.  This system is the OX.  Slow, sometimes stubborn, of tremendous power and durability, able to be steered by gentle voice command not rein nor bridle.  Its tokens would be a YOKE perhaps a ploughshare.  But is does not respond to the implements of torture and control.  It works with its superior and gentle voice command is sufficient to steer its considerable powers and abilities. It does not respond well to falsehood, new orders, unaccustomed strangers attempting dominion. This is NOT EGYPT.

The wests pretends to liberty.  But how much of spending is really voluntary?  When prices and markets and government's many devices of dominion are non-negotiable?  There is little to no true freedom on this corkscrewing planet in a lonely solar system.  Once it might have been, but the experiment has been crushed.

We're left with choices of yokes or bridles or finally, FLAILS.  But the threats are palpable everywhere and no man breathes free anymore.

Wed, 08/26/2015 - 20:23 | 6475612 Chuck Knoblauch
Chuck Knoblauch's picture

insightful

Wed, 08/26/2015 - 20:53 | 6475723 Duc888
Duc888's picture

 

 

Dumphuck.  Where were u 6 years ago.

...just another "water is wet" motherfukker.

 

yea, insightful.

 

Not.

Wed, 08/26/2015 - 22:58 | 6476142 blindman
blindman's picture

seems to me all markets are by nature
a hall of mirrors, paper moons also.
that may not be the essential problem
facing us today. it may be a prideful and
prejudiced crafting of what should be
a simple and commonly understood hall of
mirrors with smoke environment into a
full blown and embraced delusion?

Wed, 08/26/2015 - 23:10 | 6476161 kelley805
kelley805's picture

Only a financial advisor that is not retiring soon would tell you to stay in because it only took 5 years to recover the loss of the last recession.

 

Here are some more signs of a recession.

http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record...

http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/

http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/

http://www.zerohedge.com/news/2015-07-27/when-will-we-ever-learn/

Here is how to respond.

http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/

 

Here is how to get your mind off this stuff.

http://michaelekelley.com/category/humor/

 

Good luck!

Thu, 08/27/2015 - 00:42 | 6476325 OZZIDOWNUNDER
OZZIDOWNUNDER's picture

WHY does Zerohedge allow ads to BLOCK the view of Video clips that are part of the articles ? This has been going on for far too long ! You can't even get to the link to view elsewhere ( U Tube )

I would be happy to pay a monthly/yearly donation to cut out ads that ENCROACH on articles. Anyone else agree?

Thu, 08/27/2015 - 00:44 | 6476329 hedgiex
hedgiex's picture

Preys' Habitat - Getting fixes from snake oil to live in their Real World of Smokes and Mirrors. Not helpless but perhaps just defective DNAs. The specie has to evolve and adaptive ones shall survive. 

Thu, 08/27/2015 - 07:28 | 6476666 fed_depression
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