Jim Grant: "Bond Markets Worldwide Are Living In Their Own Hall Of Mirrors"

Welcome to economic 'fantasy' island.

Jim Grant, the world's most famous interest rate observer, ventured on CNBC this week to expose and explain the utterly farcical world of financial markets (and in particular, risk assets) and how grotesquely distorted global bond markets have become.

He began with an example...

“As an example of where the world is mispricing interest rates... look to Italy, which is having a big [potentially disruptive] election on Sunday...

...there is a speculative grade Italian security, Telecom Italia, the 5 1/4’s of 2022 are trading at 0.61 percent, that is a junk bond with a zero handle.”

This bond traded with almost a 6 handle just 5 years ago...

Thank you Mr Draghi.

But it doesn't stop there, Grant warns...

"...and since interest rates are critical in the pricing of financial instruments, these distortions preceded the uplift in all asset values.. and the manifestation of this manipulation is in many ways responsible for what we are now seeing in the markets."

These distortions and the chaotic aftermath of their withdrawal are exactly what current Fed Chair Powell warned of in 2013...

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.


I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.


"And I think there is a pretty good chance that you could have quite a dynamic response in the market. "

While Powell is anxious, Grant reminds listeners that the 'end of the bond bull market' does not necessarily mean disruptive change..."it took ten years for the long-dated Treasury to move from its low in 1946 of 2.25% to 3.25% in 1956..." but, as Grant points out, it's different now, "that was before risk parity and the leverage that is now in financial instruments surrounding the bond market."

However, Grant warns that he "suspects the tempo of a bond bear market will indeed be faster now than it was in 1946-56."

*  *  *

Once again Grant is correct in his diagnosis of the symptoms... and the prognosis - all of which reminds us of his rhetorical question - What will futurity make of the [so-called] Ph.D. standard [that runs our world]?

Likely it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence - after the crash of, say, 2019, that wiped out the youngster's inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal reserve's methods...

I expect you'll wind up saying something like this:

"My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates.

We put the cart of asset prices before the horse of enterprise.

We entertained the fantasy that high asset prices made for prosperity, rather than the other way around.

We actually worked to foster inflation, which we called 'price stability' (this was on the eve of the hyperinflation of 2017).

We seem to have miscalculated."

Source: Jim Grant's November 2014 speech at the Cato Institute


Harry Lightning purplewarrior Sun, 03/04/2018 - 00:36 Permalink

Its not inflation that will cause the calamity, its creditworthiness. Here's a very short outline :

Stocks fall, bonds rise from money coming out of stocks. 

US government spends trillions per year it does not have to do whatever it can to prop up economy, bonds retreat from the weight of supply.

Foreign stock and bond markets mirror US initially, but foreign governments are prevented by treaty from raising deficits. So foreign governments raise taxes in recession, causing Depression. Foreigners repatriate money from American investments, as they need capital at home to pay huge tax increases. 

Repatriation of foreign investment crushes US dollar, creating staggering Argentina-like inflation problem while US economy in Depression. 

Asia suffers from collapse of export customers and destruction of investment value in Europe and US. Peasant revolt in China topples government, widespread riots in farmland and starvation in cities. 

US breaks in three, as Midwestern and Southern States refuse to pay debts of Washington and Wall Street. Possessing all of food and large majority of former soldiers who are heavily armed, Washington is helpless to stop the secession that starts when Federal taxes stop being collected in the rebelling States.

No one wants the Left coast except Mexico, which gets California from referendum in which anyone living in the State is allowed to vote and 20 million Hispanics come to the polls to support Mexican annexation. Texas threatens to join California, but reverses course when it is announced that all American baseball teams in newly-acquired lands will be incorporated into existing Mexican baseball league and football teams will be replaced with soccer franchises in the acquired States.

I am thinking it will be ten years for this all to play out but if I wrong its because it will happen sooner and faster.

In reply to by purplewarrior

Pandelis Four chan Sun, 03/04/2018 - 03:54 Permalink

My generation gave former tenured economics professors discretionary authority to fabricate money and to fix interest rates.


I would add "former tenured economics professors and Lawyers" as in mr. new chairman mr. powell.  mr. grant cannot say that because he needs to be politically correct.


with all due respect to POTUS and the rest of the selection team, but what are we doing putting a lawyer in charge of monetary policy, to fabricate money and fix interest rates ... i don't know how many of you noticed, but at the banking committee hearings, the guy looked scared to death ... no wonder, he does have no idea how to manuveur this huge airplane, he has never been a pilot.

uhhhh... what can you say...let's hope the autopilot works but if there is a need for a pilot, we are all dead.

In reply to by Four chan

Pollygotacracker Four chan Sun, 03/04/2018 - 07:57 Permalink

The Jews at Breitbart kicked me off for making some comments about the fact that Jews were involved in the African slave trade. Everything I said was absolutely true and an historical FACT! We are living in a strange time. On Breitbart you read negative comments about blacks, Hispanics, immigrants, welfare moochers, politicians, etc. ad infinitum ad nauseum. But don't say ANYTHING about the Jews. 

"You know who your rulers are when you are not allowed to criticize them."


In reply to by Four chan

bigloser purplewarrior Sun, 03/04/2018 - 09:18 Permalink

purplewarrior, anybody who can, with a straight face, say that Jim Grant is "full of shit," probably has zero credibility in economic argumentation.

That applies to you. Mr. Grant has been studying economics and trading financial instruments for a very long time and his track record is stellar.

Nothing, and I do mean, absolutely nothing, you say, after making such a bold, uninformed statement, should be taken as serious debate.

Go away.

In reply to by purplewarrior

Kayman bigloser Sun, 03/04/2018 - 11:10 Permalink

Purplewarrior has been swallowing too much from the purple helmet. 

In the macro world, Grant has the best, long view.  

Central Banks have been practicing socialist, redistributive economics, enriching their friends at the top at the expense of the many. Asset prices do not increase assets, only pricing.

When the time arises where a bounty is put on every engorged tick sucking the life out of all nations, then the nature of the crowd will be visited upon the few. Today, there is on place on earth where you can't be found, no matter how many digits the Central Banks say you have in your cloud account. History is the future.

If, and that is a big if, Trump can get the real American economy going again, then like Roosevelt, he will have save the asses of our upper classes.

I have been an entrepreneur all my life, but you cannot compete with conjured money.


In reply to by bigloser

Yen Cross Sat, 03/03/2018 - 22:07 Permalink

  I'm short all things bonds.

  Even if central banks want to continue the game of buying their own debt back with printed toilet paper, there's already cracks, divergences starting to show in  MBS, and corporate vs sovereign bonds.

Fiat agnostic Sat, 03/03/2018 - 22:45 Permalink

We all know rates have been manipulated by central banks because The Fed makes vast sums perpetuating the debt based system they created, so they want to keep the scam going as long as possible. Eventually market forces will reassert themselves and rates will adjust to reflect reality and of course this will be a faster adjustment than the post-war era due to the dual aspects of extreme leverage and manipulation ending simultaneously. How this manifests in an over leveragaed, inter-connected financial world with unprecedendented derivative exposure remains to be seen. Perhaps more importantly for mankind is what plan the financial elite (aka The Fed & friends) have to retain their control!?

Pitty Sun, 03/04/2018 - 00:14 Permalink

Ha ha ha, smart sounding intellectual newsletter bozo with his stupid signature bullshit bow tie on CNBC telling us nothing not already know for years, going short the obvious is not working and won’t work good luck dreamers

Md4 Sun, 03/04/2018 - 02:32 Permalink

It would seem that, how the tablecloth unravels, is of little consequence to the heap of chaotic thread it becomes upon the floor below.

Whatever it will be, it will be that tablecloth no more...

hibou-Owl Sun, 03/04/2018 - 03:29 Permalink

I agree with the concept, but not the trigger.

When leverage is extreme, margin debt, company balance sheets (buybacks) are examples, gradual shifts in rates are not going to be a disaster.

It's like boiling a frog, or 100 cuts,

Look for the Enron like examples, HNA China was all in the news two weeks ago, then went went quiet. Have a look now at Deutsche bank stock. This type of situation will be the zipper, be it Steinhoff or another.  Major corrections occur when step changes are made (forced liquidation) not gradual moves.

east of eden Let it Go Sun, 03/04/2018 - 08:10 Permalink

The last time you had 'higher interest rates', circa the late 70's early 80's, the US fiscal position was much different than it is now. Then, there was a reason for people to pull out of gold and invest in T-bills yielding 20%+. Now, it is much clearer that a default is virtually guaranteed, and it will happen in the Trump Administration, probably shortly after the next federal election. People know this; finance ministers and world governments know this. 

In reply to by Let it Go

Kayman east of eden Sun, 03/04/2018 - 11:24 Permalink

"People know this; finance ministers and world governments know this."

You are some seer. 

Trump is putting the squeeze on Europe, China, and to a lesser extent Canada and Mexico. Rather that trying to print to prosperity, he is trying to revive the American entrepreneur by offering protection from foreign governments and foreign corporations backed by foreign governments. Time will tell if he succeeds. 

In reply to by east of eden

InnVestuhrr Sun, 03/04/2018 - 08:43 Permalink

Perfect facts and reasoning from them,


The REGIME rules in spite of facts & reason.

Only physical force can overthrow the Regime and restore rational undistorted markets, NOT words and NOT votes.