Jim Grant: "Uncomfortable Shocks" Lie Ahead As The Great Bond Bear Market Begins

Jim Grant, editor and founder of Grant’s Interest Rate Observer, is one of a handful of credit-market luminaries who have declared the end of the 30-plus-year bond bull market that began in 1981. Interest rates, Grant argues, probably touched their cycle lows during the summer of 2016. And as the secular bear market begins, investors who have uncritically accepted obvious aberrations like Italian junk bonds trading with a zero-handle will face a painful reckoning.

"...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."

So Grant explains in an interview with Erik Townsend, host of the MacroVoices podcast, where he shares his views on topics ranging from his opinion of the Fed Chairman Jerome Powell to inflation to the flawed logic of risk parity.


Grant begins the interview by praising Powell, whom he prefers to former Fed Chairwoman Janet Yellen because Powell lacks a PhD and is able to communicate with lawmakers and the public in plain English - not tortured Fedspeak.

Well, Jay Powell has one commanding credential. And that credential is the absence of a PhD in economics on his resume. I say this because we have been under the thumb of the Doctors of Economics who have been conducting a policy of academic improv. They have set rates according to models which have been all too fallible. They lack of historical knowledge and, indeed,  they lack the humility that comes from having been in markets and having been knocked around by Mr. Market (who you know is a very tough hombre).

Jay Powell at least has worked in private equity. He knows a little bit about the business of buying low and selling high. Also he’s a native English speaker. If you listen to him, he speaks in everyday colloquial American English, unlike some of his predecessors. So I’m hopeful. But not so hopeful as to expect a radical departure from the policies we have seen.

Moving on to market conditions, Townsend poses the question that credit-market analysts are probably sick of hearing from their clients: What, exactly, is driving this market? Is it Trump? Is it inflation? Is it the global reining in of intrusive central-bank stimulus?

Believing that one man - even the most powerful man in the world - could have a unilateral impact on markets is almost an expression of arrogance. Instead, Grant believes credit markets turn on multidecade cosmic cycles - and that the bull cycle that began in 1981 has just about run its course...

I’m a little bit more fatalistic. You know, we have come to accept that financial markets are driven by people and by policies and by personalities. And, what is Chairman Powell going to do? What will President Trump tweet next? As if they were in charge.

Well perhaps sometimes they are not in charge. I have observed over the years that the bond markets have tended to move in generation-length cycles. Anywhere from 20 years to 35 years. This is not an ironclad law of physics, but it is an observation from the middle of the 19th century forward.

So we have concluded (perhaps) the bull market in bonds that began in 1981 and that maybe ended in the early days of July 2016 (I think). So it might just be that interest rates are going up because they are going up. It sounds a little bit mysterious and indeed fatalistic, but I’m a little bit less inclined than others to assign causation to people and policies.

Moving on, Townsend turns the discussion to risk parity funds, and what Grant describes as the “flawed” thesis that bonds are inherently less risky than equities…

First, risk parity, as you know, is based on the proposition that bonds are inherently less risk-fraught and less volatile than equities. To someone who was around in the ‘60s and ‘70s and ‘80s, that proposition is somewhat contestable. But that’s the idea.

Now that may work in a gently trending market. It has not worked at certain times and junctures in which both stocks and bonds decline together. So my sense is that there’s a lot of money in risk parity and that a forceful rise in interest rates, a steep decline in bond prices, is going to force liquidation of some part of the risk parity portfolios.

Now, Erik, you wonder how far it can go. People, I think, are arguing that it would be inexpedient if rates went a lot higher. They say impossible. What then actually mean is inconvenient.

I forget now exactly what the size of the interest expense of the public debt is, about $400 billion. The government is paying 2.2 or something on its debt. Doubling of yields to 4-something and doubling of gross interest expense to $800 billion or so would certainly be an inconvenience. It would require very painful political choices. But, no, it is not impossible.

So I think that, yeah, the stock market is going to run into trouble. It’s richly valued. But I don’t look for Armageddon. I look for higher rates, and I look for appropriately lower price-earnings multiples. And I look for a much higher interest bill on the part of the US Treasury.

Having discussed the historical trajectory of nominal rates, Townsend and Grant move on to the next logical topic: A historical analysis of inflationary trends. As Grant explains, central bankers who are hoping for higher inflation should be careful what they wish for - because, historically, shifts from periods of low inflation to high inflation have been accompanied by uncomfortable shocks.

Well, Erik, I happen to be in the inflation camp. I’m most humbly placed there. There are powerful arguments on both sides of the question. But something to bear in mind is that nobody issues a press release at the start of an inflationary cycle. It kind of creeps in on little cat’s feet.

The 1960s are a case in point. In the early ‘60s there were four consecutive years – 1961 to 1962, ‘63, early ‘64 – in those years the measured rate of inflation in the CPI was, if memory serves, less than 2%. In fact in some years it was less than 1%.

...Suddenly, the US was mired in the Vietnam War, and the quiescent interest rates of the 1960s transitioned into 1970s-style stagflation.

This historical example is just another reminder that macroeconomic trends can shift in unexpected and mysterious ways...and that central bankers hoping to catalyze an increase in inflation toward the 2% target should be careful what they wish for…

Scrying these secular shifts in the direction of inflation and real interest rates isn’t always helpful, Grant points out.

What is helpful, however, is to perform a simple risk-reward analysis of markets as they are: Think about the volume of debt rattling around the global economy, and the artificially suppressed level of interest rates, and ask yourself: Does this make any sense?

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."

Later in the interview, Grant shared his view on the direction of gold, the dollar and the feasibility of long-term debt monetization by the Federal Reserve.

Listen to the interview in its entirety below:

*  *  *

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."


lamont cranston Mon, 03/12/2018 - 20:40 Permalink

So, interest rates jump 100-200 basis points...or more. Inflation??? Huh??? Home prices, anyone? Equities? Gimme a break. 

Perhaps ag commodities. Would the bell toll for Bezos et al?

Could be a great Weekly World News scenario. Inquiring minds want to know.

Harry Lightning spekulatn Mon, 03/12/2018 - 23:30 Permalink

I have liked Grant for a very long time because he does not offer the typical rah rah Wall Street cheerleader speech. He provides interesting analysis of the economic trends that act on the financial markets, albeit usually tinged by a palpable degree of cynicism.

His drawback has been his perpetual fighting of the trend in bonds, not willing to concede an inch as to why bonds have dropped substantial amounts of yield while all along the US government has been piling up incredibly large amounts of debt that any thoughtful observer realizes can never be paid off without a default. I have agreed with Grant's thinking on this matter from an academic point of view while at the same time going along with the trend to get along. Yes, Mr. Grant, the bond market will collapse one day due to a credit default, but that day was far into the future since the time when you first started trumpeting the bond collapse diagnosis.

I believe Mr. Grant to be wrong now as well. Yes, I do believe that there will be an unbelievable collapse in the US bond market a la Argentina's many examples during the last 50 years. But I do not see that happening until the highly over-valued stock market breaks down first. There are a number of reasons for the stock market to fall 25 or more percent from present levels, the descent probably has already begun albeit in a less than consistent manner. That is often the way bear markets begin, in a back and forth tussle between bulls and bears that bears finally win, causing capitulation of the bulls. I cannot see any rationale short of a credit collapse that would cause both bonds and stocks to collapse simultaneously. Rather, I think it more likely that the stock market starts falling first as a result of investors refusing to invest at hyper-valued levels. That is the process that has begun this year. As stocks fall, disinflationary and even deflationary forces will become apparent as a result of the negative wealth effect that the falling stock market creates. Not enough time has passed for investors to forget the period of September 2008 through March 2009, and as such, there are a lot of itchy trigger fingers ready to pull as stocks fall more consistently when the bear market asserts itself more fully.

Eventually stocks will fall so far as to cause a flight to safety in the bond market that propels bond prices to record highs, and yields to new lows. At that point, with an economy in shambles from a stock market that has lost half its value or more and an investment community that then finally starts to question whether the US will be able to generate the revenues to pay down its debt, the US bond market will be seized with credit concerns, and bonds will collapse as too many investors all seek to get through a narrowing door.

The US government will make several attempts along the way to save its stock and bond markets from their inevitable fall, but the result in the latter point of the cycle will be to cause hyper inflation. Which will be the final nail in the bond market's coffin, cutting the value of longer dated US debt down to something like 30 to 50 cents on the dollar. And that is how the US will get rid of its debt problem, by redeeming its outstanding debt for significantly less than the nominal value. 

As I wrote above, this cycle has occurred before, most notably in Argentina. An over-valued stock market cannot be supported any longer by fundamental valuation relative to corporate earnings. Stock values fall, causing a negative wealth effect that supports the decline in stock prices and a growing disinflation that turns into deflation. Bond yields start falling with stock prices as capital transfers from one market to the other, and the falling rates of inflation support the lower bond yields. In the terminal stage of the decline in stock prices and bond yields, the government launches massive quantitative easing operations in a vain attempt to stimulate the economy and reverse the deflationary forces that control economic decision-making. At that point a credit concern arises which quickly causes bond yields to start rising, short-circuiting any Keynesian pump-priming that the money printing was trying to initiate. The vast amount of money injected into financial markets at this time causes the dollar to collapse, quickly reversing the deflationary trend with a hyper-inflation that further pummels the prices of financial assets. With the real estate market destroyed as higher mortgage rates in a weak economy accompany the rising bond yields caused by the government-induced hyper-inflation, the US government then moves to re-structure its massive debt, redeeming outstanding notes and bonds for less than half their nominal value. That represents the end of the business cycle, and whatever economic model to control the US economy then emerges.

Which makes life very easy for investors. A few easy trades and a lot of patience, and you can build the kind of lasting wealth that only is available at times of maximum distress. Because its only at those times that the maximum potential for wealth transfer occurs, from the haves to the have-nots. I think that the trade now - any I warn you that this is what I would do for myself rather than a blanket recommendation for anyone else - is to get out of stocks and buy longer-dated non-callable US Treasuries. US longer-dated debt may move a bit higher still in yield, maybe to the 3.25% mark on 30 year bonds. But the bigger risk is that yields start falling sharply from here, so rather than look for another ten basis points in yield its better to get on the train before it leaves the station. Hold that position for as long as stocks continue to trend lower. Initially that stock trend will be difficult to decipher, for as has been seen during the last six weeks, there still are a lot of bulls with money to burn. When stocks start falling sharply and each day seems to bring a bigger fall than the day before, that's when you will know the down trend is firmly established. Bond yields eventually will benefit from the transfer of capital from equities, so wait for new low yields in your bond holdings, lower than the 2.09% recorded for the 30 year US Treasury during the month of July 2016. 

Once bond yields make new low yields, the time will be ripe to take your profits off the table, and you will reap a grand reward while most everyone else will have suffered terrible losses because they got out of stocks and into bonds too late. Once you have your bind profits off the board, then life becomes a bit difficult. Because while the US government goes through the debt clearance exercise that eventually will restore its economy, there will be little of anything valuable in which to invest. But to your credit, you will be cash rich when every asset under the sun will be cheap, so at that point look for income producing real investments. Maybe buy a business that has a steady customer base regardless of the economy, like a food store. Usually at moments like those in the business cycle, the problem becomes too many good opportunities rather than too few. 

That's how I see it, with all condolences to Mister Grant. 


In reply to by spekulatn

Harry Lightning HRH of Aquitaine 2.0 Tue, 03/13/2018 - 06:57 Permalink

That's a very good question. To start with, I have never been a fan of TIPs because their coupon rate is determined by the US CPI. I think the CPI is a poor indicator of where inflation really is in the US because the government has a vested interest in keeping it as low as possible since Social Security payments are indexed to it. So its kind of ridiculous to have the government calculating the CPI when they desperately need the number to be as low as possible. In the late-1990's they even changed the CPI formula to make it produce lower readings. As such, I believe TIPs holders get cheated insofar as the TIPs do not fully protect against the deleteriousness of inflation to the bondholder.

But, from a general perspective, as inflation rises the TIPs provide higher interest as they rise in value. Additionally they have a floor that protects your principal, you will never be repaid less than the face value of the security. However, in times of deflation your annual interest payout will be zero, and the value of the bond will fall as low as its face value.

Being that I believe the predominant trend for the future will be disinflation and deflation until the bond market makes new low yields, TIPs don't make sense to me. This will be an historic opportunity to make a killing as Treasury bond prices rise significantly...why be stuck in a security that will be paying no interest and not rising in value ? 

I would prefer to buy the Treasury bonds now and hold them until they go to a lower yield than in 2016. Then I will sell them for a very nice profit, and have a lot of cash to use later for investment in oversold and under-priced stocks, real estate and businesses. 


In reply to by HRH of Aquitaine 2.0

naro Mon, 03/12/2018 - 21:24 Permalink

How could the US government pay for its debt if interest rate climb any higher.  I believe that the Feds will keep the interest rates down until the federal debt begins to fall seriously.

aeslong Mon, 03/12/2018 - 21:37 Permalink

Bullshit. when some historical events are coincident with his augments, he repeated "historically, historically", when the other historical events didn't not agree with what he opined, he would say "this time is different".

I  would call all these statements made by him are bogus.

Let it Go Mon, 03/12/2018 - 23:11 Permalink

Decades ago Fed Chairman Paul Volcker was able to bring inflation back under control and in doing so he broke the back of those speculating that metal prices would head higher. This lesson from the past that has been forgotten by many investors.

Decades of interest rates drifting ever and ever lower have allowed many investors and the general public to forget the power of high-interest rates exert on defining prices. More about this interesting time in history in the article below.

 http://Metal Prices And Higher Interest Rates.html

Is-Be Tue, 03/13/2018 - 05:22 Permalink

My model is based upon Donnella Meadows "Thinking in Systems"

She shows us that in order for a negative feedback loop to be effective it must be

A) Timely and 

B) Powerful.

The stock market is one big feedback loop that sets the value of a stock, promissory note whateva.

The algos have taken "Timely" to a whole new level. Noise in the Old Noisy stockmarket was any movement over say half an hour.

Now you have to magnify the timeline to see the action in milliseconds.

The result is a much tighter control of the output signal.

And then the FED front loads the furnace with cash and the output just goes nice and smoothly towards the top right hand corner of the graph.

This ain't your grandpappies market. No good look for historical precedence.

The solution is to make AI the chairman.

Batman11 Tue, 03/13/2018 - 06:52 Permalink

How do bankers make so much money?

Bankers made similar amount in the 1920s, and the first step is turning academic economists into useful idiots with neoclassical economics.

The second step is a lack of regulation that stops them doing what they do, when they can.

The third step is a lack of awareness that banks create money with bank credit.

“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.

This useful idiot, neoclassical economist believed in price discovery, stable equilibriums and the rational decisions of market participants. The markets were actually being driven to these levels by margin lending and were detached from all reality. The banks were creating money and pushing it into the stock market.

With financial assets, no one is adding more supply as the demand increases and so the price just goes up. The bankers can create financial assets themselves and trade them amongst each other to rake off fees and capital gains.

The bankers also create the money supply from bank credit, so they can create money and demand for the financial assets they produce themselves with interbank trading. They need securitisation so they can get this debt off their books and just keep going until there is a systemic collapse. They securitize the debt and sell it into the markets until this bad debt, used to inflate financial asset prices, saturates the markets.  


The useful idiot, academic, neoclassical economist doesn’t look at the tell tale sign of debt creation or realise bank lending creates money.


M3 is going exponential before 2008, a credit bubble is underway (debt ≈ money)

Today’s central banker is turned into a useful idiot by looking at consumer price inflation and not financial asset price inflation. Today’s central banker also has a blind faith in the markets, price discovery, stable equilibriums and the rational decisions of market participants. Today’s central banker is usually an academic economist filled with the nonsense of neoclassical economics.

Today’s central banker does know they can artificially inflate the markets with QE, but it never occurs to them this is what the bankers have been doing. The bankers have been pumping money, they create themselves, into the markets and collecting fees and capital gains along the way.

Today’s central banker is a useful idiot to the power of four.

Batman11 Batman11 Tue, 03/13/2018 - 06:53 Permalink

Much of the fictitious wealth generated by neoliberalism comes from inflating real estate markets with the money creation of mortgage lending.

The money creation feeds into the economy making things look as though they are working well.

The limited supply of real estate just pushes the prices up and participants in this ponzi scheme can realise capital gains and collect fees as the market inflates.

As the whole thing is just inflated with debt it eventually collapses.

This is how it works with other financial assets too, but this is the one we all know.


The ponzi scheme reaches the end of the line and crashes national economies.

1990s – UK, Canada, Scandinavia, Japan, the Asian Crisis

2000s – US and through complex financial instruments, Europe and the UK. Through a drop in Western demand China.

2010s – Ireland, Spain, Greece

Soon – Canada, Australia, Norway, Sweden, Hong Kong and South Korea


In reply to by Batman11

ThanksIwillHav… Tue, 03/13/2018 - 11:27 Permalink

Being an individual I would pay $800 for G.I.O.   I would never pay $1300 unless I was running a hedge fund and could deduct expense.  Love JG's writing and verbal gymnastics but can't justify paying that much as an individual.

abgary1 Wed, 03/14/2018 - 16:24 Permalink

Moral of the story, end the central banks.

What they will say in the future is that neo-classical economic theory is totally illogical and how could we possibly attempt to control a complex, dynamic and chaotic economy by targeting inflation.