lou: maybe they shouldn't, because every day he prove them all to be frauds. we have a great new book to recommend written by my buddy and me jim born it's "putin's gambit." good night. >> announcer: from fox business headquarters in new york city, the new "wall street week." maria: welcome to "wall street week," the program that analyzes the week that was and helps position you for the week ahead. i'm maria bartiromo. jim grant is my special guest. but first colin mcshane is here. >> it was a good week for the week. the deun s & p touching all-time highs. janet yellen testified on capitol hill all with an optimistic take on the economy.

a slew of major banks reporting second quarter earnings. paul beating analyst expectations. despite that stocks traded lower. much of the week in washington was dominated by controversial emails released by donald trump, jr. in which he agreed to week with someone who reportedly had something about the russian government that would incriminate hillary clinton. democrats raised calls of collusion while the president parades his son's transparency saying most people would take that meeting. a meeting which allegedly proved to be a waste of time for the trump campaign. senate republicans unveiling their new healthcare bill that directs billions to low and middle income households to purchase insurance. medicaid would still he substantial changes and two key

taxes would remain in place. finally amazon celebrating prime day. the company's personal version of black friday. it saw its sales soar by 60%. amazon stock up more than 2% for the week. maria: janet yellen testified before congress giving a moderately upbeat report on the economy. the testimony grabbing investor attention over her plans for the fed's balance sheet. >> the committee intends to gradually reduce the federal research's security holdings by decreasing its reinvestment of the principle payments it receives from the securities held in the system open market

account. the committee currently anticipates reducing the reserve balances to a level below recent he levels but larger than before the financial crisis. maria: joining me right now jim grant, thanks so much for joining us. janet yellen spoke to the house wednesday. the senate thursday. have much similar discussion. are you as worried as some people out there about the winding down of this $4.5 trillion balance sheet? jim: it will be an interesting balance sheet. but let's try to demystify the balance sheet. the fed holds on the asset side of this two-sided thing, it hold $4.5 trillion worth of things. and that includes $2.5 trillion

of mortgages pack and as securities. that would be not quite but almost one quarter of all the first mortgages in america. then a trillion 8 of the government bond and notes held in public hand. this is immense financial obligations. that's the asset side. the liability side what the fed owes in bank reserves. an important component. so to give you an idea of scale, before the financial crisis the size of the fed's assets and liabilities was $900 billion or less. so we have gone from $900 billion in 10 years to $4.5 trial. $4.5 -- trillion.

it is an astonishing development. we should not be blase' about the consequences which we cannot anticipate as they are winding this down. maria: which is why jamie dimon said this is unprecedented. let's not underestimate how big this is because it may cause disruption in the market. jim: very wise word on his part. there is so much new and different in dam monetary environment. we had last summer $13 trillion worth of government bond in europe and japan priced to deliver a yield of less than zero. that's a first in about 5,000 years of recorded interest rate history. another first is the institution of what we call the ph.d standard, the discretionary

monetary rule from former tenured college pro pessors. we have theoretical professors leading unprecedented monetary policy experimentation. does this sound good so far? maria: no, it sound scary. what does that look like? what is disruption? does that mean a massive sell-off in stocks or collapse in the bond market? jim: there are two kind of disruptions. the happy kind and unhappy kind. we are presently in a moment of extreme hope or complacency, certainly bullishness in all markets and interest rates are as low as they have ever been. stock prices by some measures are as high as they have ever been value offed.

overlaid on that high valuation is the fact -- the never has valuation been less important in the musings and plans of the people with the money. maria: but they are important, aren't they? >> they shall dispositive. they determine outcomes. invest when things were cheap. you had a fair chance at a good outcome. and if you invested near the top, you were digging yourself into a hole. that was the dogma several hundred years before last week. maria: is this the top? >> if you asked me that several years ago i would have said certainly, maria, i have become less dogmatic on this stuff.

>> sometimes things are expensive. >> that's been my experience in life. we have much more to talk about when "wall street week" comes back after this break. >> announcer: ready, set, hike. could inflationary fears rain on the fed's rate hike parade? jim grant reacts when "wall street week" returns. before it ends. choose from the is turbo, es 350 or nx turbo for $299 a month for 36 months if you lease now. experience amazing at your lexus dealer.

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maria: the federal reserve raising interest rates for the third time last month. wall street had been expecting at least one more rate increase this year. we are expecting that to happen in september. but earlier this year federal reserve chairman janet yellen said the fed is ready to scale back on its rate increase if inflation is soft. why is this so important to janet yellen. and when i asked you during the

commercial break, we are not sure. jim: pressed for it when she was president of the san francisco federal reserve bank. this number is tacked up on the wall as if it were handed down from on high. 1965, there was not one year in which the rate of inflation reached 2%. 70 basis points. .7%. so now days that would be the grounds for kinds of a panic, right? deflation, 1930s. so what is it that changed? for one thing we are more encumbered more debt. they think we need inflation to help us pay our debts. but we never say that.

it's the intellectual dishonesty of this monetary policy that most rankles me. maria: we are out of the throes of the recession, the financial upset of almost 10 years ago. but the economy is not doing all that great. look at gdp. 1.5% on average. tax receipts down. do you think there is a risk things slow down as the fed accelerates this? >> yes, i think there is a big risk. janet yellen in her testimony this past week and the document the fed issued in june having to do with their plans for the normalization of the balance sheet. in every over case janet yellen issued a p.s. we'll be back wit with qe4.

what they are saying is there is no going back. that we are going to issue these dematerialized things we call dollars. these digital things we type into a come fewer. the way they create credit is by typing dollar signs into the computer and that's called the bank reserve. that somebody deposits the proceeds into an account at the fed. the fed by buying bonds owns the bonds. now $4.5 trillion, and the bank has an account at the fed with dollars that didn't exist before. so that's what they call qe. bar report bank of canada raised interest. maria: the bank of canada raised interest rates. >> there is a tomtom beat, the central bankers.

they tend to step back from the most radical policies. that's what they are talking about. even mario drage has been talking about this much to the alarm of people who own our fiend securities. maria: the yields in europe are virtually negative. >> what europe is doing, it's falling in behind the federal reserve that is way ahead in normalizing monetary policy. interest rates are above 1%. the fed is contemplating reducing it. they will reduce their purchases but it doesn't mean the balance sheet will shrink anytime soon.

maria: he said rates are negative but the european national bank things are getting better. jim: they are having suppressed rates and the president and ceo of deutsch bank was on tape saying all this bond buying by the european central bank without regard to price or value has served to destroy the method of price discovery by which we decide to price credit. that is soft spoken, but very eloquent and powerful denuns was. when a banker can't price credit. interest rates are the most sensitive prices in capitalism. they design risk and cash flows, and the central banks have with

malice aforethought and intended benevolence aforethought muscles around these prices for 10 years and you can't tell me there is no consequence for that. maria: i want your take on whether janet yellen gets a next term. her term is up in february. and we have to talk about fiscal policy with the markets expecting healthcare. stay right here. a lot to talk about with you. >> announcer: markets at or near all-time high. are they about to eat their game. dearthere's no other way to say this. it's over. i've found a permanent escape from monotony. together, we are perfectly balanced.

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maria: investors want tax reform. markets have done their best to shrug off the drama in d.c. but how dependent is this market on tax reform getting done this year? jim grant is with me today talking about all of the above. do markets need to see a tax reform package this year to continue this elevation that we have seen? jim: my colleague was saying -- we were talking about this great show, and evan said, who is talking about the border adjustment tax anymore? no 4th quarter conference call was complete in america without furious questions and answers about the border adjustment tax. maria: the president doesn't want it. paul ryan is holding on to it. jim: that's the answer to my

question about whether fiscal policy counts most. it's something we talk about, but i'm not sure how important it is for the stock market. maria: earnings in the first quarter were up 15%. gym earnings are up, interest rates are down. maria: is that the fuel for the stock market right now? jim: i think to some degree what he can't know the expectation of better growth and lower corporate tax rates is right there in the mind of the market. i can't tell you how important it is. but if it were to go away, it should certainly have some bearing on future reckoning. >> you were expecting disruption just from the federal reserve. >> i think sometimes we overestimate the extent to which public policy drives event. and we underestimate the extent

to which event set the agenda for public policy. janet yellen would have us believe the fed controls outcomes. i have lived to see many episodes in which event were driving the fed. and i think that the future will hold more of those. janet yellen is not the arbiter of future outcomes. she is going to be the -- i don't know -- she'll be the person who is driven by event and take her cue from events. maria: do you think she'll get reappointed? jim: i think what trump want is a low interest rate compliant credit creating person. he want a presence at the fed, he want gary cohn who is a very, very successful wall street man.

what trump want is what janet yellen will deliver in the shape of low rate, a cautious and measured retreat from low rates and the most aggressive return to radical monitoring measures. bar require doesn't seem you are buying this low interest rate cycle. >> i think they will retreat from it. and in the retreat the world will reconsider the nature of our man tearive affairs and the nature of money itself. you worry about valuations. jim: i'm going to sound like jim grant. i don't mean to be repetitive. but our institutions are repetitive. i say there is morris can than reward in this market. stocks at current levels are worrisomely high. interest rates are certainly low. we are unreasonably complacent

with respect to the capacities and judgment of the federal reserve system and i say that that now is a great time not to be caught up in the crowd which has to invest as if by compulsion. never before have we had so many trillions of dollars invested without regard to valuation and price. we calculated $21 trillion worth. central bank buying, index buying, etf buying, that is done without a single check on the nature of the value that's being purchased. maria: more "wall street week" after this. think again.

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housing starts are up. retail sales typically a market mover along with consumer sentiment all due out in the week ahead. earnings season in full swing. the big companies reporting. net flick, bank of america, goldman sachs, ibm, dish, morgan stanley, microsoft. typically they could be market movers in the week ahead. the senate could vote on a new draft of its healthcare bill. mitch mcconnell has pushed the recess back two weeks. and tack reform testimony from former treasury officials. the senate hopes to have a tack reform bill by the fall.

i'll see you sunday morning this weekend at 10:00 a.m. eastern. that will do it for us on "wall street week." >> i'm bob massi. for 35 years, i've been practicing law and living in las vegas, ground zero for the american real-estate crisis. but it wasn't just vegas that was hit hard. lives were destroyed from coast to coast as the economy tanked. now, it's a different story. the american dream is back. and nowhere is that more clear than the grand canyon state of arizona. so we headed from the strip to the desert to show you how to explore the new landscape and live the american dream. i'm gonna help real people who are facing some major problems, explain the bold plans that are changing how americans live, and take you behind the gates of properties you have to see to believe. at the end of the show,