he sees between the investors of today and those of you old past here to talk more about it jim grant is here he's founder and editor of grant's interest rate observer and author of the book you see there mr speaker and a good one at that so thank you so much jim graham for being here today what a pleasure laura nice to be here oh great thank you so much so let's start with your recent news letter which i should say is out today we are so lucky to have you on a day that you published the title of a piece in your article the first piece is market of the absurd and you actually draw some interesting parallels between the bond bearers of one nine hundred eighty one and the bond bulls today now interest rates were fifteen percent back then today we know they are microscopic so what exactly are the similarities because of course the world looks very different than it now oh well i think one similarity is is something called muscle memory which is that can the condition behavior of people operating in markets that have been trending hot for months the school quarters but for doing for years with for decades in one nine hundred eighty one

bond yields have been rising and falling prices falling since nine hundred forty six that's what thirty five years. today interest rates have been falling bond prices rising since one thousand nine hundred one that's thirty one years and counting. then. people can come to see it come to believe that central banks were kind of harmless institutions because after all they reasoned in the social democracy inflation is in the radical you can't get rid of it today or bond bulls have come to reason that after all central banks are fairly harmless institutions because in an over leveraged economy inflation simply cannot be generated so there is both there was then and there is now i think of a dangerous kind of bly indifference to the evident consequences of the extraordinary monetary policies get to continue on this historical lesson what

would you say is the biggest take away from one thousand nine hundred one and that comparison to be worried about their cognizant of right now today well i think i was around for both instances of course in ninety one it was like what five years old or something very big disco in one thousand nine hundred eighty one people really wanted no part of unprecedently high interest rates because they knew and because the great and the good in wall street were telling them that rates would go much higher i think of it people turned up their noses at equity like returns without equity risk fifteen percent fourteen percent for thirty years basically non-callable that was available up until one nine hundred eighty four off and on. the world didn't care the world had seen rates go up for a generation at a half. similar today people have seen interest rates shrink and virtually vanish before their eyes they think after all the central banks simply will not bear on the side of excess. the great and the good believe that the ph d.'s in

charge of monetary destiny know exactly what they're happening and have the control to pull it off whereas we agree on which was written to have a war and something happened. you warn about the ph d. standard often and you know it's funny looking at headlines or saying people today are worried about inflation or don't think that central bank's going to cheat that looking at the headlines you do see that concern over falling prices a couple of the headlines i read at the top of the show on any given day you can see this concern and central banks are certainly concerned over asset price deflation they don't seem to have the appropriate fear of inflation there in encouraging more leverage do you think that velocity of money could pick up unexpectedly and that all this pent up inflation reflected on the fed's balance sheet could manifest all at once. i think it will not be all at once price certainly see the possibility of the turnover rate of money or velocity picking up

it has in the past one sees for example the possibility of of the world falling out of love with the financial position of the united states government and therefore not rolling over maturing debt securities rather in lieu of buying more treasuries perhaps buying a couple of hundred acres of farmland in illinois or iowa or some canned corn or something so there's nothing that says that the world must remain in place it's in fact it seems to me that the the lesson the truly humbling lesson from cycles past is that they don't issue a press release or ring a bell. that things can remain seemingly excessive you turn your back and then they become. if not suddenly then gradually and but by degree that begin to become reasonable that is they were version of some sort of mean. and i think that we are approaching that if not having if we have not yet begun to have to begin the path back to reasonable this interest rates or you think we're on

a path back to reasonable ness right now that they're going to rise i think so yes in fact or if i sound if i sound well versed in this it's only because i've been saying it for what seems like fifty years now. but what i do i do that sort of prophecy is what none of us really can do we pretend some of us but one one can observe is there is simply no value in the fixed income markets however however even if it's not much of the world is the only world we have and we must deal with it as it is and if you are a game i would like to talk to your billions yes billions of you are just about about ways in which even today one might find some crumbs of interest income you know under the couch or yeah on the yeah well i would like to hear about that because of course the fed is trying to push everybody and. riskier and vast meant you can't make any money off of bonds right now at least looking at the yields although they look juicy compared to somewhere like japan where might you find some

value relative to the price or the cost of the of what you're investing in that oh well hold on because i want to tell you we can get like five percent when we were. ahead excited about that's huge well there are many people are involved it's not your own finances or old from nasa but if you were also involved in nursing along church and elements or a family of some kind or the treasurer of a club and you despair of finding anything that pays more than one tenth of one percent for a cash balance there is a class of mutual fund called prime rate fund or leverage loan fund eaton vance has a very good one and these funds and invest in in the senior debt claims floating rate debt claims of companies that have been through leveraged buyouts m.b.o. those and the like now these are leveraged companies but you as an investor a command the senior most capital position in that and these loans did very well as

a credit they did very well in terms of credit and repayment and the whole experience even in two thousand and seven eight and nine and these funds shield from us for a half to five and five plus there was also a class of income producing asset called the business development company i think ari's and column both have b d c they're listed in new york stock exchange the prices of these can be volatile but again the credit experience of both of them has been very good over a very difficult cycle as they both yield above eight percent all right well there you have a couple attempts in this world of no yield or low yield where you have found some to tell us about i appreciate it not to harp on the fed too much i just want to get one more insight from you on it because we did have the announcement from ben bernanke earlier this week and it was of course interesting that he. change the interest rate or the fed funds guidance to match guideposts is what he called an economic guide post as opposed to a date and he said you know we're likely to keep this low low fed funds rate

guidance as long as inflation looking one to two years out doesn't look like it's going to exceed in two and a half percent to paraphrase him when he was asked though really sorry just one more moment when he was asked how has the fed been at projections you know have they been accurate in some cases here is how he responded let's play a bit. it's fair to say that we have overestimated the pace of growth. total output growth g.d.p. growth from from the beginning of the recovery i think it's only fair to say that. economic forecasting beyond a few quarters is very very difficult. so jim gray i'm especially long especially when they're forecasting concerns the future if i can i'm older than chairman bernanke i have many more arrows under my belt therefore much more experience but let us not forget that these people missed the biggest cyclical event of their

lives in the two thousand and seven eight and nine experience let me help out just a little bit of humility in the face of the ignorance we all confront and the thing we call the future i mean so any way you are asking the lord we have i know i don't go it up the side so so. so the federal reserve wants us to know that it will be vigilant when inflation reaches the measure of two and a half percent but it is a truism of our financial lives that the thing you want to measure somehow disappears when you try to measure it for example the remeasured rate of inflation was very manageable seemingly in two thousand and six and seven the thing that was inflating was the thing as it turned out that would guide our collective economic destinies for the next five years namely house prices. the powers that be simply didn't notice. inflation is a fine term who's to say that inflation at the checkout counter is the real pearl what happens if the federal reserve driving people to so-called risk assets over

eggs that putting and creates another bubble in stocks bonds commodities farmland gold what have you. the fed will have some measure of responsibility you know or well i was waiting for the ask chairman bernanke you mr mr chairman do you want people to buy stocks you want them to buy special of great corporate if when the prices of these things collapses will you be writing letters to the bravery of what what a man's will you make as a federal functionary and yet have something they're going to start getting any of those and i'm sure that they will say that that is not in their mandate unfortunately and they can always rely on that and jim grant that i may ask you to hold right there we will come back to you in a couple minutes i just have to get to this break but we'll have more with jim grant founder and editor of grant's interest rate observer because still ahead japan's voters head to the polls this weekend and this vote might have a major impact on japanese monetary policy i know we are going to say they have

been rare enough on monetary policy for decades but jim brown tell us why we should pay attention but first your closing market numbers. well. it's technology innovations all the developments around russia we've got the future covered.

live. let's speak. with. lisa.

lisa. and. i know me a little. he and some to see. destruction without to see. what could have been just ruins. save a great sacrifice. and restore by human jets it's. a remarkable reminder of courage and selflessness. the internet is a moment people. playing golf come rushing by

a song by. me please leave me. a little any. such. claim. welcome back before the break we were talking about the chase for yield looking at something like u.s. treasury yields which the ten year is yielding one point seven percent will those e-mails look downright juicy when you compare them to japan's look at the ten year

japanese bond ok when i looked right before air it was yielding point seven four percent you can see how they've just continued on the downward swing why do we need to pay attention now will japan's voters head to the polls this weekend to vote in the parliamentary elections the man likely to win prime minister based on the polls we've had out so far he's the front runner has said he wants the bank of japan to print until price inflation gets to two percent may seem a little odd that the prime minister could be dissin volved in pressuring the central bank what does this indicate about the perceived power of the printing press and is this an excess of reality especially in the case of japan well let's ask jim grant because he has been writing about this and i'm so interested to get his insights jim what do you think about the front runner in japan saying i want the central bank to print until we get two percent price inflation and what does it say about the power that he thinks the printing press has we are there's something in the water a lot of that water being the mediterranean the atlantic the pacific the sea of

japan the arctic world. or the next social banks including switching which has got no ocean at all central banks are doing not only what they have never done but really had never been imagine they nobody had mentioned it really could or would do the things they are doing. so here is japan japan has not been heard from for twenty five years the world's number two number three economy. for ever disappointing now is going to elect we think a new prime minister who finally has had it. with the underachieving central banks the japanese the japanese can't seem to procreate nor inflate these wheat from the us if you want. they can't your brain or inflate you would think that human beings could do one or the other but they can't do both something is wrong so so japan has disappointed chronically everyone who believes that there was

a radical different unit just a slightly different turn in the road but i'm thinking that this might be something worth watching because if for no other reason the japanese will be getting on their way following which they seem to have put it to do they'll be following the world and implementing truly radical monetary policies and you know i think it i think it's very important ok so we certainly will watch i'm wondering if the japanese a yield curve is telling us anything about the beer g.'s ability to relate at this point and your view of the what i think is the problem engine among many other problems japan is is the central bank can as it were invite the banks to get up and and cha-cha boring that's a that's the wrong image for japan but they can invite the central banks to go forth and to create credit through the group the processes of buying securities or lending but if the banks are our capacity constrained through

a lack of service through a lack of capital or through a lack of of courage they will do no such thing if people feel they are over encumbered they will not apply to the banks of the banks might create credit so it's there are many difficulties in the pan but i you know it was our own chairman chairman bernanke who some years ago said that in the extreme the central bank can read an aircraft and go up and drop senos from the sky it could do that and it would not be so shocking before the cycle is over that central banks in desperation do just that yeah i wouldn't be surprised. when we look at japan completely have the japanese baked inflation into their cake as well as the u.s. and even more aggressively because you. odds are lower they've been trying to reflate for longer and they may get more aggressive so is the risk we may see a long awaited collapse in the japanese bond market before the us really arrests to watch for but it's a great question to which you have

a great answer in fact lauren i have no answer. to the trail of sorrow one of the trails of sorrow and speculation that is to be sure of the japanese bond market i think it will finally work out i've no idea whether that combination will precede our own bear market and so i begin to despair of either one but as a matter of of an arithmetic value proposition certain there is no reason to be owning these things you have to people do or think is watch out of habit out of conviction yes complacency and perhaps too now i do want to ask while we're on asia i want to ask you one question about china because earlier this week we interviewed stephanie calton who was an economist of the m.m.t. discipline or modern monetary theory and their kind of descriptive scenario for the monetary system is that the government isn't revenue constrained because it is the monopoly issuer of the currency and some of them advocate stimulus or spending until you get full employment and i asked her you know would china be the most.

relevant economy today in which they are doing something similar to what you're calling for here's what she said. they're spending a lot but it certainly doesn't look like any model that i think i am going to advocate in terms of figuring out what you need national priorities if all you're doing is building a bunch of buildings that sit empty and so forth this is not this is not compatible with anything that we advocate. my question though is is this what inevitably happens to buildings that are empty factories that are working at capacity when you do have the government spending and spending in trying to achieve this goal of full employment. yes emphatically yes i mean i think perhaps what the. the school of economics thought which i now can't quite recall but this school of economics that we just heard advocates a kind of price control it wants the fed or central bank to to manipulate interest

rates such that certain good outcomes occur such as a lot of hiring such as so-called price stability but. what happens in price control is almost invariably distortion of the allocation of resources china has got big problems in its system of credit the government controls and commands it fixes interest rates it allocates credit especially to state owned enterprises hence the empty shopping malls indeed empty cities now it's not so very different from what we have in this country where the federal reserve is muscling around the yield curve and sitting on the funds rate and raising up asset prices in the name of some set of goals that it's thinks are desirable it is heavily in the business of price control and indeed heavily into the business of central planning gradually and by degree we have come to have all too much in common with what we call red china and there you go we'll have to leave it there i really appreciate you being

here today jim grant always a pleasure on the day your on pleasure thank you so much. all right let's wrap up with viewer feedback because it's friday and we have had some hotly debated interviews this week and we've received so much feedback so we have some good ones today so first of all we had jim records on earlier this week and bam bam twelve said question please the government wants to create inflation why jim's assessment that weakening the dollar to increase exports was just a cover story has to be right because it makes no sense at all though creating inflation by increasing import prices does because workers is kind of saying this that the government wants to import inflation and so that goes through to prices in

the u.s. because the u.s. is a net importer so here's jim rickards you are why the government will want inflation take a listen. negative real rates shock you into spending with the higher than the specs inflation and the combinations designed to give last year and that's the sort of secret plan behind it so. so that's his view i said government i should have said fed and i should mention the fed may also be trying to prop up asset prices to avoid a deflationary to leverage that is so painful so that's another commonly given reason now with first said to us sort of you are new to just how to thought when the fed makes future announcements someone from capital account should be in the press gallery to ask questions well with first another dear viewers have i got news for you take a look at this video see that red head in the background looking very astute that has our own segment producer just seen underhill she wasn't called on this

time to ask her question but just you wait we will keep sending her until she gets a question in and in response to our discussion with eric sprott earlier this week for britain's stallions said why so nice to eric sprott and so incredibly rude and disrespectful to peter schiff who was a guest we had on last week. i do not know what people think would be disrespectful or rude about my interview with peter schiff it was a very fair interview yes we asked peter about his calls for hyperinflation because they have not materialized the way that it seemed to us that he had indicated in the past and we think that they are premature and we gave him time and the opportunity to respond and say that he hasn't always said that hyperinflation is going to happen he says that it could be one of the outcomes now we always try to be fair to our gas and respectful asking challenging and pointed questions in my book qualifies as such now in a back and forth surrounding the peter schiff interview while we're on it doug mcclure twelve thirty four was responding to another viewer said do you even know

what happened that day if you do then tell me how she referring to me was not talking for shad lock and he's talking about her she he is talking about. my interview with peter being influenced by mike shylock who had written a post about how he was asked to be on a panel with peter and it fell through so i don't need of your to tell you i can tell you i was not speaking for mike shabaka commish wrote a post that day that we had nothing to do with we had been working on a debate panel that didn't work out that happens all the time in t.v. it's not weird it's not rare not even a bit i did the type of interview with peter that i would have done with peter regardless now in reply to that comment or. paste ceo's the logos said i don't think lauren is anyone's mouthpiece but i imagine the producer on the show affects her angle more than some blogger dimitri is the producer of the show and we do it as a team and it's certainly true that if anyone is going to influence me or the direction of this show it is him and that is where we will leave it thanks for all your responses you know we'll continue to read them even if they don't all make air

and that's our show for today as all we have time for thank you so much for watching be sure to come back on monday in the meantime you know you can follow me on twitter at lauren lister you can go like our facebook page and interact with us there dimitri is always on there responding to you can see any shows you missed give us any feedback that we will possibly read at you tube dot com slash capital account you can watch us in h.d. on hulu and hulu alone and from everyone here thank you so much for watching and have yourself a great weekend. i'm sure would be too much brighter if you knew me. from science to.

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