Grant's Interest Rate Observer's Jim Grant: «Interest Rates Are not Sticking to the Central Banks’ Script»

Our best guess on the precious metals is a flushing-out of the speculative buyers who entered these markets over the last year or two, effectively transferring title to the asset before a run higher.

The likeliest way for this to be accomplished would be some combination of positive real interest rates and stagflation reasserting gold's and real rates' inverse relationship which had disconnected starting in 2022. Unfortunately just because something is likely there is no assurance that it will happen, though this seems to be the way to bet in the intermediate term.

From Neue Zürcher Zeitung's TheMarket.ch, November 28:

Despite the Fed easing monetary policy, the bond market is not willing to play along. Jim Grant, editor of «Grant’s Interest Rate Observer», explains why the renewed rise in yields is worrying and why he is bullish on precious metals and value stocks.

Deutsche Version

The financial markets are breathing a sigh of relief. After yields on long-term US government bonds have experienced a strong boost since mid-September, the situation is stabilizing somewhat. The question is for how long, as inflation shows signs of picking up again and could be fueled further by the economic policies of the new government in Washington.

Jim Grant, publisher of the iconic investment bulletin «Grant’s Interest Rate Observer», is worried. «I think 2025 might hold a bit of drama in the credit markets, perhaps a crisis of some kind where somebody can’t pay and that somebody knocks down a chain of other weak credits,» he warns. «Before you know it, the Fed has to intervene, cutting rates again,» he adds.

In this in-depth interview with The Market NZZ, which has been slightly edited and was conducted at the Value Intelligence Conference recently held in Zurich, the seasoned expert on investing and financial history explains what could be behind the latest developments in the bond market. He also lays out why he is bearish on the dollar, why he expects gold to make further advances and why he continues to believe in the comeback of value strategies.

«I’m worried about the burden of debt that has accumulated, facilitated and even encouraged

 by exceptionally low interest rates over the past decade and a half»: Jim Grant.

It feels like financial markets are at a pivotal juncture. What’s on your mind right now?

Interest rates are not behaving themselves; they are not following the script laid out for them by Wall Street and the Federal Reserve. When the Fed started cutting its policy interest rate in mid-September, that was supposed to be the signal for bond prices to rise and for yields to fall. But the disobedient market has refused. Yields, after an initial decline, are pushing rather aggressively higher which I think is quite interesting.

What does this mean for the outlook on the markets in the coming year?

It’s notable that corporate credit spreads are the tiniest they have been in twenty years, reflecting great optimism or complacency. This, even as competition to lend becomes more ferocious and credit quality deteriorates. That’s why I think 2025 might hold a bit of drama in the credit markets, perhaps a crisis of some kind where somebody can’t pay and that somebody knocks down a chain of other weak credits. And before you know it, the Fed has to intervene, cutting rates again. So it’s a great time to be a financial journalist. The news promises to be very exciting and even perhaps dramatic. But I’m not sure it’s such a good time having money at risk.

What signal do you think rising interest rates are sending?

In times like this, the risk is that we read our own favorite theme song into events, our own favorite narrative. Having thought for decades and decades that the United States was on a path to fiscal ruin, I am now inclined to say: «Aha! The market has finally figured out that the supply of Treasury securities is greater than the demand at current yields.» Unfortunately, the prospects for even more borrowing are concerning because there is nothing like bipartisan cooperation or a spirit of compromise. In Washington, there’s only one subject of universal agreement: both parties are determined to ruin the public credit, and that’s one possible reason why rising yields aren’t necessarily surprising.

What other explanations could there be?

Another possible reason is that the market has decided that the Fed did too much, that easing monetary policy is not helpful because there is still a more than latent inflation risk. So if the Fed is cutting rates in the face of what might prove to be a return of an inflation problem that would be concerning for the credit markets broadly, very bad for the dollar, and very bad for the Fed’s reputation. Although, I think the Fed doesn’t have much of a reputation to worry about anyway.

In other words, the bond market is signaling the risk of a resurgence in inflation?

Yes, that might be the case. To me, inflation resembles an underground coal fire. In places like West Virginia for example, these fires often smolder deep within active or abandoned coal mines, quietly spreading underground. Occasionally, telltale plumes of smoke seep from the ground, revealing their hidden presence. They can simmer for years, erupting sporadically and without warning. That’s what inflation resembles: The fire is not out, you can feel the heat on the soles of your shoes, you can see the smoke, and every once in a while, it flares. It flared in 2021, it flared in three waves in the 1970s, and possibly – everything’s a probability in our business – it’s going to come back again....

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