Here’s an interesting video from the recent James Grant Conference. The title of this year’s conference is Investing Opportunistically, Separating the Beta from the Alpha.
The first five minutes are introductions and attendee notes you may wish to skip over. The opening speech was by Marc Seidner, CFA at GMO, on inflation expectations.
Note: you may have to click on the play arrow twice to start the video.
Last year at this time a majority thought tightening was inevitable and bonds were attractively priced for those who thought otherwise now, tightening in Europe and Japan is totally priced out and even in the US, inflation expectations are down as noted by forward yield curves.
Seidner commented that 100% of strategists were negative on bonds heading into 2014 but I can name a couple exceptions, notably Lacy Hunt at Van Hoisington.
Tepid Inflation – UK, US, EU, Japan
Historically, when inflation has been this low, talk was of easing further not tightening.
One-Year Inflation Expectations
US Dollar, Euro, Yen, British Pound Forward Curves
“Europe Has Become Japan”
Seidner says that if he was washed up on an island and could periodically see one chart to let him know the state of the global economy the above chart would be the one as it shows interest rates, implied path of monetary policy, and the divergence between the US and the rest of the world.
“From this perspective of the bond market, Europe has become Japan. … There is an inconsistency in my mind between a path of forward interest rates that reflect such slow economic growth that interest rates never get off zero-bound [and believing] there will be enough growth to enable high-debt countries to delever safely,” said Seidner.
James Grant on Price Discovery and Inflation
James Grant takes the podium at about the 25 minute mark with a joke about the title of his publication, Grant’s Interest Rate Observer.
Grant asked for sympathy for his business model, because “Ladies and gentlemen, we have no interest rates. We used to have them and they were swell. Some of your parents may have lived off them.“
Grant complained about PHDs with no real world experience running things. He properly noted “Interest rate suppression is price control by another name.”
“Can prices even be measured?” asked Grant? I think not, and have stated so many times.
Grant stands up to the “universal notion that prices ought to rise and if they don’t rise something is wrong. I read the most extraordinary thing in the Financial Times the other day. It said that the failure of prices to accelerate meaningfully in this lame recovery was a dark cloud over the world’s economy.”
“Dark cloud? Dark cloud?” asked Grant.
The world has come to accept the notion that prices must go up and need to go up, yet Grant cites numerous periods in US history where prices fell and there was no panic and no problems. Notably, prices fell for 25 years in the final quarter of the 19th century reflecting the progress of the age.
Grant challenged Fed Chair Janet Yellen to “please explain the difference between progress on one hand and deflation on the other“.
Two days ago, I wrote Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” also in response to an article in the Financial Times.
I had not yet seen the above video, and I am pleased to be of the same mind as Grant: There is no economic benefit to rising prices.
Grant concluded with the idea “Gold is the anti-debt. It is money that cannot be conjured on a computer screen. It is that money that has no counterpart on the balance sheet of a central bank indicating that it’s a liability. It’s money pure. It’s out of favor. So we at Grant’s continue to carry a torch for gold.“
Mike “Mish” Shedlock