Thursday, April 16, 2009 2 comments ++[ CLICK TO COMMENT ]++

Larry Kudlow interview with Jim Grant on CNBC

ValuePlays links to a video of Jim Grant being interviews by Larry Kudlow that some of you may find interesting. It's quite odd to see Larry Kudlow sound bearish but I guess with Democrats influencing the economy, he probably doesn't want to be in the bullish camp. There isn't much new in the interview, either in terms of investment ideas or economically, but I wanted to link to it because Jim Grant is one of smartest libertarians around and newbies discovering him may find him interesting.

I disagree with most of Jim Grant's econopolitical views. I think every ideology has a major weakness and I would say that American libertarians' achilles heel, when it comes to economics, is their blind faith in gold. I think this clouds their views and may even lead to detrimental investment decisions. But everyone has their faults, including me and that's life. It's somewhat ironic though, since Jim Grant, from what I understand of him, is very close to a pure value investor--even more so than Warren Buffett, who is more of a growth investor*--and gold goes against any notion of value investing**, except in select isolated cases as insurance. Anyone investing in gold have underperformed stocks, bonds, real estate, and commodities over the long term. Gold has a long-term nominal return of around 1% and real return close to 0%. Admittedly, gold proponents such as Grant suggest gold not for its growth potential but due to its lack of counterparty risk. However, I would argue that the price premium paid for zero counterparty risk is way too high.

I think Jim Grant is wrong in saying that the economic contraction hasn't been that bad and yet the government action has been immense. The plunge in exports in Japan, Korea, and others, is certainly closer to the 1930's than anytime since. The US economy hasn't contracted sharply but if it was on the gold exchange standard, as it was in the early 30's, I believe it certainly would have contracted a lot more. Furthermore, some of the deflationary forces have been absorbed by the government and prevented from rippling into the economy. As an example, if several megabanks were allowed to fail, I think you would have seen the economy contract more sharply. I think if you look at wealth destruction, or contraction in total credit, we are certainly observing something closer to the 1930's than any period afterwards. So, yes, the GDP growth in America is nowhere near what it was in the 1930's but there was a risk it was going in that direction.

I also wanted to link to this video because this is a contrasting view of the world from the Gary Shilling post I made yesterday. Jim Grant and Gary Shilling are somewhat on opposite ends of the investment spectrum. Jim Grant leans more towards inflation (although he seems unsure) while Gary Shilling leans towards deflation. Jim Grant seems to favour gold while Gary Shilling favours bonds. As for me, I'm in the mild-deflation/low-inflation camp and am closer to Shilling.

(* Contrary to what many believe, Warren Buffett has profitted immensely from investing in growth. My guess is that Buffett pays more attention to the income statement and future profit potential than pure value investors do.)

(** In my opinion, gold is anathema to value investing because it has no intrinsic value. There is no way one can say with any degree of certainty what gold should be worth. If you had no access to the market price, you would be lucky to estimate the price of gold to anything reasonable. How does one know if it is worth $2000 or $200? The most rational approach to valuing gold that I have seen is to treat it as a currency and derive an estimate based on money supply & demand versus gold supply & demand. So far, I have not seen anyone using that technique produce a figure that closely resembles market prices. )


2 Response to Larry Kudlow interview with Jim Grant on CNBC

April 16, 2009 at 10:55 PM

One of the many reasons I have stopped reading your blog is the tedious nature of how you characterize various investors:  "value" "macro", "growth" etc.  It has the worst aspects of the inanities of a bad movie critic.
Now, If you were to be interviewed by Saturday Night Llive's Deiter In _Sprockets_, I think you will _definitely NOT_ get invited to "Touch His Monkey."  Worse, he would have given you his ultimate put-down, "Your Narrative Has Become Tiresome."  [Try to imagine the above in German-accented English].
Now, you may wonder, why am I re-surfacing and leaving you a comment?  Good question.  I am waiting for my wife to finish using the toilet.  And while I am waiting impatiently for my turn for a core-dump, I figure I shouldn't waste my foul mood just randomly surfing the net.   So here I am.
Then I read your completely off-base critique of Jim Grant.  In a way, I don't blame you for not having gotten the memo on how hedge funds and insitutional investors use Jim Grant's service.  Let me enlighten you:  Jim Grant's views and writings are like fine wine:  when they just come hot off the press (for his bi-weekly newsletter), you are supposed to put in in the drawer and preserve it for 3 years.  And THEN you open it and read it.  Historically, it takes about 3 years for Jim's ultimately correct views to come to fruition,  But he will always, always, be 100% early by approximately 3 years give or minus 2.  You may wonder, how useful would it be to be 3 year early?  That's a valid wonder, but then again, a lot of people read him for his fine prose as well.
So I when I read your comments about Jim, I can only shake my head. 
I think I heard the toilet flushing.  Time to take my dump.
Good luck with your investing career -- my best wishes to you on that front will never change, no matter how clueless you still remain.

April 17, 2009 at 10:21 AM

At least you still have me bookmarked ;)  Thought you gave up for good...

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