Tuesday, June 30, 2009 0 comments ++[ CLICK TO COMMENT ]++

Jim Grant Bloomberg Interview...stays bearish on govt bonds

A fairly good interview with Jim Grant was conducted by Bloomberg yesterday. Grant is given time to elaborate on some of his views so it's worth watching the video.

I am still not convinced that high inflation is imminent and is the most probable scenario. Yes, you have a lot of prominent investors betting supposedly on the inflation case (although one can never be sure how much they are betting.) But I'm still in the low-inflation/mild-deflation camp (i.e. one that expects a Japan-like scenario more so than a USA-in-the-70's scenario).

Jim Grant follows the Austrian Economics school and that school emphasizes total credit when looking at the money supply. I wish he had gone into his thinking on how credit will expand with looming debt destruction all around. He sort of touched on the topic but he didn't compare the money creation of central banks against the credit destruction. His view that the amount of money being pumped is unprecedented in the post-war era is correct. However, the amount of wealth destruction is also unprecedented. I don't have access to Grant's newsletter but if someone has access to his writing and can summarize his views on how credit will contract, feel free to leave a comment.

Given my mild view of inflation, it shouldn't surprise anyone that I don't share the view of Grant that the bond market may have entered a long bear market. It's a really hard call and I am not confident enough to invest money but my feeling is that any long-term bearish bond call is premature. A long-term bond yield of around 4%—10-year is currently around 3.5% and 30-year is around 4.3%—is a reasonable rate. It is only too low if inflation was high. If inflation was low or moderate, 4% yield is not unusual from a historical point of view.

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