Today I had the chance to attend a CFA luncheon in Baltimore with Carl Noble where Jim Grant was the keynote speaker. For anyone not familiar with Jim Grant, he is a very accomplished writer, historian, and value investor, and he writes an excellent newsletter called Grant’s Interest Rate Observer. Jim is also an excellent speaker, and I would encourage anyone that gets the chance to go hear him pontificate about the markets in his very unique style.
As he has been for some time, Jim is bearish on bonds (he thinks yields will rise) and the U.S. dollar, and very bullish on the price of gold. On the topic of yields, we have shared his view that they will likely drift up if the economy stays supported, but have also acknowledged that the view certainly seems consensus at this point, which is a little bit worrisome from a contrarian investing standpoint. As I sat and watched the reaction to Grant’s view on rates, the feeling I got from being in the room was that most audience members agreed with what he was saying. I mean, who can’t see that rates at these levels can’t go much lower, right?
As it turned out, I got the last question of the day and had a chance to ask Jim what a contracting money multiplier and huge bank reserves meant to his view, because the behavior of these metrics might lead some people to believe that the U.S. is currently dealing with Japanese-like deflationary symptoms that could cause interest rates to stay low for a lot longer than most folks think is possible. Jim was undeterred and essentially believes that Japan’s cultural differences were the biggest reason for their lost decade, and he believes and sincerely hopes that we don’t head down the same economic path as Japan.
At the moment we continue to be positioned to benefit from higher rates, if for no other reason that our cyclical view is for continuing economic expansion, and investors had piled into bonds in the Great Recession and may still be unwinding that trade. But I have to admit that I occasionally get the nagging feeling that current “group think” is all for higher rates at the moment, which leaves the herd vulnerable to rates moving lower and staying there longer than most expect.