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February 18, 2019Videos

Jim Grant Talks About the End of Balance Sheet Reduction and Negative Interest Rates (Video)

In a recent interview with CNBC’s Rick Santelli, investment guru Jim Grant talked about the Fed’s sudden about-face when it comes to its balance sheet reduction program, as well as the phenomenon of negative interest rates. In short, Grant said the central banks have done us “no favors.”

Federal Reserve Governor Lael Brainard said it was time to end quantitative tightening. During a CNBC interview last week, she said, “balance sheet normalization process has really done the work it was intended to do.” She also noted that she didn’t want this policy tool, which is tightening financial conditions, to run counter to interest-rate policy. She said reductions in the Fed’s balance sheet should end later this year.

Brainard isn’t the only person at the Fed talking about ending quantitative tightening. Earlier in the week, Cleveland Fed President Loretta Mester flat out said the central bank is going to end the balance sheet reduction scheme. She said, “At coming meetings, we will be finalizing our plans for ending the balance-sheet runoff and completing balance-sheet normalization.”

Of course just a few months ago, Jerome Powell told us quantitative tightening was on “autopilot.” Things sure did change quickly, leading Santelli to say the central bankers don’t seem to be too good at “seeing around corners.” Jim Grant said nobody is.

Well, I think the Fed is just as good as the rest of us at seeing around corners. The difference is they pretend to be able to do it.”

Brainard said the Fed needs to guard against “volatility.” Grant said it’s not really clear what that even means.

Does that mean guard against price discovery? Does it mean to guard against bear markets? What does volatility mean in this context? So, I think that the trouble with the Fed and the trouble with this balance sheet is that it is set up to do something that was not in the minds of the founders of this institution. And what the governor failed to mention as well as the admittedly cosmetic fact that this institution is leveraged 100 to 1, that on a mark in September, it would have been technically insolvent if that mattered and the Treasury actually indemnified the Fed against losses. But the balance sheet is more than the sum total of this massive pile of securities; it is also an expression of the way the Fed does its business. And the way it does its business is to run a fiat currency with an eye on the stock market.”

Santelli then turned to the conversation to negative interest rates, noting that a number of countries in Europe still have official policies holding rates below zero and that a study from the San Francisco Federal Reserve Bank concluded negative rates aren’t so bad.

Grant brought up Bulgaria, saying it has outstanding euro-based paper priced to yield -30-odd basis points at maturity next year.

I think even as the Fed’s technical insolvency is symbolic of the excesses of the fiat currency regime, so is little Bulgaria … you pay Bulgaria for the privilege of lending to its government thanks to the massive, almost $3 trillion worth of bond market manipulation conducted by the ECB. The bond market in Europe is as dead as the Opportunity vehicle on the Martian sands. That market is stripped of its job in life, which is to discover price and rates and to help calibrate our feelings and our calculations about financial risk. It’s dead.”

Grant said even though central banks have horribly distorted equity markets, there are always things investors can do. Nevertheless…

To generalize central banks have done us no favors by snuffing out the lights that had guided us to sensible investment decisions.”

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