Jim Grant: The Next Crash Won't Look Like 2008

0:02 [music] Welcome to a special series of the Meb Faber Show on the past, [music] present, and future of America. I'm sitting down with some of the most notable historians, Thinkers, Investors in US Financial [music] History. All tied to my new coffee table book, Investing in America: The Rise of a [music] 250year Bull Market, out July 4th. Met Baber is the co-founder and chief investment officer of Camry Investment Management. Due to industry regulations, he will not discuss [music] any of Camry's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment [music] Management or its affiliates. For more information, visit cambriavestments.com.

0:42 >> Welcome back everybody. Today is a very special episode. I've been looking forward to this conversation for what 600 podcasts now. We finally got him on the show. My guest today is Jim Grant, founder, editor of Grant's Interest Rate Observer, which he's been publishing since 1983, financial historian, one of the most respected observers on Wall Street. Jim, welcome to the show. >> Right. Thank you, Me. Nice to be here. >> As we were discussing in the intro, this is like an economic triple witching.

1:14 Listeners, this is coming out the long anticipated Jim Grant Me Faber show. Also, US versus Paraguay. Also, what's your prediction, Jim? Largest IPO of all time, 2 trillion. What's this going to look like? SpaceX today, the day it's happening. I'm going with Paraguay. [laughter] >> We heard a stat recently that if you combine SpaceX, OpenAI, Anthropic, potential IPOs, inflation adjusted.

1:44 These are so large, they are as big as all the IPOs in the '90s combined. What do you think about that? >> I think I saw the bottom. >> It felt like the '9s. There's an IPO every day. It felt like pretty euphoric. And frankly, you've written so many economic books. I love love listening to you talk about these. 1990 is my favorite bubble. And to be clear, Jim, I didn't think we'd ever see anything like it again in my lifetime, but here we are. Maybe. What do you think? I think that the excitement surrounding the potentialities of artificial intelligence dwarf the uh excitement generated by the worldwide web and by the internet by um fiber optic cables. And I think the dollars of course even when adjusted for inflation are larger today.

2:40 And I think that the role of the Fed is more intrusive, more problematical than it was then. And I think that a great deal is riding on the efficacy of the technology on which the world's hopes are hanging. And a great deal is also contingent on whether we collectively have correctly calculated or miscalculated the demand for tokens for data centers and for the rest of the capital that goes into artificial intelligence.

3:20 So, you know, you you'd think that any technology with intelligence in the very word would be up to-date supply and demand, but I think there's reason to doubt that. I think there's a great deal of overbuilding, uh, double ordering, just like, you know, there was in the late 1990s. People thought, well, such is the high degree of organization of all the information relevant to the marketplace that there will be nothing like the macro miscalculations of yestery year.

3:49 But turns out that the human speculative spirit is a pretty wild thing and is not necessarily grounded by better technology. On the contrary, sometimes that can only incite it. So I think that today is one of the greatest bubbles of all time. >> As a historian, do you feel sort of special that getting to experience that? [laughter] You know, as I look back and kind of think of a a parallel, you certainly had capacity buildouts. I don't know if railroads, fiber optics.

4:22 What's the better comparison if there is one? >> Railroads. >> Talk to us about that. But most of the young ends listening, they probably never taken a train before. >> Well, I take the subway every morning. We're not talking about that. We're talking about a technology that was uh instrumental, among other things, in in setting the American price level into a generational cascade to the downside. There was in 1873 a great panic having to do with all of the usual preceding conditions of excess and it ended as all panics do. But what did not end was the persistent decline in prices of all kinds.

5:08 And I just reviewed a book for the uh Wall Street Journal last weekend. The title was simply 1873 and Leaquad Ahmed was the author. He wrote uh mortgage of finance 15 or 20 years ago. So it reads well it's an interesting book uh nicely researched. But my point of criticism was that the author did not take the proper measure of the role of technology and cutting the ground out from under the level of prices that were prevailing in the 1870s.

5:40 I'm talking about prices going down 2 and 3% a year for 20 years. Exact calculations are kind of beyond knowing now, but people felt it keenly. And there was a great harrah in our politics and in our finances concerning the so-called crime of removing silver from our monetary our monetary ass nettles. So we just went on a gold standard. Silver was demonetized the world over. And so there's a lot lot of uh conspiracy talk, a lot of chatter, but it seems to me that the appropole of AI that what set prices tumbling, what set real wages rising was human progress, was the uh the positive destruction of time and distance with the opening of the Suez Canal in 1869.

6:36 It destroyed the canal. destroyed all manner of fixed capital. London warehouses that were in place to accommodate the long long hall trade around the Cape of Good Hope and the southern tip of Africa to India and back. Well, it was destroyed sales out steam in world commodity markets unified. This is through rail and steam and of course the telegraph. So what happened was it once wonderful and quite shocking which was a great display of the power of creative destruction. So okay so here we are today many many generations later and we are confronted with a technology about which we actually know very little. We know little consequences. We know that it can perform wonders. Right? All these cracking all these ancient inexplicably difficult to mathematical formula. Yeah it's great.

7:32 It can also fail to count milk cartons or hasten in the speed of pizza deliveries depending on the vendors you're talking to. A guy from Uber, COO of Uber, CFO was quoted the other day is saying, "Well, it's it's certainly a wondrous technology. We don't see it in our P&L. We can't really rationalize the expense just now." This is all kind of the jury is still out on this. It it's it's wonderful. It's not wonderful. It is hallucinating.

8:01 It is smarter than you ever dreamt. It is proving daily, hourly. What we do know is that the capital draw on AI is as great as it was on the railroads. And the value proposition of railroads is very simple. Iron horse what do you want? Now it is what AI augmented human intelligence planning it. Which which we going to do? We don't know. But the capital draw is immense and the dollars that are riding on the success of this and on the correct calculation of supply and demand for semiconductors, for data centers and the like. All this is terrifically important and also unknowable at the moment. So this makes it a time well worth living in. It's exciting. We look back on it say we thought that >> always obvious in retrospect. It was funny as you were talking about these various periods in time. Professor Schiller is obviously famous for his 10ear PE ratio, but less people have read some of his papers that looked at these cape ratios for the industrials, utilities, railroads. In the 1920s, the utilities hit a cape ratio, I think, darn near 60. But in the aftermath of the you know great depression period the railroads got to a cape ratio of two and change where like granted a 80% decline will do that in the PE but the point kind of being is some of these sectors which become dear so very dear in pretty short order can be on the opposite side of that extreme and not too distant >> as the rails you know they're famously infamously The stock market made its 1929 high. The industrials uh returned to the 1990 29 level 1954 and that incidentally was the year that John Kenneth Grey's book the great crash came out. And why we might ask 55 was a cautionary book on the stock market published in the year the Dow recaptured its 25 year highs? because the world was worried about a recurrence of the 1929 experience not quite factoring into the extraordinarily cheap level of the stock market as seen in retrospect not factoring in the place of America in the world um leading the um recovery from the the second world war I mean it was it was set up for a demographic industrial technological home run of you know grand slam but people looking backwards were concerned about the preceding experience. So the industrials made their new high in 1954, but the rails then I guess renamed the transports didn't make it until 1965 or 66. I forot which one. And also you know the speaking of the 50s these transformative technologies don't have to be quite so allconsuming of our attention and our capital as is AI as were the railroads.

11:11 I submit to you that air conditioning is as transformative in its way as a you know it changed human migration patterns right it made habitable the great sunb belt it gave us the year round congress isn't that great yeah so um but you look back in these air conditioning stocks in the 50s there were yeah four and five six times eight times earnings when carrier corp so this time of ours is in some ways very familiar um patterns in capital markets conform to usual cyclical touch points, but this one is much bigger, much more lured, I would submit to you, than almost any other preceding cycle.

11:53 >> Well, we have arguably, when you look at this IPO today, I'm saying it today, we're recording this before June 12th, one of the most charismatic CEOs. I mean, my gosh, you talk about the TAM total addressable market of space. It's infinite, y'all. A small part of me wants to take out the 99 highs on the final cape ratio just to say we we live through it again, but we're close enough there that it's probably uh might have happened by the time this hits the tape.

12:23 You said something that is really interesting to me, and I wanted to expand on it a little bit. you know, you're someone who spends a lot of time over the years talking about inflation, and there's a comment you made about deflation, and in general, if you say that word, I feel like most people hear something really bad. They hear the word deflation and they're like, "Oh, no, that's terrible nightmare. We got to avoid that." They conjure something about Japan. And I feel like I've heard you say, maybe this is a summary and you can correct me, but you say what the Fed calls deflation, a normal person would call progress. And why is everyone so scared of deflation? Why is this something that we should avoid or should we celebrate? And the flip side of course being inflation.

13:14 >> Deflation is a scare word. Ben Espernanki, Ph.D. invoked it uh frequently during the 2007 8 9 10 11 12 13 period because he wanted to of all things avoid a recurrence of what happened in the 1930s. And you recall Bernani going to uh on bended knee almost to Milton Friedman and saying yeah we did it speaking for the Fed. Yeah, we did it then we're not going to do it again. So that was one view was so it's not not just the Japan in the uh 1990s and into the 2000s. It was the memory of America's experience during the 30s. However, what's interesting about that memory is that it was not the foremost memory in the in the in the mind of the market in the 1940s and 50s. In 1954, William Mcchesny Martin, the uh chairman of the Fed then gave a talk about inflation. And in that talk, he said, "You can never regain the purchasing power you have lost to inflation." And the notable thing about that speech again if memory serves which it so infrequently does is that it was the speech was given in a period of months in which the CPI was actually showing negative year overyear values who's either 54 or 55 one of the two and nobody said to Martin Mr. Chairman, we are having deflation in this country right now. How can you talk about infl No, didn't come up. Nor did it come up in 56 and 57 when Congress held hearings on the inflationary threat confronting the United States when the CPI was briefly above three, knocking on the door of four. That was only briefly. But this whole beat inflation thing that preoccupied so many people in the 2008 and nine and 10, it wasn't entirely a red herring. The banking system was in trouble. And if the the government had not come in and salvage the chestnuts from the fire, every single financial institution of any size and consequence in the city of New York would have been toast. Which is a pretty shocking thing to realize because as a friend of mine said at the time, the greatest failure of ratings and risk management ever in 2008 and n this in this city and elsewhere in America. So one major source of every deflation as I know of a deflation defined as the collapse of the price level owing principally to a collapse in credit that is a financial deflation and by definition that kind of deflation entails uh major bank failures and major credit destruction. There was nothing like that double back against the railroad era in this country. There were in some European countries.

16:03 Bernaki, I think, did not do any of us a great turn by single-mindedly invoking the experience of the 30s to address the problems of 2009 and 10 and 11 and 12 and on when the funds rate was pushed down and when all manner of distortions followed from that suppression of that interest rate. So, I forgot so long have I been droning. I forgotten the question if we s take the drone. No, I mean it's just good like because so many people are so it feels like when you hear the narrative deflation is this worst case outcome and there's a correlary that I think is particularly important. If you look at a lot of the sentiment surveys today, you look at a lot of people being upset about inflation and you'll see commentators say, "Yeah, but there's no the inflation is low." I think what people fail to really grasp is that it's less in many times about the rate of change after a big inflation. It's more that it prices went up and they stay there. And so your coffee went to 10 bucks. It doesn't matter if there's only one or two% inflation out. Coffee is still 10 bucks, right? It never came down. That's the foremost feature of our monetary world today is only rationing up, never ratcheting down. Price level was broadly unchanged over 125 years or so um into the 20th century. But over that period of unchangedness, there were plenty of ups and downs. The people who worry about deflation do have this particular argument on their side, which is that in a very leveraged world.

17:39 Falling prices can do terrific damage to balance sheets that were built only for prosperity and for rising prices. So we had this whole world of ours is full of private credit, private equity. It's full of leveraged sovereigns. It's full of people who have taken out their own personal lobboss to buy a house, you know. So debt is uh foremost in our world along with the monetary policy that facilitates debt. And in this setting, a falling level of prices would be a very hard thing to manage. Indeed, that is the trouble with this inflationary boom that we're having now is that if the Fed has to raise rates to beat back their rate of rise in prices, what about all the businesses that are capitalized for very low borrowing cost? That's why I believe me that where rates were is almost as important nowadays as where rates are going. Where rates were zero, right, in 2020,221 and part of 22 effectively zero. It's a slight exaggeration, but they were low enough so that private equity got in there and did all these transactions very with a whole lot of debt, very six or eight turns of leverage depending on how you view the adbacks for expected efficiencies which often did not come to fruition, but lots of leverage and borrowing costs that would never be as low as the time in which those borrowing costs were incurred.

19:11 So people are gagging now on a funds rate below 4% and dreading the possibility of a funds rate of five or 6%. Which would be entirely reasonable if we see the inflation rate go to four four and a half then why wouldn't it? If things go badly if El Nino turns out to be a problem if the straight of Hormuz doesn't obey instructions from Washington what what happens then? So >> there's a lot of different ways I'd love to take this. The first is you hit on where interest rates have been. You've certainly seen a roundtrip in your career, doubledigit interest rates down to zero, some places negative. Now you have somewhat more normalized. But the funny thing is we spent some time looking at fixed income and the spreads of risky bonds relative to T bills. And so there was a period a couple years where we had a flat negative yield curve lasted a long time. And part of that I wonder and I'd love to hear your thoughts on this. I wonder how much of this is just and even today corporate and junk spreads pretty razor thin relative to tea bills historically and if we know anything about crisis times like you mentioned those tend to blow out when the VIX or something's going a little haywire but I wonder how much of it is just price insensitive buyers whether it's like pensions or insurance companies that hey I can take my liabilities over here and for a long time I was sitting at zero and now I can buy corporate bonds at 5% wash my hands be done with it. I don't care that there's no no margin of safety on these type of investments. I'm just happy to have some yield. Do you think that's an element of it or is it something else?

20:45 Well, I think that's an element of it, but I think with respect to insurance, there's something else which is the Apollo Athen model of life insurance company investing and management style and uh reinsurance protocols that have taken over a good part of the insurance industry. And by that I mean a management style that is determined to minimize the size of the equity portion of the portfolio or surplus as it's known in the insurance world. to minimize that and to maximize spread income in part by investing heavily in securities that are either speculative grade or are close to speculative grade floating rate for the most part in the case of private credit.

21:36 So investors mainly professional investors I think but I guess all investors were reaching frantically for yield in 2020 and on. So yes, that plays a part in things. Even today, there's still a great hunger for yield. But there's also the uh the structural change within the life insurance industry. There's something like the witnesses consulting as notes. There's a good part of the insurance composite insurance industry investment portfolio that is committed to private credit and private credit was a creature of the regulatory regime in banking. And so people could not go to banks as they had gone to banks for for loans with which to facilitate and finally to close on private equity transactions. So they went to private credit instead. And I see now that onethird of $6 trillion worth of life insurance company assets are invested in some form of private credit.

22:36 >> A third of six trillion is still two trillion. >> It's a lot of money when you say it fast. >> Yeah. You know what's funny about the private credit discussion? The amount of people that I've talked to that are really smart, like captains of industry, CIOS, very thoughtful investors, and you look at some of these redemption requests, what's going on in private credit, they're like, "Look, I don't know. I'm not that familiar with private credit." It's like a preface to this statement. You don't hear that almost anywhere else. They're like, "I don't really know what they're doing. I don't really know what they're investing in."

23:10 But I feel like that's almost a rarity of people still allocate to something all the time. I talked to so many financial advisors like, "Yeah, we got some private credit." I'm like, "What do you think about what's going on?" They're like, "Well, I don't really I don't really know. Like, I don't really know what's happening. I don't really know what they're doing or what they're investing in." And I said, "That's a very strange thought process. Very opaque, but just says private. So, I don't know.

23:32 >> It's not exactly unprecedented." Remember around uh 2005 and six. of the famous years for people saying, "Well, I don't know what a CDO squared is, but we sure have a lot of them." So, there was a terrific deficit of knowledge about the structures of mortgage credit in the years leading up to the explosion of those structures and to the crisis of credit more generally. So, I don't think this is so very much different. There's certain opakeness about private credit.

24:03 There's also a certain openness on part of the promoters. They say we are doing nothing more than making good loans that banks are now not allowed to make. We are making them to private equity borrowers for example that are nominally rated speculative grade. But we know the managements. We know the credit and we know that as usual the arbiters of these things are behind the curve and we think that the world is changing and that before very long private credit will disrupt and supplant the banking industry. I heard that myself my very own years only a couple years ago this predictions that the credit private credit would replace banks which has not yet happened but banks themselves have lent to private credit but I'm not sure the private credit is anymore to wrap up this particular speech I don't think it's any more opaque or resistant to uh analysis than uh than your mortgage structures of your >> when we're looking at kind of what's going on in the world talking about this coming back to inflation. We have a current Fed chair that's leaving and a new one coming along who's I think been to a very esteemed conference in New York City usually held in the fall time grants a couple times. Mr. WH would love to hear your grade for the exiting chair and then any thoughts on the incoming.

25:32 It's funny because the narrative very quickly has switched from the world assuming there's interest rate cuts to now assuming there's interest rate increases to who knows what a week from now. What are your thoughts? First of all, we got to give Chairman Powell A to F in between. What do you think? >> I don't think he needs me to remind him of his errors in judgment. He came on um shortly after the collapse of the bubble of 2007 8 and 9. In 2010 or 11 maybe he joined the board of governors. He came from private equity. If you go back and read the transcripts of the discussions that the FOMC was having about financial leverage in the economy. J. Pal was forthright and was to my mind on point and and knowing in his critique of the abuse of financial leverage and its risks to the macroeconomy. That was JPEL then. And years passed and I think in all these institutions you tend to get absorbed into the world view of the institution in which you were serving.

26:36 And he became rather a little more complacent concerning financial leverage. In fact, a great deal more complacent. And he also came to buy into the new age thought that the Fed owed the world a rate of inflation that we would call price stability. Now that is Kafka-esque. People keep on saying it. Doesn't make it any less weird. 2% a year is a tax on your cash. It's the government taking value. If it's malice of forethought, if they're seeking 2% a year from the person in power of your money, that is a form of taxation.

27:11 Congress alone has the power to levy tax. What's the Fed doing? Why don't we I hate this word conversation. We need to converse about we need to stop it. So Mr. Pal bought into that. He bought into the idea that in 2020 of all times to make this call, he bought into the idea that if the Fed should deliver less than 2%, the Fed owed it to us, the American people, to produce a rate of inflation higher than 2% such that over time it would average 2%. This was on the eve of inflation going what is it came finally go to nine or something 9% or something in the during the spike the stimulus strike spike. So it was a terrible ter mist timed call but it was also a terribly misconceived call and you know at one point he said we'll have to unlearn what we learned about the money supply as M2 was raising up to like a 20% year-over-year rise. It was it was just he didn't have to say these things he think them but he did think them did say them. I'm not taking second place to anyone in number of errors committed during a career. I think I've committed myself rather well in racking them up. And I'm not I don't mean to petty fog the departing chairman. I think that the problem that Mr. Powell had was his insufficient detachment from the institutional view of the Fed.

28:33 Now I happened to have met him once on a social occasion and I liked him then. I like what he did when he first started professionally at the central bank and I have no interest in getting behind President Donald J. Trump's critique of his management of the redecoration of the of the Eckles building. I mean that's that's the least of it. But what I do fault is one judgment that verges on morality, institutional morality is his uh I think that he got behind the powers that were intent on borrowing Judy Shelton from a place in the board of governors. She was the person who wanted to have a different way of thinking of things. She likes gold. She likes the gold standard ways in some form. and she's not really a gold standard advocate, but she wanted the Fed to have something to do with gold monetary affairs to have some grounding in the discipline of gold.

29:29 That was her own line. It is her line. I believe that J. Pal actively resisted her candidacy as should not have done as a political political malpractice if you ask me, which you did. So that's my take on J. Pal. >> So A+ we heard it. We heard it from Jim Grant Furnace. We given him an A+. I do admire the way he kept his dignity in the face of the attacks of the man who appointed him chairman of the Fed. As you mentioned, Me Kevin Worsh was uh at our conference I guess last year. The rule is anyone who comes to the conference and who sits down with me for interview goes on the uh federal payroll. Before that, Scott Bess the year before was the featured guest and he also was hired by the government. I remember that what Kevin and I I blew the interview.

30:15 Perhaps you've oh you would not have had this experience as interview but the first thing I did when Kevin and I sat down was I said something like said tell me Kevin does it bother you that the Federal Reserve if it were keeping its books according to GAP and not by this DIY system the Fed has introduced to make itself look solvent so it is solvent by courtesy. Does it strike you odd and perhaps worrisome the Fed is actually substantively broke? And what Kevin said was this. Well, Jim, it's nice to be here, ladies and gentlemen. It's a pleasure to be here at this grand, you know, like that. So, I lost it was over.

30:54 I lost the moral edge of the interview, if that's the right phrase. But as we left the stage together, because I had put in a word for my hobby horse, something to do with gold, and Kevin said to me, you know, Jim, you can't go back. So that's his view of things, but he does want to go back a little bit. He wants a smaller Fed balance sheet. He wants a less obtrusive central bank. I think he would not disagree with my observation that we know too well the name of the Fed chairman. If the Fed were doing its job properly and if the monetary affairs of the world were properly structured, we would not know the names of these people as we know the names of the leading ops champions in the National League. But the central bankers have become celebrities which is a sign of the deterioration in our monetary affairs if he asked me. I offered on Twitter years ago. I said I'd be happy to chair the Fed, but my only input would be we would just try to peg the Fed funds rate to the 2-year note and call it a day and otherwise just drink a few beers and reconvene next quarter and put it close to the two-year and let the market kind of figure it out. But they haven't uh called on me yet.

32:10 >> I think that's a good first step there. Maybe. Yeah, there's some things you've said over the years that when I hear them, it's hard for me to see the world in the same light again. One of the comments was when you're talking about inflation is you had a quote and you can correct me on this where a lot of economists says it's too much money chasing too few goods. But you say no, it's just simply too much money. And sometimes where the money chases is variable. Sometimes it comes up in your cappuccino. Sometimes it's in real estate in New York. Sometimes it's in stons like now. And then sometimes it's in farmland. I was just in Columbus, Ohio, sitting down with some financial adviserss, one of which who said, "My client just sold some farmland for $300,000 an acre." And as a former farmer myself, I said, "That sounds like a lot." And he said, "Well, the buyer was a AI data center." And I said, "Oh, well, they're less price sensitive than the corn farmer down the street." Talk to us a little bit about that idea because I feel like once you hear that, it's a pretty useful framework to think about the world that it always doesn't show up evenly.

33:20 >> I did say it. I do think it and I think that inflation is a matter of overstraining generally. It's overstraining the productive apparatus. It's overstraining the labor market. It's overstraining our financial system. It's a question of too muchness which muchness is a function to great degree I think of monetary in discipline. There's no there's no uh in a paper money regime without um the discipline of convertability of that paper into something or other at a fixed rate.

33:59 There's a kind of a permanent element of uh of helium in things. is that you know that things want to go up. There are exceptions. In the 1990s when everyone was outsourcing labor to India and China was entering the WTO when the material goods were cheap and getting cheaper and the Feds seemed to be embarking at a genius phase. All that was there was it was a paper money regime and there was very little measured inflation. There came to be a lot of inflation at the corner of broad and wall and I think that's where my definition would not register with the more conventional definitions that you can measure inflation the core CPE or by the trimmed mean core CPU all manner of recondite variations the theme of price indices and you can pick out some Fed governors have done you can pick out ones that make inflation look kind of came I think that William Machzley Martin again he was Fed chairman from 1951 to 1970 when the uh stock market was on a tear.

35:08 He would identify what he took to be the excessive valuations and the excessive leverage in the stock market as an example of a species of inflation. And I think that people today maybe because of the quantification of economics, the reign of the econometricians, the uh all these brainiacs at uh the Fed and elsewhere who see economics purely in quantitative terms. There's much less willingness to um take a broader view of things, a kind of a qualitative view of things. Maybe it's because I am not such a quantitative person. I take that opinion. I take that approach.

35:47 But it seems to me that when you look at um the state of the IPO market, when you look at the margin debt has doubled in the past year, I think up 50 anyway a lot. If you want to look at indices, look at the Federal Reserve Bank of Chicago's Financial Conditions Index. It says easy money. So why would you want to cut rates? Well, because um somebody says so. That was a dig of Donald Trump. However, uh serious economists can make the case that inflation is not such a big deal and that they say wait for the productivity boom that is around the corner. We will wish that we had some inflation which we will not then have.

36:24 So that's the opposite case. >> We obviously had this life-changing inflation of the 60s and 70s that most investors today who might have been born in the 70s really never experienced. You know, we joke on this podcast that hear younger folks today complaining about their 5% mortgage and we always say, "Hey, go ask your mom or dad what they paid on their mortgage or some older people and you'll be surprised that they could make it work at 12% or 15% or something." That feels astounding. At that time though, the country arguably wasn't as leveraged with debt as it is today. I wonder as there could be a situation where it theoretically inflation ticks up a little bit for or above. The Fed kind of is in a a little pickle where you have credit markets, bond markets probably where rates are coming up as well as inflation coming up. What do you think they do in that scenario? They just let it happen. They're trying to inflate away this debt. As I think back to was hanging with Rob Arnot last week and he had published an old paper that looked at cape ratios and various inflation regimes and when inflation was mellow you could have a cape ratio in the low kind of 20s. You know granted we're at 43 today but when it ticked up above that 4% 5% level the average cape ratio was like low teens on the stocks. So it seems like theoretically it creates big problems if inflation ticks up. Are they just going to raise rates into that and say, you know, bond markets be damned or what? What do you think?

38:06 >> No, I think they'll be very attentive to the stability of our of stability of credit. Very few people talk about this. The Fed doesn't really mention it. Nobody gives a speech about beware of a materially higher funds rate in this time of high financial leverage and rather precarious goings on for example in the life insurance business. You don't hear that but that's what we've been writing about. So I think the Fed is constrained in ways that it does not acknowledge.

38:38 is constrained against an aggressive attack on inflation in a time of extreme financial leverage. And that extreme financial leverage also is beginning to apply. It's a description to the public credit to the federal finances. I can't recall exactly the figures we cited in a piece a couple of weeks ago. That's what you get for interviewing a gentleman of a certain age, man. But you can imagine very easily a situation in which the government would be issuing treasury bills with which to service the preexisting stock of treasury bills when we be borrowing money with which to meet interest expense on the extent debt that is around the corner if things continue as they are and that's called Ponzi finance. But the more immediate problem will be not the federal finances that is in a ways in the distance. But there is a real issue for lower rated corporate borrowers of rolling over their debt incurred at very low rates of interest at today's rates. But especially worrisome would be rolling it over at 200 basis points higher than today for example or even 100. So I think that is something that the Fed must be knowing.

40:05 Of course it knows it but it doesn't really talk about it very much but I think that is a material constraint in the Fed. Fed talks about the constraint of the labor market. It's dual mandate but the silent there's three mandates officially. The third is the little noted uh stable moderate long-term interest rates. But the fourth is is Wall Street. It's financial stability. It's the 401k mandate. It's um do you really want to be the guy who sunk the stock market from a cape ratio where it is today? No, we I really don't want to be that guy. So that's what the Fed is up against. [laughter] It's up against the valuations it does not discuss. It's up against the margin debt. It does not discuss. It's up against the now gently accelerating aggregates for M2 and CNI loans, commercial industrial bank loans.

40:53 and is up against most of all the leverage that its own manipulated and suppressed interest rates instigated in the past five or six or seven years. That's what the Fed is up against. Much of it is its own doing. You get a phone call next week, maybe it's from Scott, but let's just say the president, and it doesn't even have to be this president, just any president, somebody in a position of power, and they say, "Jim, we've been listening to you. We heard you on the Meb Faber show.

41:26 You sound just like a voice, beacon of light in the darkness." They said, [snorts] "We're going to give you 10 minutes. What do you think we should do in general? You got any proposals put into legislation? Any bright ideas for us? We'll take any comments you give and give it serious inquiry. What do you think you'd tell them in those 10 minutes? >> I'm not sure if I have those answers. Let me give you a couple of things that I've always thought the Fed needed to do. I think it with Wars, I think it needs to be less obtrusive. I want it wants a smaller balance sheet. It wants to ditch its dual mandate. It wants to concentrate on really stable prices. It wants to acknowledge it is broke just as a an item of financial hygiene and truthtelling and it wants to put some gold in its basement. The Fed needs to own some gold as a marker of its commitment to sound finance as defined by our forebears.

42:24 We need we we need to restore personal responsibility to financial outcomes too. This was not exactly the Fed's doing, but it is in part the doing of the bank regulators there and elsewhere. And one part of the ethos of the gold standard was the so-called double liability rule that held that the bank stockholders were themselves responsible for the solveny of the bank if it became impaired or insolvent. And they would get a capital call, not the people, not the FDIC fund, of which there was none.

42:58 I think that institution which went out the window in 1935 or so that institution spoke so well of our ancestors in finance. They realized that banks are precarious by their nature of their leverage. They realize that the bank stockholders got the dividends on the upside and they thought that in justice they ought to front the capital to redeem a mismanaged bank on the downside. They thought that the currency ought to be redeemable as a marker of the government's own commitment to fiscal property and to monetary stability. Not 2% a year tax on your cash balances, but actual stable prices in a money that we can hold our hands and say this is money. So I am under no illusions about the reinstitution of the gold standard for all sorts of reasons that would take even more than 12 minutes on an elevator. But I think that the way forward is to announce a resumption to the ideals of the generation of Hamilton and Gallatin and others and through on through our history we've veered so far off this deficit trillion half dollar de trillion dollar deficit that's that's normal now you know 39 trillion gross public debt okay that's normal this country is paying a trillion dollars in interest this fiscal year. And it was about 45 years ago that Reagan got on television said the public debt has just hit $1 trillion. So we've gone from $1 trillion in principle to $1 trillion of interest expense in a lifetime.

44:44 Certainly in a Wall Street career, in an unsuccessful Wall Street career, you can't keep working at my age to call yourself a success on Wall Street. You have to retired at 30ome. not very many years there has been a a steep a swoop down in the conditions that would define uh sound finance whether it be in money or in public credit. So uh that's my program. >> The funny thing is you you talk to people you say look Fed's only been around what a little over a century. Is that about right? The modern fiat era.

45:18 >> Yeah. 1914. Yeah. I've only my entire lifetime has only been, you know, born in the late 70s. A lot of people that's been the only world they know, but it's really not that long in the history of economics and markets. Stock markets been around since what 1600 and bond markets and everything else way before that. So this experiment, while it feels like my entire lived experience is actually quite short relative to history, you've owned gold for 40 years.

45:49 I feel like a lot of youngans got seduced by the what they like to call their digital gold, Bitcoin, which seems to be losing its appeal as everyone gets seduced by AI and everything else going on. Talk to us a little bit about the role in a portfolio. How do you think about it? Would the young gym have imagined a 5,000 price tag, 5,500? When did it hit finally when he first started buying some coins or what?

46:16 >> I can tell you about my gold origin story. I was standing in line. Oh, mistake number one. Never queue up for an investment, right? Bad, bad beginning. But I remember it was a very chilly day early in 1980. And if it wasn't at the very peak, it was close to the peak of $850 an ounce. I've been running for Barons for a few years. And I had persuaded myself that this was it. This was the monetary moment of crisis. Now, don't forget, because you can't actually have known that this was happening, but in 1980, the CPI was up like 13% year-over-year. In 1981, some people were paying 20% for a mortgage.

46:55 It was strange and it was a barren, and nobody ever seen the likes of it. You know, like during the battle of Gettysburg, the union was paying about 6% or so for to borrow. Wasn't it going to even be a country if things went badly and now we're paying 15% a long bond? What? What? That was the backdrop for gold hitting its first peak of $850 an ounce. Now, the thing to know about gold as a as an investment as opposed to a monetary asset that is not meant to be traded is that it can go to sleep for 15 or 20 years, leaving you feeling very foolish. And I, as I pushed across by cashier's check for $875, whatever the markup was, I thought to myself, ah, I am protected. Okay, fast forward a few years and my wife and I had just had our fourth child by then and uh trying to figure out how to pay the tuitions in New York City public school private school and uh I was forced much to my mortification to confess that the Krueger rand or two or three that I had uh wasted the family cash balance on so many years has had uh actually gone from like $850 to about uh oh $500 whatever it was down So that could happen. So that's something to know about gold as an investment. It pays nothing. It earns nothing. It is uh it is non regenerative. It is the uh warbuff's idea of a bad investment. Charlie Mer heap scoring on it. These people are not actually amateurs in investing. The late Munger was not. So the bear case is in some ways irrefutable. It's not actually an investment. Earth is it's a conceptual investment in deterioration the willful orchestrated managed decline of America's dollar that's what it is and why did it go from 2800 to 5600 in about 18 months or two years well because I don't know I mean the conditions were there for that was so you never know and uh so now it's 4,400 down in the percent somehow the world has got into its mind that war is bearish for gold. No, war is bullish for gold with the other horsemen of the apocalypse idiots. Why are you doing this? So, you can talk to the market. You can explain to the market why it's wrong. But gold will insist on doing what it ought not as it has done in intervals the past 40 years. I'm here to tell you this has been some slog.

49:26 However, if you look at it the right interval of years, artfully picked by the gold guys of whom I am one, it's outperformed stocks 20 years great except not every year and except you often felt rather foolish for owning it. So that's my speech of no particular sales value. Certainly not a really forceful sales speech to people who were thinking about this. I own it because I believe the dollar is has gone to zero basically against gold. has gone 99% down.

49:57 >> My podcast listeners already know this cuz I told them the story a few years ago in real time where there was a headline and I love to kind of test these headlines out where it was saying Costco was selling like 30 million of gold bars a month and they were sold out. I said there's no way that's true. So sure enough I went online, Costco was sold out of gold bars. So it was online queue. So it wasn't an in-person queue but sure enough I went through it and I bought a gold bar online. and it showed up at my house. I wasn't quite sure what to do with it afterwards. I had to go buy a safe cuz I'd never owned anything of value in my house. And so, but it was still a cue. And then the good news is fast forward 2,000 points later, you could see that that supply mismatch was or demand mismatch was very real for a lot of individuals, which I thought was a a fascinating insight. Although American individuals really have not gotten into this move in gold, it's it's very much a of all things, central banks, isn't it peculiar that central banks have been the big buyers? Central banks who uh via profession the printers of um irredeeable currency, maybe they know a little bit about their line of work that the rest of the world doesn't appreciate.

51:08 The central banks have been very much in the forefront of this Asia much more so than the West. It's one of these exaggerations you hear that I've just perpetrated in Wall Street, but uh the ownership of gold mining stocks is uh very sparse. Of course, um I do take because you just said it as true that um no matter what interval it is that uh gold has done a better job at a 60/40 portfolio than gold than bonds have done. I got to tell you that from 2011 to about 2016 these miners were down like 80 and 90% many of them it's brutal.

51:47 I often mention this there's a book called the golden constant and it was a very scholarly history of of the purchasing power of gold during those centuries in which it was a fixed rate and defined as money. his title was it said at all is the curs of person power is kind of constant but now gold is a speculative asset uh I think its pedigree is better than bitcoins and I think it's altogether preferable to bitcoin but it yields exactly as much as bitcoin does and its specul is is less volatile than bitcoin because bitcoin trades seven days a week but gold has exhibited some of the speculative bounciness of the crypto world which I must say I find undignified for the ancient monetary metal.

52:40 >> It seems like today 2026 kind of fraught with a lot of danger. You got expensive stocks, you got risky bonds out there on the curve. What do you think about in terms of building portfolios? Is it a mix of T bills and gold? Are there other assets that you think are thoughtful here in 2026? I don't set up as a financial advisor, so take all this with a grain of salt, but I I do invest with people who find a great deal to do. And we at Grants as every two weeks are out with a security analysis on a particular company, we often find uh longs despite a world where the cape ratio is as elevated as it is. So there are values we find for example there are some uh more or less obscure banks in the continent of Europe that are trading at astonishingly low multiples of book and earnings. We just wrote about a company in the UK that is also in the bargain bin. It is a platform for used car transactions and the market is quite sure it will be disrupted and cancelled by AI but we think there are reasons to doubt that and we think that it's rather a compelling investment. We try we think we succeed in finding individual things.

53:58 We also have taken a shine to oil believing that whatever happens uh next couple of weeks or months in Iran that the supply demand balance is going to favor the long side of the hydrocarbon markets. By the way, does it strike you as it does me that the war in Iran is beginning to take on the feel of kind of a grudge match in professional wrestling with the violence is certainly felt keenly by those who are in the way of the so-called kinetic rounds, but the violence it seems performative and scripted and uh and some seems an odd conflict, odd war.

54:34 >> Jim, as you look back your career, you made a lot of investments over the years. You got a most memorable one that sticks out? Anything that you're like that's just seared in my brain. Good, bad, in between. >> Yeah, the year is 2009 and uh the markets Mr. Mark is not feeling well. And I recalled Sir John Templeton, if I remember this right, in 1940 when uh the battle of Britain was uh was raging and England was in the balance of that battle and France had been overrun. All allgether things were not so bullish in the continent of Europe. Sir John Templeton went and bought um shares of everything below two quid in London and certain number of Franks in Paris and did rather well. So I called up the broker and said u put like about about $5.

55:28 It wasn't a very big and all the S&P stocks that are trading below uh $10. That was during the genius phase of grants by the way that ended shortly thereafter after that phone call. But I got to tell you that some of these things were up 20fold. And it just speaks to the extraordinary depths and heights that Marcus can reach. Remember late great uh Richard Russell, Dick Russell, what a wonderful guy. He wrote the Dow theory letters for years and years.

55:56 And Dick Russell uh delivered himself of a lot of these storied axioms of investing, maxims I guess is a better word. And one of them was very humble say markets can do anything. Isn't that good to remember? Just as soon as you think you've got it all figured out, markets can do anything. We wrote something um I use that word advisly a great investor who recently died. Murray Stall, S T H A L. He wrote that he ran founded and managed uh Horizon Kinetics and Steve Bregman and his uh colleagues are taking over. Dare say do a great job with it. But Murray was such an interesting character. I wrote a long piece about him in grass after he died. Just unconventional thinker. He was not the kind of guy who said um just because everyone's carrying an umbrella doesn't mean it's not going to rain.

56:53 There's an element of conceit in this country opinion business. He was not that kind of contrarian. He was a thinker. And what he thought was that the virtues of diversification were way overdone because what it meant was you didn't know enough about what you're investing in. So, one of the funds that Horizon Connectic has uh managed and managed to great effect over the years um biggest position was like 60% of AUM one 60% position. It worked out. And so, um anyway, you never know. Marcus can do anything. It's funny, you know, we always tell people to be a good investor, you got to be part historian to at least understand what's happened, but also part comedian knowing that like it's going to be weirder and different in the future in some, you know, totally different way.

57:41 >> There's a cream pie waiting for your face. You know, you and by the way, my first book was was a biographer Bernard M. Baroo, a great speculator of yester year, the fascinating figure. And Baroo said the following. He said, "I have lost money enough money. I've lost money enough that would make the average married man go out and shoot himself. And this was from a guy who um was in on the ground floor of what used to be a famous stock Texas Golf Self or long since swallowed into somebody's conglomerate.

58:12 But Baroo taught me the importance of sucking it up, of bearing your losses, of not overly blaming yourself, but uh resolving to make a different mistake next time. It's one of the reasons it's it's so fascinating and so fascinating to write about and I I dare say to do investing. I don't invest for a living. I write for a living. Key distinction for anyone listening. But one of the things that makes all of this so interesting is the utter unpredictability of a human animal in the face of large sums of money. We are not at our best, not at our most rational. It's not our best subject. And what we know now is that AI is going to conquer all. We know that Elon Musk can't possibly die broke.

58:54 [laughter] Well, maybe that's true. Try as he might, seemingly try as he might. But we know all the such things we really can't know. And yet there are trillions of leveraged dollars running on indefensible, factually indefensible convictions. Convictions that may be true, may not be true, but are certainly not certainly true. >> Jim, well said. The interesting part about thinking about all these examples in history that you eloquently describe, they're all so different. Dracula Miller actually has a similar quote where he said, "I have so many scars you wouldn't believe." And here's arguably one of the better investors, you know, of all time.

59:35 And particularly if I had to give anybody money, I think the number one trait would be humility cuz we all make a million mistakes. But one last question, we're going to let you go. I promise. You got to look back at one period in history that these youngans could read about, study about. You've written a bunch of books. I got one sitting right here. I can whack someone with if they come in the office. What's a period that you think is particularly interesting or unique that you would say, "Hey, read up on this. It's a fun fun period uh that you may not know about."

60:05 >> Uh 1984. And uh what's compelling about 1984 as a laboratory experiment is the action of the bond market and the world's perception of the opportunities in the bond market. So to set the scene very briefly um interest rates had peaked in a 35 year bond bare market. I guess 35 years 1946 to 81. Somebody can do the subtraction for me.

60:37 but they peaked at 15%. And along comes Paul Vulkar a couple years before that and um lowers the boom. The President Reagan fires the air traffic controllers thereby setting a new era in American labor relations and wage demands. Um commodity prices roll over and basically tank oil especially. So that was obviously a thunderclap of an inflation cycle. It was over. Or maybe not so obviously because money supply picks up a little freedom within ruling the roost among the monetary economists and the stock market bottomed and uh began to turn up sharply in August of 82 and there was a kind of a a whiff of reflation around and pretty soon the long bond was no longer when it was the lows were 11 or so. I was about now 12, got 13. And in the spring of 1984, the 30-year Treasury non- call for 25 years briefly traded at 14% just for a few minutes.

61:45 And if I remember correctly, the CPI was printing at about four or less, giving that mythical, dextrous, clever speculator in bonds who bought them at exactly 14 10 percentage points of real yield. >> Holy mackerel. That's a one decision. You just go away the rest of your lifetime. That's all you got to do, >> right? Okay. And Wall Street made it easy because they were Wall Street was selling securities known as as cats and lions and tigers. The feline bonds were zero coupon instruments that were came to market around 12 and it would mature in 30 years at par. And the internal rate of return was 13%, 12% 14%. Right?

62:31 Sound attractive? Equity returns no equity risk. Nope. Nope. And why? because people recollected the long preceding bare market which is brutal except that you got to invest coupon income ever higher rate so it wasn't so brutal as it was made out to be but I thought that episode was the the the greatest single the clearest example of the perversity of Marcus of the of the irony built into human interactions with Marcus you what is so compellingly a bargain in retrospect of the time is yeah yeah not for me know and just the way things are you know whatever you think is going to be wrong you just don't know which episode you're going to be so wrong about it was so interesting to I remember I was writing the time trying to think of reasons to be bullish on bonds that and you would say well you could at 14% you could lose four points a year and break even on the coupon income. Yeah. So what? So I've seen kid I've seen bonds go down 10 points a year. What are you talking about? But that was then and pretty soon of course um bonds were the thing and by 1986 everyone had to have them. They were yielding 6%. They got back to 10% in ' 87.

63:54 >> Imagine telling them at some point that bonds are going to be yielding near zero and some sovereigns in the world be negative [laughter] you know going forward. They say you lost your mind. that would have qualified you for [sighs] you. You would have been read out of the Wall Street community of knowing people for that particular line of argument that would not have gone over. >> Jim, on that note, this has been what a blessing. I could talk to you all day. I love listening to you over the years.

64:23 You're one of the rare people that when you come across my feed, it's a stop and do not miss. Listeners, check out grantspub.com for Jim's wonderful newsletter as well as you got any tickets left to the conference still open fall time New York City >> for you for the listeners of your podcast. We're making an exception. Yes, good seat still available. Yeah, >> best time of year in the world. Jim, thanks so much for joining us today.

64:47 >> Yeah, what a pleasure. Thank you, Me. >> Podcast listeners will post show notes to today's conversation at mefavor.com/mpodcast. If you love the show, if you hate it, shoot us feedback at the mebfabshow.com. We love to read the reviews. [music] Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.