James Grant: The ‘Epicenter’ of the Next Crash Is Not Banks – Life Insurance, Junk Debt & The Fed
Summary
Market Outlook: Funding stress in repo markets, political pressure on the Fed, and a cooling labor market suggest rising odds of policy intervention and rate cuts.
Fed Liquidity: The guest argues the Fed’s quiet mandate to ensure smooth market functioning may drive renewed liquidity injections, echoing 2019 and boosting hard assets.
Gold: Bullish case linked to a potential turn toward easier policy; gold shows few hallmarks of speculative excess in Western markets.
Silver: Framed as both monetary and industrial, with current strength tied to supply-demand deficits rather than pure speculation.
AI: Concerns over an AI-driven market led by a narrow cohort, plus a financing mismatch as long-duration debt funds rapidly obsolete tech and data centers.
Private Credit: The guest sees opacity, rating inflation, and LME practices masking true risk; warns the cycle is late-stage with two-price outcomes.
Life Insurance Risk: Potential epicenter of the next credit crisis as life insurers load private credit/PE exposure; regulators may be slow to surface losses.
Yen Carry Trade: A BoJ tightening and yen strength could trigger repatriation and a global de-risking impulse that US policy may struggle to offset.
Transcript
Welcome back. I'm Jeremy Saffron. Now, we have three developments hitting the US economy at the same time, and each one matters [music] to the markets. Now, first, funding stress is back. Bloomberg reports overnight repo rates for the year-end turn have jumped about 60 basis points above the Fed's target. Now, several major banks are now openly asking the Federal Reserve to step in with new liquidity. Second, political pressure on the Fed is escalated. In an interview transcript released today, President Trump said lowering interest rates is now a quote litmus test for his next Fed chair. And Kevin Hasset, widely viewed as the front runner for that job, said today that there is plenty of room to cut rates even more than a quarter of a point. And third, the labor market is cooling once you look at the details. Now, job openings ticked up. Yeah, they did. But hiring fell by more than 200,000 and layoffs rose to their highest levels since early 2023. and quit rate. Uh that dropped to its lowest since 2020. And the inflation data the Fed needs for tomorrow's meeting won't be released until July. Meanwhile, markets do expect a rate cut tomorrow. Japan may raise rates next week. And metals are responding. Gold holding above $4,200. Silver, if you look at that chart, just pushed past $60 US for the first time ever in history on the spot side. Now, this is not positioning. It's not hedging. Markets are adjusting to what they believe comes next. And few people explain these shifts, the history, the credit cycles of politics with more clarity than our guest today. James Grant joins me now. He is the founder and editor of Grant's Interest Rate Observer. And for more than four decades, his writing has challenged central bank orthodoxy, warned against the distortions of easy money, and documented how these markets behave when interest rates lose their meaning. Jim, great to have you back on Kicko News. Nice to see you. >> Thank you. Nice to be here. >> Uh, obviously not too much going on in the news flow today. Uh [laughter] nerd. >> Um I I want to start with the the this new report on on repo rates. It's trading at around 4.25 4 and a quarter roughly 60 basis points above the Fed's target and major banks are calling for intervention. Now in your latest letter you wrote that today's financial system suffers from what you call quote suppressed price discovery where official rates conceal the true cost of money. Is this repo spike simply the real price breaking through the official storyline? And historically, I mean, 99, 2011, 2019, these were technical events. They were early warnings that the system was kind of overleveraged and underreserved. Is is that what we're looking at now, Jim? >> Yes. Uh underreserved is a certainly a term of art. >> The Fed speaks um the Fed can speak in tongues. You know, we can quite understand what they're talking about. There is um there's an Apple level reserves. Uh that's [clears throat] what the Fed uh now says it wants. There is an abundant level of reserves. What it has had a couple of years ago it began with the target of abundant and previously back in days of Y there was an adequate level of reserves. Nothing debt too big, debt too little. Uh [clears throat] so what does all that mean? means that the um uh the Fed is in fact the kind of the puppet master of the money markets. >> Mhm. >> And um it administers these rates and the [clears throat] trouble many of them administer. So the trouble with administered rates is they return so little information to the administrator. >> Right? So they um uh the Fed uh in that sense uh encounters the problems of any central planner. Um and these problems were last and most vividly on display in 2019, September 2019. The um one day out of the blue, you know, no press release, no grass band announcing anything. the um uh the overnight rate on uh a collateralized loan collateralized by Treasury Securities uh rose from uh jumped from like 2% to about 10. It didn't stay there long. was just, you know, um [clears throat] uh but it stayed there long enough uh to send shock waves of uh of uh astonishment and uh and uh and fear through the uh uh through the institution of our central bank, >> right? And the Fed interveneed with a great uh injection of uh of funny of money which we you know kind of euphemistically called liquidity. printed up some dollars and and um and uh the Fed then uh was kind of uh noodling over how to present this to the world because um it had just uh not so long before this, it had begun to uh uh to tighten up his balance sheet. He wanted to put the financial crisis and its aftermath behind it. And lo and behold, um uh the market uh [clears throat] uh revealed that there were cracks and rivets popping and and there wasn't enough uh liquidity in the market, >> right? >> Although uh in 2019 u uh the Fed had every reason to believe that it was uh perfectly adequate this level of reserves. Okay. So they they they they don't they didn't know, they couldn't know, but they thought they knew. Um realizing that there were not enough dollar bills floating about the system, uh the Fed um uh undertook to inject about $60 billion a month, I think, if memory serves, which it so infrequently does, but 60 billion or so a month beginning in September. And by the time >> [sighs] >> uh well, let me uh add that um it looked like QE, didn't it? All this $60 billion. And um the Fed and uh in in uh an intimate uh conversation among the members of the Federal Open Market Committee uh said, "God, it does kind of seem like like uh more QE. That's not good. But how do we how do we how do we sell this? and um uh they sold it as a temporary uh technical fix for a problem of reserve provisioning. >> Huh? >> Yeah, >> it sounds like and a dime thing, right? So, um and then JPL gets up and says this is not QE. In no sense is a QE. But 6 months later, the Fed had added $350 billion plus to its balance sheet. And that took us to uh March of 2020 when the um corona virus manifested itself to all and sundry to see and to suffer from. So that that was the uh those six months were the the entree uh to the uh complete um sense of abandonment of of monetary discipline and monetary discipline was was thrown to the side to combat the uh the pandemic. Anyway, it's a very long- winded way of saying that um the year-end difficulties we're having in the money market now and the calls for help on the part of the big uh big banks >> um could be the prelude uh to a turn in the Fed's operating procedures such that we are once again adding liquidity rather than pretending to withdraw it or to keep it the same. And uh getting back to the reason we're all here talking together today is because that would be good for gold. I'm sure I >> Hey, and Jim, maybe maybe silver, too. Um Okay, >> I always I always forget I always forget that they're the high achiever. Um >> you know it, you know it. Um okay, I want to ask you something about what you just said there and then of course we'll get on to the macro thesis. That 2019 episode, you know, that 10% overnight rate on Treasurybacked lending was a reminder that even the safest collateral could become, you know, temporarily unfinancable. Are we closer to repeat of of that dynamic now? In other words, is today's rate move, you know, the market quietly warning us that that system is running without enough true liquidity once again? >> Uh, we'll know more after the turn of the year, but yes, I think that is the message of the markets. I think it's the it's the message that the Fed will take from the market, >> right? >> That what the um the market wants is more liquidity, >> right? And um you know I I'm I'm of the view I'm this is very much a minority opinion but I'm of the view that a little volatility a little bit of illquidity is great because it uh it rations lending and it it constitutes a reminder uh that the public credit um is in trouble by the uh uh the immensity of the public debt. And um you know there when you hear the Fed talking about uh these uh um uh these episodes of ill liquidity in the money markets, they they say everything except that the supply of securities is greater than the demand for securities at current levels of interest current rates of interest. uh that to me is is the is the clear takeaway is that the supply of securities is greater than the demand at these rates of interest. So um uh that means that we're perhaps ought not to be running a 7% or 6 12% deficit uh as [clears throat] percentage of GDP at a time of uh of uh roaring financial prosperity if not universal prosperity in the main street. Mhm. >> So it's, you know, it's a it's a um it's a kind of a fraugh and hugely interesting moment. >> Yeah, absolutely. And of course, you know, we're watching the Fed's expectation and the rate cuts tomorrow. The market has already priced in a rate cut as you know, but the October, November inflation reports, I mean, they won't be out until January and and this entire year has been defined by revisions. Jobs, inflation, GDP, you know, the numbers kept getting rewritten. If policymakers cut without current inflation data, is the current, you know, is the decision grounded in economics anymore, is it just driven by funding stress or or even political influence? >> I think political stress, political influence, and funding stress both play their part. You know, the Fed has three uh statutory mandates. Uh full employment, uh stable prices, and moderate long-term rates of interest. That's the That's the fence legislative um uh marching order. >> Yeah. >> Uh but there is a fourth and it's the uh it's the quiet one and um it is the mandate we make conjecture to maintain uh so-called smooth market functioning >> and that can take precedence. you know, the Fed is uh is in the business of facilitating the financing of the public debt as much as it is in doing the other things I mentioned that Congress has charged with undertaking. >> So, uh this gets really interesting, you know. So, what if the let's say that the um that the rate of inflation is uh is uh is running hotter than the uh quite stale data that we're looking at. and the Fed is has loosens and you know cuts rates and u um then they've really got a problem. >> Yeah. Jim, would when when you describe smooth market functioning is is is the quiet, you know, the Fed's quiet kind of fourth mandate, it raises a critical point. I mean, if the central bank sees every sign of stress as a threat to market functioning, haven't we conditioned Wall Street to to just expect this rescue, you know, reflexively? I mean I I mean in other words is the fourth mandate the very thing that prevents genuine price discovery. >> I think that we are talking among like two guys who really can read each other's minds. [laughter] >> Good. It's like watching Fox and Friends. Don't you think that President Trump is the greatest guy? Yeah. Yeah. Yeah. Yeah. The greatest one. >> Well, yes. I exactly I exactly [clears throat] agree with you that um um that uh this is uh uh this is the process of conditioning uh the markets to expect the Fed to do what the Fed has habitually done which is to uh make things nice and to tamp down volatility. The volatility of bond markets very is very is very sedate. um uh you know the so-called move index is is uh is is low at near at near at low levels. That's that's the com that's the uh uh that's the the comparison that it's the uh counterpart to the VIX index in fixed income and uh [clears throat] so the the the bond market is is kind of serene notwithstanding what's going on in the money markets and uh >> we know about the stock market. So I yeah I think you're exactly correct that the Fed is uh uh the Fed and not for the first time by any means. The Fed is um uh is leading people to think that nothing really bad's going to happen as long as it is in business. >> So I mean you know obviously the defense is that in a $30 trillion Treasury market disorder you know isn't just noise that can spill into mortgages and corporate credit and payrolls. Do you see a world where the Fed can step back from this fourth mandate or or is intervention now kind of baked into the architecture of the system? >> Uh you know Scott Besson said something very I thought was very hopeful and very sound and um um sound as I would judge sound. He said the Fed ought to be it ought to be less with us. It ought not to be so much the center of the thing of the financial markets. You know, it's like a a World Series baseball game beginning with um a 10-minute feature on the on the umpires. You know, where they went to high school and and what their parents had to say about them, only nice things. So, the the umpires not really the point of a baseball game, nor are members of the FOMC really the point of functioning financial markets. They're there for a purpose, but not the purpose of control, it seems to me. So, can we back away from this? Yeah, we can. We have to be We have to We have to um tell people what's going to happen. Uh that from now on, we're not going to hold the hand of the market. We're going to take the trading wheels off and let the market have its bumps and uh and and uh band-aids can buy its own band-aids, you know, and if it has to go to the emergency room, well, we'll I don't know the analogy is getting strained. And the >> uh uh the Fed, I think, in the certainly in the um in the spirit of Secretary Besson's call for simplicity might add to that um uh uh the allied good of letting the market uh go its way. And even as you know >> Yeah. So [clears throat] the President Trump is saying well this business the the the the great Hollywood mega merger. I'm not said I'm not so sure about that. And when he saw the um the latest 60 Minutes he was really not sure about he didn't like the way he was portrayed um by that person of low IQ. So I he said I'm really not sure about this any so is huh is that the way it works? is is is is is every price to be determined by a lobbyist who knows somebody who knows somebody who knows somebody who knows the president of the United States or who knows the chairman of the Fed. This is really kind of crony capitalism. >> Let me ask you, I mean because you mentioned Scott Essen's view that the Fed should quite literally do less step back from constant intervention and stop trying to manage every fluctuation if if the Fed actually adopted that posture. I mean, what would the markets look like? What would we finally get real risk-taking again? Or would the adjustment be so severe that the Fed would never tolerate the pain long enough for discipline to return? >> Well, that's that's a matter for the the Fed to um uh to deal with. If that time ever came, you'd want somebody who was committed to the principle of markets rather than the principle of the outcome. And um the trouble with the uh with the interventionists who are more and more in control of our economic lives that they are they're not free market people. They are business people who want to do deals and control outcomes. Whether it's a financial market outcome that is up and to the right in the chart pattern or whether it's uh it's getting a uh a golden share of a steel company in a merger or getting 25% of Nvidia's sales of a certain chip to China. I mean what are they where this come from? It it it is it is more and more looking like uh Argentina uh before um uh before the ouster of the Paradistas. I don't know. It's it's it's quite concerning to me where we're going. >> This must be the least conservative Republican administration on record. Certainly, it's the most phenal, >> by which I mean the most self-interestedly interested in money for itself. Yeah. Yeah. >> I mean, you know, critics obviously would say that the modern system can't handle uh handsoff Fed, you know, between the leverage now and and this derivative plumbing and and then we got the political pressure. Is the minimalist central bank even possible anymore or is that era gone? >> Sure. Yeah. >> Yeah. >> Yeah. Send me in, coach. [laughter] I'd do it. >> You got your hand up. >> Uh, of course it's it's possible. you know, you'd have to resolve to uh uh to not watch TV for a day or two if you're running the Fed and just let chips fall. But the but the the the alternative is to let things proceed as they have been proceeding. Mhm. >> And to u uh if a sparrow falls to earth to return that bird to the air, you just to uh uh to uh um never let anything get uh uh [clears throat] never let a bare market proceed too far. >> Yeah. And um so so uh excesses uh accumulate and misallocations uh build on each other and pretty soon you have a dysfunctional economy and that's the reason you know recessions exist for a reason and bare markets exist for a reason. It's not just the glib business returning money to its rightful owner. uh these downturns and these slumps and these recessions uh clear out uh mistakes, investment mistakes, and uh they're not pretty, but they're necessary. And to forestall them through constant liquidity preference uh liquidity injections is to uh uh sentence us all collectively to uh uh [clears throat] to a uh an economy that is increasingly uh rigid and uh um and incapable of correcting its uh its errors. that good. >> I mean, Jim, that raises a bigger question about where all this liquidity ultimately shows up because while the Fed grapples with funding strains and political pressure, the stock market today is I mean, it's being held out by an extremely narrow group of of companies and and almost all of them that strength traces back to the AI theme. And I'm not sure if you heard, we had a new report out today. We have Howard Marks warning about a terrifying what he's calling a terrifying mismatch in AI financing and Nvidia alone carrying an outsized share of the market's gains. Let me ask you this. I mean, does this AIdriven leadership strike you as a healthy expression of innovation in this market or is it another symptom of what you were just talking about of a market distorted by cheap money and Fed intervention? >> Yeah. Uh it reminds me of the um of the late 1990s and uh the uh overbuilding of uh of the infrastructure of the internet you know uh >> um but you know it it's it's so in that sense it is a normal um cyclical excess. technology brings with it enthusiasm. Enthusiasm becomes overenthusiasm and [laughter] at length there is a reckoning and most often uh or [clears throat] not infrequently at least a crash. That that's the that's the record from railroads and I dare say it was a record in canals and for that record in uh what preceded canals. I'll think of this by midnight. So um uh so but but there is something else going on and that is the uh uh the uh the competition to uh push money onto the projectors and the promoters of data centers and we at grants uh liken them to the pyramids of ancient Egypt. you know, uh um uh great money pits. And um as a friend of mine would remark at times like this lonically, he'd say, "We'll know more in 10 years." >> Yeah. >> Which is true, but not helpful. Right. >> Not helpful. But it is it is interesting because that that same report from Howard Marx, I mean, they put out that note and he raised that massive red flag regarding the duration mismatch of this AI arms race. to me. He questions the sanity of buying 30-year bonds to fund technology that changes every 18 months. I mean, are we effectively financing future junk where these multi-billion dollar data centers become stranded assets long before the debt is ever repaid, leaving investors holding the bag, I guess, on on, you know, what could be a massive infrastructure bubble. >> Well, only the very best questions answer themselves, and you just did it. Yeah, it's exactly right. Yeah. So, um, Howard Marx is right and you're right in, uh, framing Howard Marx's remarks, and I couldn't have said it better, nor will I try. >> Yeah. Okay. Interesting. He he did describe, I mean, I I found it just an interesting kind of note. I mean, he would describe the employment outlook as terrifying, warning of social division and and, you know, populist demog. But this this ignores the massive deflationary pressure that AI puts on goods and services. I mean, if AI drives the cost of living down faster than it displaces wage, we aren't heading for poverty. We're heading for that new era. What are your thoughts on this? >> That that's if it works. >> Yeah. Interesting, >> right? Is is is it is it really the thing? Um I don't know. Is this, you know, um uh does it think or does it uh grab phrases from copyrighted materials and put them together most cleverly? and uh and thereby save our college students from the unfair and excessive effort required by professors to have them write something original. I I I don't know. I don't want to be the guy standing by the road um laughing at the Model T that is uh um waiting for a a toe out of the ditch and say getting a horse. But I I I think that um there are real questions about the efficacy of this technology about its usefulness and um and uh the the the [laughter] compulsion to lend the compulsion to finance is just as you and Howard have innovated. It is separate and distinct from I think from a fair reckoning of the usefulness and the uh and the lifespan of this technology. the technology generally, you know, as as Fred Hickey was always reminding us, technology is in the business of destroying itself, you know, through something better. And um so it ought not to be priced as if it were uh you know, some product coming out of Proctor and Gamble that would have a 30-year shelf life uh product life. So I I I I think there's much to be worried about in uh in uh in this uh uh [clears throat] in this very very topheavy uh market. You know, I was talking with um Simon Malovich who is a uh somebody that uh sort of that Kitco would warm to. Simon is in the uh in the physical gold business. He buys it for his clients. He stockpiles it and uh keeps them apprised of why they own it. and um and uh uh he was reminding me and I will remind our audience that um it's not just the uh stock market that is kind of suspended on as it were on a a single line of dental flaws. You know, it's the uh economy itself is very dependent upon the top 10%. >> Yeah. You know, >> for for consumption, it's for taxes. It's and if if the stock market were one morning to get up and walk in front of a bus and stock markets tend to do when valued as high as this one although very few if any has ever been uh valued so high as this um >> the economy I think would be in rugged shape. So um I don't this is uh this is the age old conundrum about human progress. You know, there's always uh the progress is is is uh is intoxicating. You railroaders were intoxicating. Uh um and uh and uh you know, three or four lines of track we built in in parallel fashion and uh they all get financed and only one would work and didn't matter. People were just caught up with the excitement of the moment, the excitement of the vision of the technology and the hope for something better in the future. And how much >> how much more so with a thinking machine, you know? >> Yeah. No kidding. Something definitely to think about. I mean, you know, this brings us also to private credit. I mean, you know, I'm sure you heard about Jeffrey Gunnlac. He said uh earlier this week that private credit is seven or $1.7 trillion market is engaging in garbage lending. You've heard that from most people with echoes of kind of 2006. Now, the ACC says deployment hit a record 592 billion last year. In your recent letter, uh you warned that today's markets operate in an era of of of false calm, right? Created by low rates as we're discussing. Uh is private credit one liquidity event away from discovering what these loans are really worth? >> Oh, you know, the um private credit has instituted ways to forestall any such revelation. you know, it's got something called LME, liquidity management exercises. very very uh kind of uh anodine and uh and um a little bit suspicious name given to the uh the process by which bankruptcy can be avoided or or bankrupt be avoided by uh displacing one set of creditors uh to the advantage of another set and thereby postponing someday of recogniz collateral can be shifted around and >> [clears throat] >> um and it's It's all uh if you ask me it's all quite cynical and uh and is uh in contravention of the very notion of credit which is man's confidence in man. It's faith. You know, credit is is confidence and faith in it. And uh and uh so private credit is increasingly uh [clears throat] functioning um as I say in contravention of that that uh that dictim and it is also subject to uh very very um worrying tendencies towards uh um uh towards uh kind of false ratings. there a bunch of rating agencies that you haven't heard of unless you're in the business and they are um [clears throat] uh joining and giving these uh issuers u of debt kind of a a very prettyl looking ratings given the financial situation of those borrowers. So there's great inflation in the ratings of private credit. uh there is opacity the you can't know exactly often what you're what you're investing in disclosure is minimal often mostly and uh and as again there's there's this compulsion to lend all of which there's a competition to lend this regulatory arbitrage so credit you know since time out of mind has worked in cyclical fashion you know they uh it begins with uh uh after a bust and everyone's contrite and resolved not to do that again because the market is hung over and h is never going to take another drink and time passes and people take a little more take a little bit risk. Ah, that's good. That risk felt good. It pays you and and at length um we're back to where we were before the uh last crisis. And um it has uh that's ever it was ever thus it's ever that way now. And I think we're in the rather towards the end the beginning of the particular credit cycle towards the uh towards the uh explosive phase, but who knows when. >> Yeah. Yeah. Timing is everything. I I want to put >> No, no, it's not. If it were, I wouldn't be talking with you. >> Yeah, it's true. It's true. It's actually Well, good to say. >> It's a >> Jim. Let me let me put kind of a contradictory development on the table. It was just today Goldman Sachs CFO Dennis Coleman, he came out with a story and he said that that private equity deal pipeline is finally thawing. You know, sponsored deals are up 40%, jumbo financings are percolating, and M&A on track for one of the biggest years in history. Now this is happening in the same market market where you know Jeffrey Glack says private credit resembles subprime and where you've warned that low rate distortions haven't been reflected in asset prices yet. So you know which signal should investors trust? Is it is it this revival in deal making as a sign of genuine health or or the last grasp of a market kind of trying to do business before funding costs and credit losses make that impossible? >> Yeah, good question. Um as to the facts to begin with uh private credit is inherently speculative grade because it is almost always uh extended to the uh participants in some sort of highly leveraged transaction mostly private uh uh uh private equity. So um almost by definition private credit is speculative grade. So it's not Jeffrey didn't say anything too re um uh too revelatory in calling it junk. It is inherently junky. But uh you know the uh the uh the veil is uh so closely guarded against uh uh too close inspection of the merchandise and private credit. You know you don't really get the uh the marks to market. Uh you don't get them at all. In fact they don't this stuff is not traded. I guess maybe some of it might be, but mostly it is untraded. >> So there's not that fail safe on on where you stand and the ratings are questionable often, >> right? >> So I take Jeffrey's side in this and um uh you know, you you think it uh you think that uh um it can't go on, it does go on. And that too is always the case. My goodness, these these cycles if they ended where they ought to end, use that in quotation marks, ought to. >> Yeah. >> Life would be so much simpler. But as it is, they they test the patience of the uh of the uh most devoted u uh exponents of the value investing creed. You know, they just go on and on and um they want you to jump in and uh and participate. >> Yeah. Do it. >> You know, talk about being, you know, mispriced for safety. I mean, you've warned for years about the loop between private equity, private credit, and on and life insurers and and how risk, you know, migrated into institutions people assume are safe. Gunlack did say that private credit has two prices, 100 or zero. Um, if that's, you know, if that's true even in part, is is this eventually an insurance sector crisis? >> Yes. Yeah. I'm glad you mentioned that. We have been uh as far as I know we have very little company in this but u uh the risks that private equity and private credit present to the life insurance policy holder an inuitant we think are considerable >> and um uh we've been working on this thesis building it and uh naming names I won't name them on air because u that's why the subscribers subscribe but um we think this could be the uh the epicenter uh or certainly close to the epicenter of the next major credit crisis, life insurance. >> Interesting. >> And it's going to be too bad for the people who didn't think they were getting involved in a speculative activity when they took out a life insurance policy. But but policy holders might well be drawn into the troubles and um of all the vulnerable people in the world. people depending on uh uh life insurance premiums ought not to be uh uh unknowing participants in the speculation. You know, everyone ought to be offered the opportunity uh to to uh uh to speculate but uh I think none of us ought to be drawn into such a thing um without uh full disclosure which has not been forthcoming. >> That's interesting. I mean, obviously insurers would say, you know, we're matched. We're we're capitalized, but are they capitalized for a world where price discovery returns? >> No, they they're capitalized for prosperity. Let's put it that way. They're not capitalized for adversity. Um, long long ago in the U and the Bible of value investing entitled security analysis by Benjamin Graham and David L. Dodd first edition 1934 and um the authors uh read wrote this is this of course this is this was in the aftermath of the official ending of the great depression wrote that um uh uh that bronze ought to uh uh be able to stand the a depression test and of course that that we don't have depressions anymore we have recessions we have depress recessions that are forced shortened by Fed intervention. But there's no there's no Federal Reserve for life insurance business. You know, there's um and um uh these life companies um I think are not capitalized for uh for real trouble. and their assets are not necessarily um [clears throat] uh acquired uh uh with with real trouble in mind. I think it's it's an understatement. So, so on timing I'll try let me say it more pl. So the um the um uh the asset allocators the insurance companies are not saying let us buy uh um loans private equity private credit loans leverage loans and and and uh and and BAA's corporate bonds that stand the test of a severe cyclical downturn. Nope. I don't think that's what they buy them because they need to fill a spot of the portfolio uh with a certain yield level, a certain expected return >> and um and those are investment habits that are ingrained by years and years of Fed intervention and by low interest rates as we were discussing earlier. >> Yeah. Yeah. Yeah. And Jim, if I got to ask you, I mean, if the insurance sector is where the mispriced risk is concentrated, I mean, does does that mean the average retirement account is more exposed than people realize? And I guess, you know, further further to that, we could kind of get into that regulatory thing, right? Because unlike banks, I mean, insurers operate under a completely different regulatory framework, but state regulators often assume that these private loans will be held to maturity at par. I mean, does that blind spot create a situation where the problems don't surface on balance sheets until they're unavoidable? >> Yes. Um, uh, the possibility of an insurance, life insurance centered financial problem does put retirees at risk. And yes, the um regulatory regime of u of life companies is by is uh is is state by state >> with varying degrees of u of of uh of uh of attention, rigor, and competence. So just as you say or imply with your question, it's it's a this is going to be we think we at grants think it's a problem is going to be a bigger problem but um yeah we've been wrong before but we're we're we're trying to build this thesis and build it out as helpfully as possible to our readers. >> Yeah. Interesting. Uh I want to pivot to kind of overseas for a moment because markets now price an 80% chance that the Bank of Japan raises rates next week. Now, in your recent letter, you wrote that that time is returning to finance, meaning duration matters again after years of, you know, zero rates. If if Japan tightens and and the yen strengthens, the carry trade obviously unwinds, cheap yen has fueled US tech, treasuries and and the credit for for for a decade. Could that unwind trig trigger a global margin call that a Fed cannot offset? >> Yes. And the uh the guest for your next show, this guy who works in Singapore, his name is David Dredge >> and he's been writing about this and and he's is an actual [laughter] a participant in the markets running for years. But yeah, uh David and we are of one mind on this that um um uh there is a genuine risk that uh of repatriation of funds by Japanese investors who have spent years um sending their money abroad uh scouring the globe for higher yields and those available in the essentially zero interest rate uh regime Japan >> and uh The Japanese 10-year note is near 2%. The 30-year bond, I guess I I saw is a three and a half. I something like that. So, these are now respectable almost almost competitive um yield levels worldwide. So, uh it's it's one of the it's one of the risks that the market is confronting whether we acknowledge it or not. Yes. >> Yeah. Yeah. I mean, you know, the consensus is that the bank the Bank of Japan will move slowly and and the market is kind of prepared. What makes this potentially sharper than expected, do you think? A little bit more. >> Well, um, let me again agree with you. I I've done nothing but agree with you, which is very pleasant. >> It's not good. It's not looking good here, Jim. >> No, wait. Um, yeah, you ladies, I've not been fed these questions. Please know that. But, um, um, the [clears throat] bank Japan is a great volatility muffler. Just when you think something dramatic is going to happen, um uh they will uh uh the authorities will issue a press release uh so bland and and and and absolutely impenetrable as to meaning that you know and and Mark will say, "Oh, oh, I guess it's so what is going to happen?" So um this particular rock has been rolling down the hill of uh people who expect to get that rock to the top of the hill uh over and over again for many many years. Uh so I'm not there's no guarantee this time will be the back won't uh somehow pull the uh the houses for a mixed metaphor pull the rock from the [laughter] [gasps] um it could be this winds up as a great big nothing that um there's no repatriation there's no problem there's no but um rarely rarely have uh uh [clears throat] have Japanese rates uh been well they haven't been seen this way for a generation at these levels So, we'll see if there's a repatriation trade and if there is, what consequences it might have. But the there is the risk of a of a of a very damaging repatriation trade. >> Yeah. Well said. And listen, Jim, I time is going too fast. I know you have a hard stop. Before we let you go, because it is Kico, I do have to ask you, otherwise our viewers won't be happy. I mean, gold is above $4,200. Silver just made that new all-time high over $60. I mean, you've called gold the quote reciprocal of faith in central banking, right? I mean, silver has always been the public's metal. Do you think silver's surge is, you know, a broader public vote of no confidence in monetary policy here? >> So, silver is an interesting uh there was a um the there was a there were a pair of books that came out in the early 80s and one was uh gold. It was entitled um uh gold the uh the golden constant. The Golden Constant was Ray Jastrum and Roy Jastram I think and Roy Jast wrote a second book [laughter] companion book and silver the restless metal and I smile when I think of the title the restless metal because silver is just crazy right it's restless as nuts it is [clears throat] the most volatile thing is it's as volatile as Bitcoin it's as volatile as as I don't know as as oh yeah it's as volatile as Donald Trump I'll put it that way it is not strictly a monetary metal it is also though an industrial one. And what silver has going for it now is is some element of appeal to those who believe that the so-called debasement trade is live well and kicking and going higher. And it also is um is u uh is a uh uh uh is the uh market for those who detect a great supply demand imbalance >> and want to capitalize on that. So so go a supply deficit in silver. There is a monetary element and it's a very volatile thing. Now, um, and, uh, there's a there's a bit of folklore in the in the medals market that says, uh, gold, uh, peaks when silver finally has its day in every cycle. So, when when silver gets a catches a bid, uh, that's it for gold. >> Yeah. >> And, uh, uh, I think that is not the case now because um, uh, silver is not really on a speculative bender. It's on a supply demand bender. I say this with some I say there's a little hesitancy because you know it you never know until the aftermath what is speculative and what is a more or less healthy market move. Yeah, >> but certainly uh gold has exhibited none of the uh of the the hallmarks of extreme speculation. Certainly none in the in the western portion of the world, you know, ETF flows, what have you or um nothing like you what you'd see in a in a culmination of a speculative move. So, um yeah, so silver is a thing and uh and so so is gold. Yeah. >> James Grant is the founder of Grant's Interest Rate Observer. Uh, thank you for joining us today. This was very insightful. Obviously, our time went too fast, but we got to get you back on, Jim. And, uh, I appreciate your time. >> I would like that. Thank you a lot. >> Thank you. Appreciate that. All right. [music] For continued coverage of gold markets and global policy shifts, make sure you're subscribed to Kitco News and follow us [music] across all platforms. I'm Jeremy Safford. Thanks for watching. >> [music] >> Heat. Heat.
James Grant: The ‘Epicenter’ of the Next Crash Is Not Banks – Life Insurance, Junk Debt & The Fed
Summary
Transcript
Welcome back. I'm Jeremy Saffron. Now, we have three developments hitting the US economy at the same time, and each one matters [music] to the markets. Now, first, funding stress is back. Bloomberg reports overnight repo rates for the year-end turn have jumped about 60 basis points above the Fed's target. Now, several major banks are now openly asking the Federal Reserve to step in with new liquidity. Second, political pressure on the Fed is escalated. In an interview transcript released today, President Trump said lowering interest rates is now a quote litmus test for his next Fed chair. And Kevin Hasset, widely viewed as the front runner for that job, said today that there is plenty of room to cut rates even more than a quarter of a point. And third, the labor market is cooling once you look at the details. Now, job openings ticked up. Yeah, they did. But hiring fell by more than 200,000 and layoffs rose to their highest levels since early 2023. and quit rate. Uh that dropped to its lowest since 2020. And the inflation data the Fed needs for tomorrow's meeting won't be released until July. Meanwhile, markets do expect a rate cut tomorrow. Japan may raise rates next week. And metals are responding. Gold holding above $4,200. Silver, if you look at that chart, just pushed past $60 US for the first time ever in history on the spot side. Now, this is not positioning. It's not hedging. Markets are adjusting to what they believe comes next. And few people explain these shifts, the history, the credit cycles of politics with more clarity than our guest today. James Grant joins me now. He is the founder and editor of Grant's Interest Rate Observer. And for more than four decades, his writing has challenged central bank orthodoxy, warned against the distortions of easy money, and documented how these markets behave when interest rates lose their meaning. Jim, great to have you back on Kicko News. Nice to see you. >> Thank you. Nice to be here. >> Uh, obviously not too much going on in the news flow today. Uh [laughter] nerd. >> Um I I want to start with the the this new report on on repo rates. It's trading at around 4.25 4 and a quarter roughly 60 basis points above the Fed's target and major banks are calling for intervention. Now in your latest letter you wrote that today's financial system suffers from what you call quote suppressed price discovery where official rates conceal the true cost of money. Is this repo spike simply the real price breaking through the official storyline? And historically, I mean, 99, 2011, 2019, these were technical events. They were early warnings that the system was kind of overleveraged and underreserved. Is is that what we're looking at now, Jim? >> Yes. Uh underreserved is a certainly a term of art. >> The Fed speaks um the Fed can speak in tongues. You know, we can quite understand what they're talking about. There is um there's an Apple level reserves. Uh that's [clears throat] what the Fed uh now says it wants. There is an abundant level of reserves. What it has had a couple of years ago it began with the target of abundant and previously back in days of Y there was an adequate level of reserves. Nothing debt too big, debt too little. Uh [clears throat] so what does all that mean? means that the um uh the Fed is in fact the kind of the puppet master of the money markets. >> Mhm. >> And um it administers these rates and the [clears throat] trouble many of them administer. So the trouble with administered rates is they return so little information to the administrator. >> Right? So they um uh the Fed uh in that sense uh encounters the problems of any central planner. Um and these problems were last and most vividly on display in 2019, September 2019. The um one day out of the blue, you know, no press release, no grass band announcing anything. the um uh the overnight rate on uh a collateralized loan collateralized by Treasury Securities uh rose from uh jumped from like 2% to about 10. It didn't stay there long. was just, you know, um [clears throat] uh but it stayed there long enough uh to send shock waves of uh of uh astonishment and uh and uh and fear through the uh uh through the institution of our central bank, >> right? And the Fed interveneed with a great uh injection of uh of funny of money which we you know kind of euphemistically called liquidity. printed up some dollars and and um and uh the Fed then uh was kind of uh noodling over how to present this to the world because um it had just uh not so long before this, it had begun to uh uh to tighten up his balance sheet. He wanted to put the financial crisis and its aftermath behind it. And lo and behold, um uh the market uh [clears throat] uh revealed that there were cracks and rivets popping and and there wasn't enough uh liquidity in the market, >> right? >> Although uh in 2019 u uh the Fed had every reason to believe that it was uh perfectly adequate this level of reserves. Okay. So they they they they don't they didn't know, they couldn't know, but they thought they knew. Um realizing that there were not enough dollar bills floating about the system, uh the Fed um uh undertook to inject about $60 billion a month, I think, if memory serves, which it so infrequently does, but 60 billion or so a month beginning in September. And by the time >> [sighs] >> uh well, let me uh add that um it looked like QE, didn't it? All this $60 billion. And um the Fed and uh in in uh an intimate uh conversation among the members of the Federal Open Market Committee uh said, "God, it does kind of seem like like uh more QE. That's not good. But how do we how do we how do we sell this? and um uh they sold it as a temporary uh technical fix for a problem of reserve provisioning. >> Huh? >> Yeah, >> it sounds like and a dime thing, right? So, um and then JPL gets up and says this is not QE. In no sense is a QE. But 6 months later, the Fed had added $350 billion plus to its balance sheet. And that took us to uh March of 2020 when the um corona virus manifested itself to all and sundry to see and to suffer from. So that that was the uh those six months were the the entree uh to the uh complete um sense of abandonment of of monetary discipline and monetary discipline was was thrown to the side to combat the uh the pandemic. Anyway, it's a very long- winded way of saying that um the year-end difficulties we're having in the money market now and the calls for help on the part of the big uh big banks >> um could be the prelude uh to a turn in the Fed's operating procedures such that we are once again adding liquidity rather than pretending to withdraw it or to keep it the same. And uh getting back to the reason we're all here talking together today is because that would be good for gold. I'm sure I >> Hey, and Jim, maybe maybe silver, too. Um Okay, >> I always I always forget I always forget that they're the high achiever. Um >> you know it, you know it. Um okay, I want to ask you something about what you just said there and then of course we'll get on to the macro thesis. That 2019 episode, you know, that 10% overnight rate on Treasurybacked lending was a reminder that even the safest collateral could become, you know, temporarily unfinancable. Are we closer to repeat of of that dynamic now? In other words, is today's rate move, you know, the market quietly warning us that that system is running without enough true liquidity once again? >> Uh, we'll know more after the turn of the year, but yes, I think that is the message of the markets. I think it's the it's the message that the Fed will take from the market, >> right? >> That what the um the market wants is more liquidity, >> right? And um you know I I'm I'm of the view I'm this is very much a minority opinion but I'm of the view that a little volatility a little bit of illquidity is great because it uh it rations lending and it it constitutes a reminder uh that the public credit um is in trouble by the uh uh the immensity of the public debt. And um you know there when you hear the Fed talking about uh these uh um uh these episodes of ill liquidity in the money markets, they they say everything except that the supply of securities is greater than the demand for securities at current levels of interest current rates of interest. uh that to me is is the is the clear takeaway is that the supply of securities is greater than the demand at these rates of interest. So um uh that means that we're perhaps ought not to be running a 7% or 6 12% deficit uh as [clears throat] percentage of GDP at a time of uh of uh roaring financial prosperity if not universal prosperity in the main street. Mhm. >> So it's, you know, it's a it's a um it's a kind of a fraugh and hugely interesting moment. >> Yeah, absolutely. And of course, you know, we're watching the Fed's expectation and the rate cuts tomorrow. The market has already priced in a rate cut as you know, but the October, November inflation reports, I mean, they won't be out until January and and this entire year has been defined by revisions. Jobs, inflation, GDP, you know, the numbers kept getting rewritten. If policymakers cut without current inflation data, is the current, you know, is the decision grounded in economics anymore, is it just driven by funding stress or or even political influence? >> I think political stress, political influence, and funding stress both play their part. You know, the Fed has three uh statutory mandates. Uh full employment, uh stable prices, and moderate long-term rates of interest. That's the That's the fence legislative um uh marching order. >> Yeah. >> Uh but there is a fourth and it's the uh it's the quiet one and um it is the mandate we make conjecture to maintain uh so-called smooth market functioning >> and that can take precedence. you know, the Fed is uh is in the business of facilitating the financing of the public debt as much as it is in doing the other things I mentioned that Congress has charged with undertaking. >> So, uh this gets really interesting, you know. So, what if the let's say that the um that the rate of inflation is uh is uh is running hotter than the uh quite stale data that we're looking at. and the Fed is has loosens and you know cuts rates and u um then they've really got a problem. >> Yeah. Jim, would when when you describe smooth market functioning is is is the quiet, you know, the Fed's quiet kind of fourth mandate, it raises a critical point. I mean, if the central bank sees every sign of stress as a threat to market functioning, haven't we conditioned Wall Street to to just expect this rescue, you know, reflexively? I mean I I mean in other words is the fourth mandate the very thing that prevents genuine price discovery. >> I think that we are talking among like two guys who really can read each other's minds. [laughter] >> Good. It's like watching Fox and Friends. Don't you think that President Trump is the greatest guy? Yeah. Yeah. Yeah. Yeah. The greatest one. >> Well, yes. I exactly I exactly [clears throat] agree with you that um um that uh this is uh uh this is the process of conditioning uh the markets to expect the Fed to do what the Fed has habitually done which is to uh make things nice and to tamp down volatility. The volatility of bond markets very is very is very sedate. um uh you know the so-called move index is is uh is is low at near at near at low levels. That's that's the com that's the uh uh that's the the comparison that it's the uh counterpart to the VIX index in fixed income and uh [clears throat] so the the the bond market is is kind of serene notwithstanding what's going on in the money markets and uh >> we know about the stock market. So I yeah I think you're exactly correct that the Fed is uh uh the Fed and not for the first time by any means. The Fed is um uh is leading people to think that nothing really bad's going to happen as long as it is in business. >> So I mean you know obviously the defense is that in a $30 trillion Treasury market disorder you know isn't just noise that can spill into mortgages and corporate credit and payrolls. Do you see a world where the Fed can step back from this fourth mandate or or is intervention now kind of baked into the architecture of the system? >> Uh you know Scott Besson said something very I thought was very hopeful and very sound and um um sound as I would judge sound. He said the Fed ought to be it ought to be less with us. It ought not to be so much the center of the thing of the financial markets. You know, it's like a a World Series baseball game beginning with um a 10-minute feature on the on the umpires. You know, where they went to high school and and what their parents had to say about them, only nice things. So, the the umpires not really the point of a baseball game, nor are members of the FOMC really the point of functioning financial markets. They're there for a purpose, but not the purpose of control, it seems to me. So, can we back away from this? Yeah, we can. We have to be We have to We have to um tell people what's going to happen. Uh that from now on, we're not going to hold the hand of the market. We're going to take the trading wheels off and let the market have its bumps and uh and and uh band-aids can buy its own band-aids, you know, and if it has to go to the emergency room, well, we'll I don't know the analogy is getting strained. And the >> uh uh the Fed, I think, in the certainly in the um in the spirit of Secretary Besson's call for simplicity might add to that um uh uh the allied good of letting the market uh go its way. And even as you know >> Yeah. So [clears throat] the President Trump is saying well this business the the the the great Hollywood mega merger. I'm not said I'm not so sure about that. And when he saw the um the latest 60 Minutes he was really not sure about he didn't like the way he was portrayed um by that person of low IQ. So I he said I'm really not sure about this any so is huh is that the way it works? is is is is is every price to be determined by a lobbyist who knows somebody who knows somebody who knows somebody who knows the president of the United States or who knows the chairman of the Fed. This is really kind of crony capitalism. >> Let me ask you, I mean because you mentioned Scott Essen's view that the Fed should quite literally do less step back from constant intervention and stop trying to manage every fluctuation if if the Fed actually adopted that posture. I mean, what would the markets look like? What would we finally get real risk-taking again? Or would the adjustment be so severe that the Fed would never tolerate the pain long enough for discipline to return? >> Well, that's that's a matter for the the Fed to um uh to deal with. If that time ever came, you'd want somebody who was committed to the principle of markets rather than the principle of the outcome. And um the trouble with the uh with the interventionists who are more and more in control of our economic lives that they are they're not free market people. They are business people who want to do deals and control outcomes. Whether it's a financial market outcome that is up and to the right in the chart pattern or whether it's uh it's getting a uh a golden share of a steel company in a merger or getting 25% of Nvidia's sales of a certain chip to China. I mean what are they where this come from? It it it is it is more and more looking like uh Argentina uh before um uh before the ouster of the Paradistas. I don't know. It's it's it's quite concerning to me where we're going. >> This must be the least conservative Republican administration on record. Certainly, it's the most phenal, >> by which I mean the most self-interestedly interested in money for itself. Yeah. Yeah. >> I mean, you know, critics obviously would say that the modern system can't handle uh handsoff Fed, you know, between the leverage now and and this derivative plumbing and and then we got the political pressure. Is the minimalist central bank even possible anymore or is that era gone? >> Sure. Yeah. >> Yeah. >> Yeah. Send me in, coach. [laughter] I'd do it. >> You got your hand up. >> Uh, of course it's it's possible. you know, you'd have to resolve to uh uh to not watch TV for a day or two if you're running the Fed and just let chips fall. But the but the the the alternative is to let things proceed as they have been proceeding. Mhm. >> And to u uh if a sparrow falls to earth to return that bird to the air, you just to uh uh to uh um never let anything get uh uh [clears throat] never let a bare market proceed too far. >> Yeah. And um so so uh excesses uh accumulate and misallocations uh build on each other and pretty soon you have a dysfunctional economy and that's the reason you know recessions exist for a reason and bare markets exist for a reason. It's not just the glib business returning money to its rightful owner. uh these downturns and these slumps and these recessions uh clear out uh mistakes, investment mistakes, and uh they're not pretty, but they're necessary. And to forestall them through constant liquidity preference uh liquidity injections is to uh uh sentence us all collectively to uh uh [clears throat] to a uh an economy that is increasingly uh rigid and uh um and incapable of correcting its uh its errors. that good. >> I mean, Jim, that raises a bigger question about where all this liquidity ultimately shows up because while the Fed grapples with funding strains and political pressure, the stock market today is I mean, it's being held out by an extremely narrow group of of companies and and almost all of them that strength traces back to the AI theme. And I'm not sure if you heard, we had a new report out today. We have Howard Marks warning about a terrifying what he's calling a terrifying mismatch in AI financing and Nvidia alone carrying an outsized share of the market's gains. Let me ask you this. I mean, does this AIdriven leadership strike you as a healthy expression of innovation in this market or is it another symptom of what you were just talking about of a market distorted by cheap money and Fed intervention? >> Yeah. Uh it reminds me of the um of the late 1990s and uh the uh overbuilding of uh of the infrastructure of the internet you know uh >> um but you know it it's it's so in that sense it is a normal um cyclical excess. technology brings with it enthusiasm. Enthusiasm becomes overenthusiasm and [laughter] at length there is a reckoning and most often uh or [clears throat] not infrequently at least a crash. That that's the that's the record from railroads and I dare say it was a record in canals and for that record in uh what preceded canals. I'll think of this by midnight. So um uh so but but there is something else going on and that is the uh uh the uh the competition to uh push money onto the projectors and the promoters of data centers and we at grants uh liken them to the pyramids of ancient Egypt. you know, uh um uh great money pits. And um as a friend of mine would remark at times like this lonically, he'd say, "We'll know more in 10 years." >> Yeah. >> Which is true, but not helpful. Right. >> Not helpful. But it is it is interesting because that that same report from Howard Marx, I mean, they put out that note and he raised that massive red flag regarding the duration mismatch of this AI arms race. to me. He questions the sanity of buying 30-year bonds to fund technology that changes every 18 months. I mean, are we effectively financing future junk where these multi-billion dollar data centers become stranded assets long before the debt is ever repaid, leaving investors holding the bag, I guess, on on, you know, what could be a massive infrastructure bubble. >> Well, only the very best questions answer themselves, and you just did it. Yeah, it's exactly right. Yeah. So, um, Howard Marx is right and you're right in, uh, framing Howard Marx's remarks, and I couldn't have said it better, nor will I try. >> Yeah. Okay. Interesting. He he did describe, I mean, I I found it just an interesting kind of note. I mean, he would describe the employment outlook as terrifying, warning of social division and and, you know, populist demog. But this this ignores the massive deflationary pressure that AI puts on goods and services. I mean, if AI drives the cost of living down faster than it displaces wage, we aren't heading for poverty. We're heading for that new era. What are your thoughts on this? >> That that's if it works. >> Yeah. Interesting, >> right? Is is is it is it really the thing? Um I don't know. Is this, you know, um uh does it think or does it uh grab phrases from copyrighted materials and put them together most cleverly? and uh and thereby save our college students from the unfair and excessive effort required by professors to have them write something original. I I I don't know. I don't want to be the guy standing by the road um laughing at the Model T that is uh um waiting for a a toe out of the ditch and say getting a horse. But I I I think that um there are real questions about the efficacy of this technology about its usefulness and um and uh the the the [laughter] compulsion to lend the compulsion to finance is just as you and Howard have innovated. It is separate and distinct from I think from a fair reckoning of the usefulness and the uh and the lifespan of this technology. the technology generally, you know, as as Fred Hickey was always reminding us, technology is in the business of destroying itself, you know, through something better. And um so it ought not to be priced as if it were uh you know, some product coming out of Proctor and Gamble that would have a 30-year shelf life uh product life. So I I I I think there's much to be worried about in uh in uh in this uh uh [clears throat] in this very very topheavy uh market. You know, I was talking with um Simon Malovich who is a uh somebody that uh sort of that Kitco would warm to. Simon is in the uh in the physical gold business. He buys it for his clients. He stockpiles it and uh keeps them apprised of why they own it. and um and uh uh he was reminding me and I will remind our audience that um it's not just the uh stock market that is kind of suspended on as it were on a a single line of dental flaws. You know, it's the uh economy itself is very dependent upon the top 10%. >> Yeah. You know, >> for for consumption, it's for taxes. It's and if if the stock market were one morning to get up and walk in front of a bus and stock markets tend to do when valued as high as this one although very few if any has ever been uh valued so high as this um >> the economy I think would be in rugged shape. So um I don't this is uh this is the age old conundrum about human progress. You know, there's always uh the progress is is is uh is intoxicating. You railroaders were intoxicating. Uh um and uh and uh you know, three or four lines of track we built in in parallel fashion and uh they all get financed and only one would work and didn't matter. People were just caught up with the excitement of the moment, the excitement of the vision of the technology and the hope for something better in the future. And how much >> how much more so with a thinking machine, you know? >> Yeah. No kidding. Something definitely to think about. I mean, you know, this brings us also to private credit. I mean, you know, I'm sure you heard about Jeffrey Gunnlac. He said uh earlier this week that private credit is seven or $1.7 trillion market is engaging in garbage lending. You've heard that from most people with echoes of kind of 2006. Now, the ACC says deployment hit a record 592 billion last year. In your recent letter, uh you warned that today's markets operate in an era of of of false calm, right? Created by low rates as we're discussing. Uh is private credit one liquidity event away from discovering what these loans are really worth? >> Oh, you know, the um private credit has instituted ways to forestall any such revelation. you know, it's got something called LME, liquidity management exercises. very very uh kind of uh anodine and uh and um a little bit suspicious name given to the uh the process by which bankruptcy can be avoided or or bankrupt be avoided by uh displacing one set of creditors uh to the advantage of another set and thereby postponing someday of recogniz collateral can be shifted around and >> [clears throat] >> um and it's It's all uh if you ask me it's all quite cynical and uh and is uh in contravention of the very notion of credit which is man's confidence in man. It's faith. You know, credit is is confidence and faith in it. And uh and uh so private credit is increasingly uh [clears throat] functioning um as I say in contravention of that that uh that dictim and it is also subject to uh very very um worrying tendencies towards uh um uh towards uh kind of false ratings. there a bunch of rating agencies that you haven't heard of unless you're in the business and they are um [clears throat] uh joining and giving these uh issuers u of debt kind of a a very prettyl looking ratings given the financial situation of those borrowers. So there's great inflation in the ratings of private credit. uh there is opacity the you can't know exactly often what you're what you're investing in disclosure is minimal often mostly and uh and as again there's there's this compulsion to lend all of which there's a competition to lend this regulatory arbitrage so credit you know since time out of mind has worked in cyclical fashion you know they uh it begins with uh uh after a bust and everyone's contrite and resolved not to do that again because the market is hung over and h is never going to take another drink and time passes and people take a little more take a little bit risk. Ah, that's good. That risk felt good. It pays you and and at length um we're back to where we were before the uh last crisis. And um it has uh that's ever it was ever thus it's ever that way now. And I think we're in the rather towards the end the beginning of the particular credit cycle towards the uh towards the uh explosive phase, but who knows when. >> Yeah. Yeah. Timing is everything. I I want to put >> No, no, it's not. If it were, I wouldn't be talking with you. >> Yeah, it's true. It's true. It's actually Well, good to say. >> It's a >> Jim. Let me let me put kind of a contradictory development on the table. It was just today Goldman Sachs CFO Dennis Coleman, he came out with a story and he said that that private equity deal pipeline is finally thawing. You know, sponsored deals are up 40%, jumbo financings are percolating, and M&A on track for one of the biggest years in history. Now this is happening in the same market market where you know Jeffrey Glack says private credit resembles subprime and where you've warned that low rate distortions haven't been reflected in asset prices yet. So you know which signal should investors trust? Is it is it this revival in deal making as a sign of genuine health or or the last grasp of a market kind of trying to do business before funding costs and credit losses make that impossible? >> Yeah, good question. Um as to the facts to begin with uh private credit is inherently speculative grade because it is almost always uh extended to the uh participants in some sort of highly leveraged transaction mostly private uh uh uh private equity. So um almost by definition private credit is speculative grade. So it's not Jeffrey didn't say anything too re um uh too revelatory in calling it junk. It is inherently junky. But uh you know the uh the uh the veil is uh so closely guarded against uh uh too close inspection of the merchandise and private credit. You know you don't really get the uh the marks to market. Uh you don't get them at all. In fact they don't this stuff is not traded. I guess maybe some of it might be, but mostly it is untraded. >> So there's not that fail safe on on where you stand and the ratings are questionable often, >> right? >> So I take Jeffrey's side in this and um uh you know, you you think it uh you think that uh um it can't go on, it does go on. And that too is always the case. My goodness, these these cycles if they ended where they ought to end, use that in quotation marks, ought to. >> Yeah. >> Life would be so much simpler. But as it is, they they test the patience of the uh of the uh most devoted u uh exponents of the value investing creed. You know, they just go on and on and um they want you to jump in and uh and participate. >> Yeah. Do it. >> You know, talk about being, you know, mispriced for safety. I mean, you've warned for years about the loop between private equity, private credit, and on and life insurers and and how risk, you know, migrated into institutions people assume are safe. Gunlack did say that private credit has two prices, 100 or zero. Um, if that's, you know, if that's true even in part, is is this eventually an insurance sector crisis? >> Yes. Yeah. I'm glad you mentioned that. We have been uh as far as I know we have very little company in this but u uh the risks that private equity and private credit present to the life insurance policy holder an inuitant we think are considerable >> and um uh we've been working on this thesis building it and uh naming names I won't name them on air because u that's why the subscribers subscribe but um we think this could be the uh the epicenter uh or certainly close to the epicenter of the next major credit crisis, life insurance. >> Interesting. >> And it's going to be too bad for the people who didn't think they were getting involved in a speculative activity when they took out a life insurance policy. But but policy holders might well be drawn into the troubles and um of all the vulnerable people in the world. people depending on uh uh life insurance premiums ought not to be uh uh unknowing participants in the speculation. You know, everyone ought to be offered the opportunity uh to to uh uh to speculate but uh I think none of us ought to be drawn into such a thing um without uh full disclosure which has not been forthcoming. >> That's interesting. I mean, obviously insurers would say, you know, we're matched. We're we're capitalized, but are they capitalized for a world where price discovery returns? >> No, they they're capitalized for prosperity. Let's put it that way. They're not capitalized for adversity. Um, long long ago in the U and the Bible of value investing entitled security analysis by Benjamin Graham and David L. Dodd first edition 1934 and um the authors uh read wrote this is this of course this is this was in the aftermath of the official ending of the great depression wrote that um uh uh that bronze ought to uh uh be able to stand the a depression test and of course that that we don't have depressions anymore we have recessions we have depress recessions that are forced shortened by Fed intervention. But there's no there's no Federal Reserve for life insurance business. You know, there's um and um uh these life companies um I think are not capitalized for uh for real trouble. and their assets are not necessarily um [clears throat] uh acquired uh uh with with real trouble in mind. I think it's it's an understatement. So, so on timing I'll try let me say it more pl. So the um the um uh the asset allocators the insurance companies are not saying let us buy uh um loans private equity private credit loans leverage loans and and and uh and and BAA's corporate bonds that stand the test of a severe cyclical downturn. Nope. I don't think that's what they buy them because they need to fill a spot of the portfolio uh with a certain yield level, a certain expected return >> and um and those are investment habits that are ingrained by years and years of Fed intervention and by low interest rates as we were discussing earlier. >> Yeah. Yeah. Yeah. And Jim, if I got to ask you, I mean, if the insurance sector is where the mispriced risk is concentrated, I mean, does does that mean the average retirement account is more exposed than people realize? And I guess, you know, further further to that, we could kind of get into that regulatory thing, right? Because unlike banks, I mean, insurers operate under a completely different regulatory framework, but state regulators often assume that these private loans will be held to maturity at par. I mean, does that blind spot create a situation where the problems don't surface on balance sheets until they're unavoidable? >> Yes. Um, uh, the possibility of an insurance, life insurance centered financial problem does put retirees at risk. And yes, the um regulatory regime of u of life companies is by is uh is is state by state >> with varying degrees of u of of uh of uh of attention, rigor, and competence. So just as you say or imply with your question, it's it's a this is going to be we think we at grants think it's a problem is going to be a bigger problem but um yeah we've been wrong before but we're we're we're trying to build this thesis and build it out as helpfully as possible to our readers. >> Yeah. Interesting. Uh I want to pivot to kind of overseas for a moment because markets now price an 80% chance that the Bank of Japan raises rates next week. Now, in your recent letter, you wrote that that time is returning to finance, meaning duration matters again after years of, you know, zero rates. If if Japan tightens and and the yen strengthens, the carry trade obviously unwinds, cheap yen has fueled US tech, treasuries and and the credit for for for a decade. Could that unwind trig trigger a global margin call that a Fed cannot offset? >> Yes. And the uh the guest for your next show, this guy who works in Singapore, his name is David Dredge >> and he's been writing about this and and he's is an actual [laughter] a participant in the markets running for years. But yeah, uh David and we are of one mind on this that um um uh there is a genuine risk that uh of repatriation of funds by Japanese investors who have spent years um sending their money abroad uh scouring the globe for higher yields and those available in the essentially zero interest rate uh regime Japan >> and uh The Japanese 10-year note is near 2%. The 30-year bond, I guess I I saw is a three and a half. I something like that. So, these are now respectable almost almost competitive um yield levels worldwide. So, uh it's it's one of the it's one of the risks that the market is confronting whether we acknowledge it or not. Yes. >> Yeah. Yeah. I mean, you know, the consensus is that the bank the Bank of Japan will move slowly and and the market is kind of prepared. What makes this potentially sharper than expected, do you think? A little bit more. >> Well, um, let me again agree with you. I I've done nothing but agree with you, which is very pleasant. >> It's not good. It's not looking good here, Jim. >> No, wait. Um, yeah, you ladies, I've not been fed these questions. Please know that. But, um, um, the [clears throat] bank Japan is a great volatility muffler. Just when you think something dramatic is going to happen, um uh they will uh uh the authorities will issue a press release uh so bland and and and and absolutely impenetrable as to meaning that you know and and Mark will say, "Oh, oh, I guess it's so what is going to happen?" So um this particular rock has been rolling down the hill of uh people who expect to get that rock to the top of the hill uh over and over again for many many years. Uh so I'm not there's no guarantee this time will be the back won't uh somehow pull the uh the houses for a mixed metaphor pull the rock from the [laughter] [gasps] um it could be this winds up as a great big nothing that um there's no repatriation there's no problem there's no but um rarely rarely have uh uh [clears throat] have Japanese rates uh been well they haven't been seen this way for a generation at these levels So, we'll see if there's a repatriation trade and if there is, what consequences it might have. But the there is the risk of a of a of a very damaging repatriation trade. >> Yeah. Well said. And listen, Jim, I time is going too fast. I know you have a hard stop. Before we let you go, because it is Kico, I do have to ask you, otherwise our viewers won't be happy. I mean, gold is above $4,200. Silver just made that new all-time high over $60. I mean, you've called gold the quote reciprocal of faith in central banking, right? I mean, silver has always been the public's metal. Do you think silver's surge is, you know, a broader public vote of no confidence in monetary policy here? >> So, silver is an interesting uh there was a um the there was a there were a pair of books that came out in the early 80s and one was uh gold. It was entitled um uh gold the uh the golden constant. The Golden Constant was Ray Jastrum and Roy Jastram I think and Roy Jast wrote a second book [laughter] companion book and silver the restless metal and I smile when I think of the title the restless metal because silver is just crazy right it's restless as nuts it is [clears throat] the most volatile thing is it's as volatile as Bitcoin it's as volatile as as I don't know as as oh yeah it's as volatile as Donald Trump I'll put it that way it is not strictly a monetary metal it is also though an industrial one. And what silver has going for it now is is some element of appeal to those who believe that the so-called debasement trade is live well and kicking and going higher. And it also is um is u uh is a uh uh uh is the uh market for those who detect a great supply demand imbalance >> and want to capitalize on that. So so go a supply deficit in silver. There is a monetary element and it's a very volatile thing. Now, um, and, uh, there's a there's a bit of folklore in the in the medals market that says, uh, gold, uh, peaks when silver finally has its day in every cycle. So, when when silver gets a catches a bid, uh, that's it for gold. >> Yeah. >> And, uh, uh, I think that is not the case now because um, uh, silver is not really on a speculative bender. It's on a supply demand bender. I say this with some I say there's a little hesitancy because you know it you never know until the aftermath what is speculative and what is a more or less healthy market move. Yeah, >> but certainly uh gold has exhibited none of the uh of the the hallmarks of extreme speculation. Certainly none in the in the western portion of the world, you know, ETF flows, what have you or um nothing like you what you'd see in a in a culmination of a speculative move. So, um yeah, so silver is a thing and uh and so so is gold. Yeah. >> James Grant is the founder of Grant's Interest Rate Observer. Uh, thank you for joining us today. This was very insightful. Obviously, our time went too fast, but we got to get you back on, Jim. And, uh, I appreciate your time. >> I would like that. Thank you a lot. >> Thank you. Appreciate that. All right. [music] For continued coverage of gold markets and global policy shifts, make sure you're subscribed to Kitco News and follow us [music] across all platforms. I'm Jeremy Safford. Thanks for watching. >> [music] >> Heat. Heat.