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"Wanted," a proper help-wanted notice for the governor of the Bank of England would have said, "Someone to preside over the exchange rates of pound notes for gold, and vice versa, at the fixed and statutory rate. Bachelor's degree desirable." More than a few Englishmen could discharge such a simple set of duties. Simplicity, however, is not the defining feature of the Ph.D. standard of monetary organization.
So far has home building recovered from the stygian depths of 2009 that prices are rising even for unimproved dirt without gold underneath. Never mind the absence of acquisition, development and construction loans or the money woes of the smaller home builders, the prices of finished lots are on the rise. A kind word on the long fallow equity of a couple of listed land businesses.
It isn't a stock market, but a market of stocks, as someone or another said. Some stocks are big, and they are in the S&P 500. Others are medium size, and they are in the S&P 400. Still others are so tiny, so infinitely insignificant in the eyes of Wall Street that they are beyond the pale of any familiar index. A survey of the stock market's bantamweight division.
Progress in science is cumulative; we stand on the on the shoulders of giants. But progress in finance is cyclical; in money and banking, especially, we seem to keep making the same mistakes. An exploration of the connection between witchcraft and superstition, on the one hand, and modern central banking on the other.
From time to time, the names at each central bank change, but the Ph.D. standard remains constant. "At times of extreme economic and policy uncertainty, it pays to be quick and bold," Bank of Canada governor and soon-to-be Bank of England governor Mark Carney recently told an audience. What other central bank is on the lookout for a new leader?
Along with Mitt Romney and Paul Ryan, the invisible hand had an election to forget. Even so, the market is pricing in an assortment of mortgage REITs as if the Republicans won—with the price mechanism riding victorious on their coattails—and as if the Democrats lost. Herewith, a look at some potentially mispriced securities.
Many are the farmers’ blessings this Thanksgiving eve. Stunted interest rates, hungry foreigners and the congressional ethanol mandate have contributed their mite to the making of $7 corn, $14 soybeans and $2.40 pecans. Down on the farm, these are the good old days. A new chapter in the bull-market saga of American agricultural property.
Come the next collapsed asset bubble or the next roaring inflation, many will recall that they never did understand what the various distinguished former Ivy League economics department heads were talking about. Then again, as will come to light, neither did the supposed experts. Either the lessons of monetary history are moot or our mandarins are wrong.
The Swiss National Bank has managed to amass the world’s fifth largest portfolio of foreign exchange reserves—along with a chunky position in the common shares of Nokia and a synergistic investment in a currency printer. Blaming the gnomes for distorted yields in the euro zone.
Managers of life-insurance general accounts are well aware of the cost that the collapse of interest rates has exacted. In 2007, let us say, management asked the investment officers if 3% was not a viable yield to offer on a long-term annuity. How could it not have been? Actually it wasn’t. Nowadays, companies are having to resort to speculative grade debt to fund five year annuities promising just 2.5%.
A record $225 billion left the People’s Republic, much of it, apparently, without permission, in the 12 months ended September, The Wall Street Journal reported on Tuesday. That’s $115 billion more than tiptoed, fled or exited in the 12 months ended March 2009, the previous such peak of Renminbi outflow. For the sake of the people’s credit system, the mandarins ask—nay, insist—that the money stays put.
Banks once dominated the business-lending field, and they may still hold the greater part of business loans. But the near death of leveraged finance in 2008-09, the subsequent demoralization of wide swaths of American business and the passage and implementation of Dodd-Frank have made the bankers keen to do less. Who has filled the empty market spaces?
A shrinking top line, a shrinking bottom line, a 25% unemployment rate in one’s home country—pretty clearly, not everything is going swimmingly for a certain Athens-based engineering company. “It’s hard to expand without a banking system and a government,” a company officer remarks. Perhaps not impossible, though.
Since July, President Obama’s odds of being re-elected have closely tracked the stock market. As the president’s chances seem to improve—as reflected by transactions registered on Intrade—so does the S&P 500. Yet, we wonder: Is it the incumbent that investors prefer, or the incumbent’s FOMC? More government or more money?
We doubt that the Federal Reserve will recognize the moment at which to backpedal, and we speculate that the future will bear no obvious resemblance to that version of the future that the Fed today makes bold to forecast. Hold on to your hats is the executive summary of the Grant’s credit and interest rate forecast; details to follow.
Many applaud the Fed’s ZIRP and QE and Twist for bringing about what one practitioner has poetically called a “beautiful deleveraging.” Beautiful—to some—it might be, but the name of the game in the autumn of 2012 is increasingly “re-leveraging.” Look outside: It’s raining bonds. To the income-seeking investor, the news could hardly be worse, though there is one redeeming grace—the prevalence of quirky pricing.
This publication is bearish on China: persistently, emphatically, and perhaps by now, just a bit tediously. And we are bearish on the commodities, countries and industries that derive their principal incremental lift from the People’s Republic—iron ore, Australia, and luxury goods, to name three. Herewith a bearish analysis on a certain restaurant company that owes its 21st century growth spurt to the world’s most overrated economy.
After the Lehman Brothers bankruptcy in 2008, the Bush administration, on behalf of the mute American taxpayer, opened the federal vaults to Wall Street. When General Electric received $139 billion in FDIC debt guarantees and placed $16 billion in commercial paper with the Federal Reserve, this bluest blood of American blue chips was rated triple-A. This was four years ago—four long years ago, to be sure.
The contrast between the New World and the Old has never been starker. Car sales in France and Spain fell 18% and 37%, respectively, year-over-year in September. For the first time since World War II, more bikes were sold in Italy than cars last year. While American data look good compare to Europe’s, that is owing more to the bleak fortunes of the monetary union than hale growth at home.
The Federal Reserve Bank of San Francisco, forgetting never to ask a question without knowing the answer, sought the opinions of the viewers of Facebook on the latest iteration of “nontraditional” monetary policy: “What effect do you think QE3 will have on the U.S. economy?” it inquired. Market intervention usually has consequences, but not necessarily the consequences that the authorities expect.
There's no guarantee, of course, that cheap securities can't become even cheaper (it happens all the time in Value Land). But, as discounts widen, other things being the same, yields increase. In this supposed age of financial globalization, herewith a bullish expose on a distant market inefficiency.
It's a mark of just how far Americans have wandered from the ideals of the financial founders that a deficit of 7.3% of GDP seems an almost reasonable blot of red ink. But it's reasonable only in comparison with the recession-and-stimulus-swollen deficits of recent years. In the Age of Keynes, there are plenty of zeroes.
Rare is the goldbug who owns the object of his or her desire. GLD, the gold exchange-traded fund, is gold at one remove. The shares of Newmont Mining or any precious-metals mutual fund are gold at an even greater remove. Dealing in the barbarous relic itself has never been easy. But it is getting easier.
Radical money-printing is the norm in monetary policy the world over--except in China. For all the talk of fiscal stimulus to jolt the world's No. 2 economy back to life, growth in the footings of the People's Bank of China is at a virtual standstill. Next up, orders to compel lending?
The aging chairman of the Federal Reserve Board says one thing, your aging editor another. We persist because he persists, and because monetary ideas have consequences. If we're right about the chairman's message, danger and opportunity are staring the holders of dollar-denominated assets right in the face. We write to try to sort out risk and reward.
"We are facing a structural crisis of capitalism," Luis Arce Catacora, the Bolivian finance minister, was quoted as saying last month on FT.com. "Capitalism is the old man around, an old man that is no longer responding to the advances of mankind demands. It is time for a change." However well such talk might play in La Paz, it lays an egg at the headquarters of a certain unloved precious-metals producer.
Six months ago, the World's Second-Largest Economy was held to be invincible. Today, it would seem to be going out of business. Longtime bears on China--and therefore on Australia, which has prospered so mightily by supplying China's demand for natural resources--we write not to pound the table, but to update the facts and reframe the analysis.
Buying sovereign debt with newly conjured euros does not--repeat, not--constitute the act of monetarily financing a government, ECB President Mario Draghi assured euro zone officials on Monday. Not if, that is, the debt matures within three years. On the Continent, "nontraditional" monetary policy is fast going mainstream.
Mr. Market is as fed up as anyone with this once-mighty corporate edifice, whose stock is seemingly valued for every contingency except good news. The question, therefore, is not whether a certain disfavored automaker is driving on economic black ice, but whether the market has adequately, or more than adequately, discounted that known risk.
Save money. Buy a home. Build equity. Own a nest egg. Thanks to the bear market in houses and the bull market in bonds, the Ozzie and Harriet formula for getting ahead is working again. For the eligible borrower who can find a property offered for sale at less than its replacement cost, these are the good old days.
"Disaster economics," Louis Bacon, progenitor of Moore Capital, said in explaining his decision to return money to investors who don't really want it, "where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets." Out of the frying pan, into negative-yielding government securities.
On Tuesday, the Swiss National Bank unveiled its latest astonishing feat of money printing. In just three months, April through June, the central bank of the gnomes created new francs at the annual rate of 756.9%, bringing foreign currency reserves to the grand total of Chf 406.5 billion ($420.2 billion), the equivalent of 71% of Swiss GDP. Sin isn't sinful because it isn't fun, or because it doesn't seem defensible.
We live in a technological golden age but in a monetary and fiscal dark age. While physicists discover the so-called God particle, governments print and borrow by the trillions. Science and technology may hurtle forward, but money and banking race backward. Now underway is an attempt to resolve the investment tension between technological progress and financial retrogression.
Let it be said that the Swiss don't usually go around tempting hyperinflation. It isn't like them. Manageable debts, low inflation and--over the sweep of decades--a strong exchange rate are the hallmarks of Swiss public finance. But facts are facts: In May and again in June, the Swiss central bank materialized new Swiss francs equivalent to 11.2% of the $573 billion Swiss GDP.
A subscriber laments, "the markets are so screwed up, with systematic interference with price discovery going on. How do you run a bank in this environment? Bank equities offer levered exposure to mispriced, distorted credit markets. It's difficult to have confidence in longs." Amen to that, but a cheap stock is a cheap stock.
With Spanish and Italian bond yields soaring; with panicked Spanish and Italian authorities banning the short sale of bank stocks; with Madrid, just having received approval for €100 billion with which to bail out Spanish banks, now finding itself on the other end of the cup; the proof is incontestable. It is, indeed, a world of sin and sorrow. The world is deflating--or is it inflating? Whatever it's doing, what can an investor do about it?
Chinese banks are ramping up their lending in Australia, while Wayne Swan, the Australian treasurer, petitions Beijing to make the Australian Dollar directly convertible into the Renminbi. Homing in on an Australian company that seems especially exposed to Chinese disappointment.
“The market to me feels, and I say ‘feels’ from having traded foreign exchange since the 1970s. It feels like it is being intervened in and being manipulated.” So commodity trader and paid-up subscriber Keith Bronstein advises Grant’s about the euro. Manipulation is in the air and in the markets.
Every April the Bank of Bernanke squares up accounts among the dozen Federal Reserve districts that constitute the Federal Reserve System. Compare and contrast the 17-nation euro zone, in which interbank accounts never do get settled. The decline and fall of central banking told through American settlements and European unsettlements.
The young, youngish and seasoned principals of Bienville Capital Management, New York and Mobile Ala., hold informed opinions on China, Europe, gold and the world’s monetary affairs. They travel, think, read and consult. And then, all at once, it came to them: The opportunity they were searching for is the one they are virtually sitting on.
The Bank for International Settlements, the central bankers’ own Swiss bank, comes down hard on runaway money printing in its brand-new annual report. Central bank assets today foot to $18 trillion or almost 30% of global output, double the ratio of 10 years ago. Maybe the monetary mandarins got early copies.
When two-year German government securities are priced to yield less than nothing and Martin Wolf, the cerebral Financial Times columnist, counsels panic (as he did only last Wednesday), an enlightened opportunist may begin to allow himself to think of the upside. What kind of opportunities is the old continent serving up?
Notables gathered at the University of California, San Diego, last week for a two-day meditation on China's brand of paper money. Will the renminbi grow up to rival the U.S. dollar? This publication is of one mind. Herewith a status report on some of our China-themed short-sale candidates.
Buy a house for half of replacement cost. Fix it up. Rent it at a gross yield in the low to mid teens. Talent and capital are rushing to implement this very strategy. "All the people you mention," says one such practitioner, "plus us, plus 50 of our favorite investment firms, could each go raise a couple of billion dollars and it would still not begin to put a dent into the market." Bye-bye to the McMansion phase of the American home investment cycle. Hello to the era of the McBargain.
Just seven basis points more than zero was the yield on Germany's zero-coupon notes of June 2014. The times may be troubled (they often are) and people may be desperate (someone usually is), but that doesn't mean that low-yielding sovereign debt is the last word in safety and soundness. Herewith an exploration of the alternatives.
In 1899, the president of the Equitable Life Assurance Society asked scores of respected American financiers about the future course of interest rates. Failing to anticipate the secular bond bear market that would begin in 1900, the eminent authorities unanimously erred. "Groupthink" may be a new coinage, but the phenomenon is as old as the financial markets.
To judge by deeds, not words, the Bank of Bernanke is as tight as a tick. Over the past three months, Federal Reserve Bank credit has shrunk at an annual rate of 9.3%. At the peak of QE2 one year ago, Fed credit was billowing at short-term annualized rates of as much as 47%. Waiting for QE3.
"The ocean was too big for the old man," was The Wall Street Journal's epitaph in 1906 for J.P. Morgan's flop of a shipping trust, International Mercantile Marine. Just as the elder Morgan's financial crown slipped in the wake of his failed merchant-banking gambit, so has Jamie Dimon's reputation suffered with revelations of JPM's imperfect hedge. But there is a difference.
According to China's National Bureau of Statistics, nominal Chinese GDP, sparked by a 20.9% surge in urban fixed-asset investment, grew at a year over year rate of 12.1% in the first quarter. Yet, according to China's heavy construction machinery trade group, sales of heavy equipment plunged in the same quarter--and in the same China.
Government-issued interest rates are the way forward, the Federal Open Market Committee commands. Inflation-adjusted yields are now, and may long remain, negative, it indicates. Income-famished savers can like it or lump it. We write not for the repressors, who never seem to listen anyway, but for the repressed.
A certain master limited partnership, in the business of transporting and storing natural gas, perhaps comes as close as any public security to delivering Fed-resistant income. The shares—not to be confused with Treasury bills, by any means—are priced to yield more than you might expect.
Almost exactly 20 years ago in these pages, the first modern Wall Street skyscraper featured as a case study in deflationary investing. Low commercial rents and strangling costs were the story line in 1992, as they had been in 1932. So how fares the Equitable building in 2012?
Last week brought a surprise cyclical sighting; a commercial mortgage-backed securities financing that dared show its face in the market with a combined—albeit rating agency adjusted—loan to value ratio greater than 100%. It was the first such occurrence since credit went to the hospital in 2008. Time for a new cycle?
This publication endorses no candidate for president except Grover Cleveland, the old gold-standard Democrat who, in any case, is dead. But we do support the price mechanism in all its commercial and monetary applications. And we reciprocally oppose policies that override or thwart the price mechanism, the Fed's interest rate policies most of all.
Your editor, in the spirit of unconditional devotion to the readers of Grant's, has read every word of the transcripts of Ben Bernanke's four March lectures to the students of George Washington University. They are a revelation, though what they reveal may or may not be what the chairman intended.
A zero-percent funds rate is tailor-made for an honest-to-goodness depression. Yet of course, there is no depression, only an unscintillating recovery from steep recession and wall-to-wall credit distress. Still, the Fed hews to zero percent as if it sees what others don't, or can't. What might these perils be?
Should management of this dwindling, idiosyncratically-governed media company succeed in journaling millions from the preferred holders to the common holders, the resulting ripples could be worth billions. A story about the sanctity of contract--or, as it appears to be in this case, the evanescence of contract.
The consequences of Beijing's variant on the so-called Asian development model come in two phases. The short run yields breakneck growth and worldwide acclaim for genius of the Chinese technocrats. The long run features a towering stock of unproductive assets matched by a teetering pile of debt. For a certain railroad holding company, the long run is here.
"The [Chinese] economy is shifting, it's changing," Ian Ashby, president of the iron ore division of mining giant BHP Billiton, warned in Perth on Tuesday. "Steel growth rates will flatten, and they have flattened." Actually, Chinese steel production was down by 13% year-over-year in January. "Flat" would be an uptick.
While 21st century Greek fiscal and financial management may leave a little something to be desired, the record of German monetary stewardship in the Hellenic Republic is supremely worse. During Nazi occupation in World War II, Greece suffered famine, pestilence, wholesale killings and hyperinflation. The last-named plague is the topic at hand.
Since the boom went boom, these pages have featured bullish accounts of houses for sale in a variety of exotic settings. We have sung the praises of the bargains on offer in Detroit, Marco Island, Fla., Fishers Island, N.Y., and the rocky Maine coast, to name a few places in which most people do not, in fact, live. We now turn to ordinary single-family houses in prosperous southeastern cities.
Love and marriage--and interest rates, too--are among the foremost drivers of nonagricultural land prices. You, Mr. or Ms. Grant's Subscriber, may or may not be a landowner, but you assuredly have an interest in the forces that push land values up or down. A primer on uninhabited acres.
Not even the worst hurricane lingers over one place for more than a day or so, yet the post-Greenspan property liquidation is entering its sixth year. Longtime residents of a certain Florida island attest that, for the most part, the bear markets are worse than the hurricanes.
Certified safe nowadays are bonds and buildings that yield next to nothing. Proof of just how safe they are, in fact, is how little they promise to return. Give us, instead, certifiably risky assets priced for a bad outcome, e.g., cast-off suburban office buildings valued at a steep discount to replacement cost.
When Agnico-Eagle suffered a production shortfall at its Nunavut, (Canada)-based Meadowbank mine last year on account of a string of accidents beginning with a wolverine and ending with a kitchen fire, it once and for all established that mining is a rugged and unpredictable business. Mindful of that truth, we undertake a review of one of the few pure-silver plays.
On Jan. 24, the IMF downgraded its forecast of 2012 global growth by 0.75% and its forecasts for China and India by 0.8% and 0.5%, respectively. The vehicles that were expected to drive 28% of global growth from 2012 through 2016 may be flashing "check engine" lights.
Last week, the U.S. Treasury auctioned 10-year inflation-protected notes at a 0.046% negative real yield, while Her Majesty’s Treasury issued four-year conventional notes at a 0.893% nominal yield. Seekers after no return don’t have very far to look. Making the controversial case for some return.
No claim as to cause and effect, but Newt Gingrich won South Carolina the day after he promised to name Lewis E. Lehrman and James Grant to co-chair a commission to study the feasibility of America’s return to the gold standard. The fundamental conclusions of such a commission may be foregone: We’re for it. As for the technique of getting from fiat currency to the real McCoy, that’s a harder nut.
If beautiful vistas were monetizable, a certain real-estate development company might be in the S&P 500 already. If well-conceived plans and managerial persistence were monetizable, ditto. But the corporate owner of these wide-open spaces is a case study on delayed gratification
Since the prior issue of Grant’s, Japan has tapped an additional $6.5 billion from the Federal Reserve’s central bank liquidity swap facility for a grand total of $20.5 billion. Central bank money printing may calm the waters of volatility, but it has other consequences besides.
Perversely, America's sovereign claims have appreciated as the American fiscal position has deteriorated. The more the government borrows, the lower the interest rate it seems to pay. The more evidently hopeless the long-range "entitlements" picture becomes, the higher bond prices seem to climb. A belated salute to the 29th president of the United States.
"To be properly bearish on China," said Grant's on June 3, "one must be similarly bearish on the things connected with the vast Chinese enterprise." Of course, China will eventually go the way of all state-directed abusers of bank credit and over-builders of real estate (risk off!). However, in counterpoint, there's nothing like a cheap stock (risk on!). The bearish case on a corporate jewel and the bullish case on an obscure non-jewel.
In 2011, the gold price was up by 10.5%, but the XAU gold and silver index was down by 19%. The record shows that patient holders of gold and gold-mining shares have fabulously prospered over the past 10 years--those few, that is, who can remain patient. Concerning "the colossal mismatch between the relevant duration of the asset class and the time horizon of a good chunk of its investing participants," it seems to spell opportunity.
Lost--or nearly so--in the year-end shuffle is the provocative fact that a certain Asian central bank joined the European Central Bank and a few needy others in the queue for dollars from the Federal Reserve's international swap facility. What a 14 billion drawdown may suggest about the health of some of the world's biggest banks. Meantime, a kind word for oversold U.S. regionals.