My publishers called this book The Forgotten Depression. I'm hoping future editions might be less self-effacing and appear under the title: The Previously Forgotten Depression.
OR: So, coming back to today, you've said the logical investment is gold.
Grant: A logical investment. Certainly not the only one.
You can't really sell short the shares of a central bank. Nor do you actually want to be short the Federal Reserve when it is making -- and I use the word advisedly -- tens of billions of dollars on its riskless purchase of treasury bonds.
But the reciprocal of the success of our monetary policies, the reciprocal of the world's faith in the people who manage the central banks, the Draghis and the Kurodas and the Yellens, is the price of gold. The higher the price of gold, the less the demonstrated or expressed faith in these institutions. The lower the price of gold, the greater the expressed complacency in these institutions and their management.
I recently read Nouriel Roubini’s critique of the poseurs, hacks, and morons who criticized the mandarins running our monetary affairs. He is right, to a degree, that some of us expected a much greater reaction against QE. More inflation, a much higher price of gold, or a much greater sense that this was the wrong thing to do. Not a verbal sense but visual evidence that the thing had failed. But by the lights of the world, QE has succeeded. So, an investment in gold -- “speculation” is the better word, because gold returns no earnings or interest -- a speculation on gold is a speculation on the eventual demonstrated failure of these policies.
The reason I'm so bullish on gold is that I am of the staunch conviction that these monetary policies will go down in history as a terrific fraud. Not the fraud of corrupt or evil people, but a fraud perpetrated by people who thought they knew more than they do. These same academics, these same creators of monetary models indecipherable to the layman, were all in power in 2004 (and 2005 and 2006 and 2007 and 2008). They missed the biggest monetary event of their professional lives. They have demonstrated conclusively that they can't see into the future.
In fact, the more we talk, the more bullish on gold I get. I'm going to place a quick call now to buy some more of this stuff.
OR: Do you prefer gold stocks, or gold itself?
OR: Both. Got it.
Grant: I buy gold bullion as a cash-management asset here at this mighty publishing enterprise we call Grant’s Interest Rate Observer. I buy also for myself: gold mining shares. I'm most keen lately on Barrick Gold (NYSE:ABX), which has, in my mind, all the attributes of a promising investment. People despise it. It has a very checkered recent record and people are projecting that recent record out into the future. It is overly financially leveraged. This leverage is heaped on top of the geological leverage that’s part and parcel of mining operations. The people who manage it have succeeded in alienating all the gold bugs in the world because they went out and bought a copper mine with a lot of borrowed money, outbidding in the process one of the state-owned mining businesses of the People's Republic of China. So Barrick has done everything wrong. However, as I see the situation, it is about to do everything right. New management, great gold properties in more or less friendly countries. They are going to dispose of some non-core assets. It seems to me as if Barrick is going to do itself proud and make its shareholders a very happy bunch.
OR: You spoke once before about a different ABX, and people were wise to listen. Wasn't that the short prime ticker?
Grant: What a kind memory you have.
OR: And now you're giving them another ABX at $12?
Grant: You have to come in more often. But I want to transition from the mortgage problems of the early and mid-Oughts to the present-day global market in sovereign debt. In 2004, 2005, 2006, 2007, and 2008, everyone owned mortgage-backed securities because they were deemed safe, because the regulators wanted you to own them, because the ratings agencies pronounced them to be an investment-grade product. So the world was in for a very wrong price, as it turned out. People who saw this as a great prospective short sale observed that these mortgage-backed securities were priced at 102 cents on the dollar. If everything went well, you might get 103 cents. If everything went the way it should have gone, based upon the trend and housing prices and the like, you would have gotten zero cents on the dollar. The risk-reward was phenomenal.
Fast-forward to the present day. You asked about negative interest rates. Now, owing to (among other things) arbitrary regulatory capital ratings, sovereign debt is the most advantaged asset class. The world’s banks, especially, have to own these because they're deemed to be intrinsically safe. And remember: there ain't no intrinsically anything in asset value. It’s all a matter of cash flows and price.
It seems to me there is a haunting parallel between the mortgage problems of the mid-2000s and the sovereign debt opportunity, as they call it, of the present day. People are buying that stuff because a greater fool (or a greater central bank) is going to buy it after them. At the current Grant’s conference, Paul Singer -- one of the voices of the big short then -- proposed that the bigger short is in sovereign debt now.
OR: Why do you think people hate gold so much? Is it because they've lost money? Is it political?
Grant: They haven't made money. The bull market in gold, I say, is still going strong. It was a $19 stock, as it were, at $1,900, and it’s pulled back to a $12 stock. But the move in gold from 1998 to 2011 was a relentless move up, much better than the stock market. Nobody believed it. Gold is, first of all, an object of scorn for the clerisy of central bankers and academics because it is the legacy money that was in business thousands of years before the birth of John Maynard Keynes. The successor currency, the government-conjured kind, affords employment to the chattering classes. The Fed is the biggest employer of Ph.D. economists in the world, I think. The gold standard worked without economists.
James Grant, financial journalist and historian, is the founder and editor of Grant’s Interest Rate Observer. His most recent book is The Forgotten Depression, 1921: the Crash That Cured Itself.