Jim Grant: "Bond Markets Worldwide Are Living In Their Own Hall Of Mirrors"

Welcome to economic 'fantasy' island.

Jim Grant, the world's most famous interest rate observer, ventured on CNBC this week to expose and explain the utterly farcical world of financial markets (and in particular, risk assets) and how grotesquely distorted global bond markets have become.

He began with an example...

“As an example of where the world is mispricing interest rates... look to Italy, which is having a big [potentially disruptive] election on Sunday...

...there is a speculative grade Italian security, Telecom Italia, the 5 1/4’s of 2022 are trading at 0.61 percent, that is a junk bond with a zero handle.”

This bond traded with almost a 6 handle just 5 years ago...

Thank you Mr Draghi.

But it doesn't stop there, Grant warns...

"...and since interest rates are critical in the pricing of financial instruments, these distortions preceded the uplift in all asset values.. and the manifestation of this manipulation is in many ways responsible for what we are now seeing in the markets."

These distortions and the chaotic aftermath of their withdrawal are exactly what current Fed Chair Powell warned of in 2013...






While Powell is anxious, Grant reminds listeners that the 'end of the bond bull market' does not necessarily mean disruptive change..."it took ten years for the long-dated Treasury to move from its low in 1946 of 2.25% to 3.25% in 1956..." but, as Grant points out, it's different now, "that was before risk parity and the leverage that is now in financial instruments surrounding the bond market."

However, Grant warns that he "suspects the tempo of a bond bear market will indeed be faster now than it was in 1946-56."

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Once again Grant is correct in his diagnosis of the symptoms... and the prognosis - all of which reminds us of his rhetorical question - What will futurity make of the [so-called] Ph.D. standard [that runs our world]?

Likely it will be even more baffled than we are. Imagine trying to explain the present-day arrangements to your 20-something grandchild a couple of decades hence - after the crash of, say, 2019, that wiped out the youngster's inheritance and provoked a central bank response so heavy-handed as to shatter the confidence even of Wall Street in the Federal reserve's methods...

I expect you'll wind up saying something like this:





We seem to have miscalculated."

Source: Jim Grant's November 2014 speech at the Cato Institute