John Michaelson on the trouble with ultralow interest rates

Superlow rates function like Robin Hood in reverse.  They take from retirees and frugal working people who can’t get a decent, risk-free return on their savings and give to the rich, who own most of the appreciating assets.  Would-be home buyers might be clamoring for rate cuts, but low mortgage rates don’t make homes cheaper when we can’t (or won’t) increase supply.

Cheap money promotes unhealthy consolidation in the business world, sustains staid corporate incumbents at the expense of innovative newcomers, and promotes the financialization of the economy.

In short, bankers and private-equity firms love cheap money.  The rest of us get very little out of it.

And yet the Fed’s every instinct is to return to low interest rates.  Its decadelong adherence to low rates and quantitative easing wasn’t based on empirical evidence.  Rather it was based on theoretical models and untested academic dogma.  Unfortunately, the Fed is still dismissive of real-world evidence that ultralow real rates are associated with anemic growth.

~ John Michaelson, Michaelson Capital Partners, "The Era of Low Interest Rates Is Over. Good Riddance.," Barron's, December 7, 2024

Peter Schiff on bank failures: "the entire house of cards was directed by the Fed and U.S. government"

I warned for years that the banks will start collapsing for the precise reason that they're collapsing now: the Fed kept interest rates at zero for so long.  That's what allowed the institutions to load up on overpriced, low-yielding Treasuries, mortgage-backed securities and other loans.  Plus U.S. government auditors from the Fed, FDIC, they encouraged the banks to buy these long-term Treasuries and mortgage-backed securities because they gave favorable accounting treatment.  The banks didn't have to mark them to market as long as they could pretend they would hold them to maturity.  So the entire house of cards was directed by the Fed and the U.S. government, and now it's collapsing and they're acting like they have nothing to do with it and they're tying to figure out how to put out a fire that they lit.  And of course the problem is they're not putting out the fire, they're throwing gasoline on it.

~ Peter Schiff, interview with Fox Business, 4:05 mark, May 4, 2023

Jim Grant on SVB's $73 billion loan portfolio

What zero percent interest rates do is bring on the phenomenon of zero gravity finance.  Imagination displaces analysis.  And if you are in the business of projecting technology out into the wonderful 10 or 20 year realm, there's nothing like zero percent rates to facilitate that exercise of imagination.  And that's what Silicon Valley Bank had going for it.  So this portfolio - $73 billion loan portfolio - I think might also have been problematic.

~ Jim Grant, CNBC interview, 1:25 mark, March 16, 2023

Brian Chesky on priorities, easy money and discipline

In life, one of the things I learned from the pandemic is you can do anything you want in your life; you just can't do it all at the same time.  You have to have ruthless prioritization.  And one of the pitfalls of tech the last 10 years - especially the last 5 years - is probably a plethora of capital.  Too much money.  And too much money means too many things at the same time.  And so we had to get really disciplined.  We said, "what we need to get focused on is great customer service and getting enough hosts."  And those became our priorities.

~ Brian Chesky, Airbnb CEO, interview, Bloomberg TV, November 18, 2022

Phil Grant on Ben Bernanke being awarded the 2022 Nobel Prize in economics

This morning, the Royal Swedish Academy of Sciences announced it will award the 2022 Nobel Prize in economics to a trio of economists including Ben Bernanke, Fed chair from 2006 to 2015 and author of the central bank’s zero rate-cum-asset purchase response to the global financial crisis.  Recall that, in response to a query from 60 Minutes in 2010, Bernanke expressed “100 percent” faith in the Fed’s ability to keep a lid on inflation, adding that: "We could raise interest rates in 15 minutes if we have to." 

More broadly, Bernanke’s longstanding advocacy for the discretionary, “Ph.D. standard” of monetary management remains a stance worth scrutinizing.  In a February 2004 speech, the then-Fed governor extolled the virtues of the “great moderation,” i.e., a decline in volatility across both inflation and economic growth metrics that prevailed since Paul Volcker tamed inflation in the early 1980’s.  Among his conclusions: 

The historical pattern of changes in the volatilities of output growth and inflation gives some credence to the idea that better monetary policy may have been a major contributor to increased economic stability. 

Few disagree that monetary policy has played a large part in stabilizing inflation, and so the fact that output volatility has declined in parallel with inflation volatility, both in the United States and abroad, suggests that monetary policy may have helped moderate the variability of output as well. 

Everything in moderation, even moderation.

~ Philip Grant, "Crowd Control," Almost Daily Grant's, October 10, 2022

Nassim Taleb on ZIRP: "we've had 15 years of Disneyland"

I think that we've had 15 years, 14 1/2 years of Disneyland that basically has destroyed the economic structure.  Think about it, no interest rates.  So anyone who's, say, 40 years old, has no experience in markets.  Zero.  They don't know what time value of money is.

[...]

So that generation of people who have the wrong instinct, they have the wrong methods, those who made a lot of money during that period are basically the least fit for real markets.

~ Nassim Taleb, CNBC interview with Andrew Ross Sorkin, 0;15 and 3:00 mark, September 15, 2022

Kevin Duffy on the downside of ZIRP

In addition to fake news and fake science, we now have fake interest rates sending fake signals to businesses and investors attempting to allocate capital, and to governments more than willing to squander it.

~ Kevin Duffy, The Coffee Can Portfolio, May 27, 2020, p. 12

Jim Grant on interest rate management since 2000

The federalization of American finance didn't come of a clear, blue, free-market sky.  The government has met every cyclical disturbance since 2000 with lower interest rates and heavier applications of what is fastidiously called "financial repression."

~ Jim Grant, "A short history of making things worse," Grant's Interest Rate Observer, May 1, 2020

Jim Grant on unintended consequences of ZIRP and complacency about inflation

So one of the other unintended consequences of this 10 years of suppressed interest rates and predictable Financial interventions by the Fed, well they’ve given us near record-high equity valuations — they did about 15 minutes ago until it ended or at least paused. We don’t know. They gave us, perhaps, more corporate debt for unit of corporate earning power than ever before, and much of this debt is very low quality. They have given us unicorns. They have given us zombies. They have given us all manner of things, some pleasant to be sure but many corrosive.

What they have not given us is any economy wide or political community wide new revelation into the dangers of the manipulation of the most sensitive prices and capital, namely interest rates. That’s my hobby horse but I think it’s a very dangerous road. We haven’t even talked about inflation. Nobody talks about inflation, right?

Imagine we were even in this conversation, like 35 or 40 years ago, when inflation was still at thing, and I said, Albert, what do you suppose the consequences might be of an immense infusion of new bank credit and to the fiscal program that is likely to reach 10% of GDP? How will you guess that would affect the price level?

And you would think to yourself, that idiot. And you would say, because you’re polite, Jim, I suspect that might lead to above higher inflation. But today no one thinks that. You can look at the futures curve and various interest rate derivatives that reflect current thinking on the likely course of rates and inflation and they’re flat.

Nobody is anticipating any adverse inflationary outcome from this, which I find is a remarkable commentary on the complacent thinking. You’re not thinking of complacency with, on most days, VIX readings at 75 and 80. But with respect to inflation and its prospects, there is certainly complacency rampant[ly] so.

~ Jim Grant, "Nobody Knows Anything," interview with Albert Lu of Sprott Media, March 24, 2020

Ben Bernanke: "Easier financial conditions will promote economic growth"

Easier financial conditions will promote economic growth.  For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.  Lower corporate bond rates will encourage investment and higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

~ Ben Bernanke, Washington Post op-ed, November 4, 2010

Jim Grant on ZIRP and "a compromise in the corporate immune system"

For ten years, or thereabouts, central banks of the world have taken it into their power to guide - indeed some might say (Grant's has said) - to suppress or to manipulate what is arguably the most sensitive or most important rate in capitalism, which is the rate at which we discount future cash flows, measure financial risk, and set investment hurdle rates.  That rate of interest, on average, has been under the thumb of our, to be sure, dedicated public servants.  Arguably, the price set by the central banks has been - certainly it's a controversial price - on the evidence of the massive buildup in financial leverage in the corporate and financial sectors - not the banks, mind you, but elsewhere - that price has been too low.  And is it not possible that the consequence of the manipulation of the rate of interest has led to as it were, since we're all epidemiologists now, a compromise in the corporate immune system such that an exogenous shock like this has dealt a blow to finance - has instituted a panic - such that might not have occurred had risk been priced in the market and rather than through administrative means?

~ Jim Grant, Grant's podcast interview with Mervyn King, March 27, 2020

Kevin Duffy looks under economic hood and applies free lunch fallacy to NIRP and QE

There is no free lunch. Polices like negative interest rates and Quantitative Easing are doing damage to the underlying economic engine. They misallocate capital, discourage thrift and promote fast money over slowly building wealth. At the end of the day, central banks are not all powerful. They are not immune to the laws of economics.

~ Kevin Duffy, "Central Bankers Are Starting to Lose Control," The Market, November 19, 2019

Kevin Duffy on the impact of a decade of ZIRP on corporate America

A decade of zero interest rate policy has not only turned all traffic lights green, but many income statements red. Profitability and growth have become mutually exclusive terms. Apple sports a 25% operating margin, but revenues are declining as it surrenders market share in a saturated and competitive smartphone market. Meanwhile, newly public companies like Uber and Slack Technologies are growing revenues north of 40% while losses are counted in the billions.

~ Kevin Duffy, "Remembering a Year to Forget," The Market, July 8, 2019

Jim Grant is asked about Fed chairman Jerome Powell's press conference and stock market's negative reaction

Grant: I don't think it's a matter of communications policy.  I think it's a matter of substance.  To me, the clear and present risk is the consequences - unintended though they may be - of ten years of suppressed and distorted interest rates with the attendant distortions in both the so-called real economy and especially in the financial economy where leverage has been piled upon leverage.

CNBC: So this is inevitable, this kind of negative reaction.

Grant: Certainly after ten years of the lowest interest rates, literally in the 3,000 years of recorded history.

CNBC: We get that you didn't agree with the policy before, but right now are they making a mistake?

Grant: It's not a question of agreeing with it.  The consequences of ten years of distorted interest rates are things that we can't always see, but which are nonetheless there.  For example, the distortions of the leveraged loan market with fine print that's supposed to protect investors has been eviscerated or written down.  Green investments proliferate because there are no interest rates.  Interest rates are meant to measure risk, discount future cash flows and set investment hurdle rates.  When those things are absent or distorted, decisions in real time - real things - are not as they might be.  And exactly what is wrong is revealed in time.  Now, the stock market is a forward looking indicator.  The economy is not a forward looking indicator, right?

~ Jim Grant, interview on CNBC, December 19, 2018

Jim Grant on the great interest rate suppression experiment

An interest rate is a price.  Prices convey information.  Distorted prices convey misinformation.  Build a new factory?  Reckon the value of a future cash flow?  Deduce financial risk from a credit spread?  Manipulated rates give you the data you need to arrive at the wrong conclusion.

Like the flu, mispricing is communicable.  Like a sneeze, arbitrage transmits the disorder from one place, and one asset class, to the next.  Pygmy interest rates lead to tiny real-estate cap rates and towering equity P/E multiples.

~ Jim Grant, "Meet the Carrefour S.A. senior unsecured 1 3/4s of 2022," Grant's Interest Rate Observer, September 22, 2017

Donald Trump on Janet Yellen and her low interest rate policy

I like her, I respect her…I do like a low interest rate policy, I must be honest with you.

~ President Donald Trump, interview with The Wall Street Journal, April 12, 2017

RBS Securities analyst on the return of synthetic CDOs

Synthetic CDOs are sort of the natural evolution, and in many respects the final frontier, of investors’ search for yield against a backdrop of historically low interest rates. I think the big takeaway here is, ironically, the Fed and regulators are forcing investors to the darkest corners of the structured finance market and the structured credit market to find yield.

~ Richard Hill, RBS Securities analyst, "Behold the Ghosts of Bubbles Past," Bloomberg Businessweek, April 1, 2013

David Einhorn on income inequality

Ending the jelly-donut monetary policy [sugar high from ZIRP] would do more to alleviate income inequality than any of the widely debated changes in the tax code.  For the super wealthy, zero rates supported by a Bernanke put on the bond market encourage outsize income through leveraged speculation.  For everyone else, zero rates reduce the standard of living because greater food and energy costs soak up income.

~ David Einhorn, Spring Grant's Conference, 2012, as reported in April 20, 2012 issue of Grant's Interest Rate Observer, "Dollars to donuts"

Leon Cooperman: "ZIRP will work"

Ultimately, the policy of zero percent interest rates by the Fed will work.

We're overweight energy and the economy is slower, but we are not going into a recession.

~ Leon Cooperman, as appeared on CNBC, August 18, 2011

David Stockman on the Fed's Zero Interest Rate Policy

The destructive result of the Federal Reserve's earlier housing and consumer credit bubble became the excuse for embracing a destructive zero interest rate policy which is self-evidently fueling even more destruction. This destruction is namely, the exploitation of middle class savers; the current severe food and energy squeeze on lower income households; the illusion in Washington that Uncle Sam can comfortably manage $14 trillion in debt because the interest carry is close enough to zero for government purposes; and the next round of bursting bubbles building up among the risk asset classes. [...] So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to US economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000.

~ David Stockman, "Federal Reserve’s Path of Destruction," MarketWatch, 2011