Jim Grant, the editor of Grant’s Interest Rate Observer, is a long-standing critic of the US Federal Reserve and central banks in general. He thinks that those expecting the Fed to hike interest rates this year will be disappointed, he told CNBC earlier this year. The Federal Reserve has “missed its market” and the next move is more likely to be a cut.
Economic data suggest that the manufacturing sector is either in recession or flirting with it. For example, the inventories of auto companies are building, suggesting that they have increasing trouble selling the stock of cars that they have.
However, Grant thinks that even more loosening would not be enough to revitalise the economy. The “persistent radical monetary experiment” of ultra-low interest rates has led to the Federal Reserve being put in charge “of market manipulation”. This has “been great at boosting real assets, but not the real economy”.
Although “things are clearly better than they were in 2008, America has been going through “the slowest recovery in living memory”, with “young people unable to break into the world of work”. Overall, the “horse of speculation” is “ahead of the cart of enterprise”.
Grant is bearish on asset prices, likening the stock and bond markets to a “little kitten stuck at the top of a tree”, with Janet Yellen left looking on like a “helpless” firefighter saying, “how did you get up there little fur ball?” The combination of “sky-high asset markets and softening activity” suggests the world could be “entering the down portion of the credit cycle”. The outlook is very unclear, but“we will know more where we are in two years’ time”.