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Jim Grant: Cash is the Only Sensible Asset Now

Wednesday, 25 May 2011 09:01 AM

Nearly everything investors might want to buy now is overvalued, and the nearly the only asset that makes sense is cash — to be ready to invest when the next, inevitable collapse occurs, says Jim Grant, editor of Grant’s Interest Rate Observer.

In an interview, Grant places the blame squarely on the Federal Reserve, which he charges with taking upon itself the misplaced mission of pumping up stock values in order to fake a short-term recovery.

The S&P 500 Index has risen 15.6 percent since the Fed renewed its “quantitative easing” policy in August 2010. The latest round, known as QE2, is schedule to end next month.

“The Federal Reserve has unilaterally taken it upon itself to levitate asset prices. It is suppressing interest rates. When you're not getting anything on your savings, you are inclined to go out and buy something, anything, to generate either income or the expectation of capital gains,” Grant tells The Associated Press.

“So the things that we take as prices freely determined are, in fact, manipulated.”

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Fed Chair Ben Bernanke
(Getty Images photo)
Grant laughed at Federal Reserve Chairman Ben Bernanke, who recently spoke positively of the stock market making new highs, specifically the Russell 2000, which tracks small-cap stocks. Small caps often see accelerated gains early in an economic recovery.

“He sounded like another stock jockey. He was taking credit for new highs in the small-cap equities index. The Fed, as never before, or rarely before, is now the steward of this bull market,” Grant said. “One wonders what it will do if stocks pull back significantly.”

The proper course, last followed in the depression of the early 1920s (not the later Great Depression) was to let assets fall to the accurate price levels, Grant explained. That is the “fast and ugly” approach, but it leads to a quick recovery.

“The slow and ugly approach is to mitigate, temporize, and forestall to give us time to work ourselves out of difficulties,” Grant said. “That's the current approach. I think it's intended to be a more humane approach, but I wonder about its humanity. I mean these college kids get out of school and they've got nothing. It's awful, 9 percent unemployment and going nowhere except sideways.”

Grant predicted inflation would get to double-digits before long, no matter what the Fed says it about now, and he believes that the Fed will reenter the markets soon after the latest round of quantitative easing ends, and possibly stay in for quite a long time — QE3 through QE “N.”

“It does seem improbable that the inflation rate would ever get beyond 3.5 percent, let alone knock on the door of 10 percent. But I'm here to tell you it's going to 10 percent,” Grant said.

The voting members of the Fed are likely to turn their attention toward inflation expectations, reports Bloomberg News, which points out that the breakeven rate for inflation-protected Treasurys (TIPS) suggest that investors are significantly more worried about rising prices than consumer prices might reflect.

Rising expectations of inflation can contribute to the early onset of inflation itself, as Fed members know from research.

“If inflation persists or if inflation expectations begin to move, then there’s no substitute for action,” Bernanke told reporters following the last Fed decision on interest rates. “We would have to respond.”

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Nearly everything investors might want to buy now is overvalued, and the nearly the only asset that makes sense is cash to be ready to invest when the next, inevitable collapse occurs, says Jim Grant, editor of Grant s Interest Rate Observer. In an interview, Grant...
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2011-01-25
Wednesday, 25 May 2011 09:01 AM
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