Jim Grant - A case for prolonged inflation and potential black swan event in Japan

First, here’s the link to the highly recommended The Market NZZ interview: https://themarket.ch/english/jim-grant-japan-is-perhaps-the-most-important-risk-ld.8232

The consequences of low-interest rate regime taking shape worldwide

The global monetary regime in place has created an artificially low rates of interest the consequences of which include rampant misallocation of capital and great gusts of speculation including highly leveraged corporates and private equity markets. That’s the essence of an inflation generating system

Only the rate of inflation growth has subsided, not the actual inflation itself

The nature of fiat currency system is such that the loss in purchasing power due to inflation is never recovered. The world is currently witnessing an elevated level of average prices with muted rate of increase in these prices. Still, we are in a system that is inherently inflationary

On bond market cycles….

The last great secular bear market in bonds began in 1946 and ended in 1981. It was then followed by an even more prolonged bull market that began in October 1981 and perhaps ended in 2020 when 10 year treasury yields went to 0.5%. The bond bull market is over now, heralding an era of higher interest.

Japan is perhaps the most important risk in the world

The Bank of Japan is buying Japanese Government Bond (JGB) in billions of dollars to keep yield within a specified range as part of governor Kuroda’s yield curve interest rates suppression program. The BoJ announced it will not stop until there is inflation. Well, the CPI inflation has risen to 4% in December and several corporates have announced significant wages increases. Sooner or later, the BoJ will have to give in and pivot.

Implications of higher interest rates in Japan - flight of capital to Japan and increased volatility in developed markets

Enormous amount of Japanese assets, about USD 3 trillion, is invested in developed economies. As per Bloomberg estimates, Japanese assets constitute 7.3% of America’s GDP, 7.5% of France’s, 8.3% of Australia’s and 9.5% of the Netherlands’ GDP. Once Japanese interest rates rise, there will be a repatriation of this capital back into Japanese markets. resulting in volatility in developed economies.

Weakling fiat system

We all have gotten used to the fiat system that has been in place in 1971. The Central Banks cannot keep on printing money to maintain a suppressed interest rate regime for an extended period of time. At some stage, we will have to look for an alternative and that alternative may just be gold.

There’s more pain to come in the equity markets

The market has come down from extremely overvalued to nearly expensive territory and an extremely overvalued market does not normally bottom out at nearly expensive.

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