James Grant: Expect 'Higher For Much, Much, Much Longer'

Inflation & interest rates more likely to rise than fall in the years ahead

Between February 2022 and August 2023, in order to combat hot inflation, the Federal Reserve rocketed its discount rate from near 0% to 5.25% -- the most aggressive interest rate schedule in living memory.

Since then, the Fed has kept the rate at 5.25% -- the 'higher for longer' era

But despite this, even when paired with Quantitative Tightening, economic growth has remained robust, inflation is sticky, unemployment remains under 4%, and the stock market is at all time highs.

In short, the Fed's aggressively restrictive policies haven't cooled things down much.

They've been so ineffective that even the Wall Street Journal is asking: Do interest rates really matter anymore?

To find out, we have the great fortune of speaking today with perhaps the world's foremost living expert on interest rates, James Grant, founder and editor of the highly-respected market journal Grant's Interest Rate Observer.

Jim expects interest rates are going to remain “higher for much, much, much longer” from here. And that the cumulative Lag Effects from that are going to be quite painful.

To learn why, click here or on the image below:

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Adam’s Notes: James Grant (recorded 5.29.24)

EXECUTIVE SUMMARY:

• Jim predicts that interest rates will remain high for much longer than expected, drawing from historical trends of multi-decade cycles. For example, the period from 1946 to 1981 saw persistently rising interest rates, while the following 40 years experienced declining rates. He believes the current era marks the start of another multi-decadal cycle of rising rates.

• High interest rates make banks more vulnerable due to their impaired assets, such as bonds and leases from a low-interest era. Many banks have hundreds of $billions in unrecognized interest rate losses. If commercial real estate continues to deteriorate, it could render many banks insolvent, as noted by experts like Paul Kupiec and Thomas Hoenig.

• The banking system's risk is heightened by potential downturns in commercial real estate, particularly in office buildings. Hundreds of banks have a high ratio of commercial real estate exposure to Tier One capital, making them susceptible to downturns in this sector. Grant highlights that the banking system lacks a sufficient margin of safety to absorb significant losses in commercial real estate.

• Persistent inflation, which Jim expects, will exacerbate