Submitted by Taps Coogan on the 12th of March 2018 to The Sounding Line.

Legendary market commentator, interest rate expert, and founder of Grant’s Interest Rate Observer, Jim Grant, recently spoke with Erik Townsend on Macro Voices to discuss whether or not the current 35 year bond bull market is finally ending and to discuss the massive credit bubble that has formed in China.

Mr. Grant noted:

“On historical form, when one of these bond cycles get started it just keeps going and the rhyme and reasoning for it is apparent mostly in retrospect. It might help to anchor one’s perceptions of current day interest rates with a little bit of historic perspective. So there is a page turner of a book called ‘The History of Interest Rates,’ no doubt you have one by your bedside, and I called up the still-living co-author of it, Dick Sylla, who was a professor of financial history at NYU, and I said ‘Richard I have read many, but not every page of your magnificent narrative. Tell me, in the 5,000 year history of recorded interest rates, have there ever before been substantially negative nominal bond yields?’ Not just Treasury bill yields mind you, but bond yields, and Dick thought for a second and said no. So a 5,000 year first… As of… July 2016 I think there was something (like) $11 trillion worth of sovereign debt priced to yield less than nothing. Alright, so there was a paper that came out at the Bank of England a couple months ago and a very important observation, to me at least, which was as of early July 2016, the 10-year Treasury, quoted as it was at 1.36% or something below, this was the lowest reading ever recorded on a global benchmark sovereign 10-ish year yield and it goes back to the 1300s. So we are looking at a truly apical low in the summer of 2016… and I think… this will be the backdrop to a very long cycle of rates to the upside.”

On China:

Erik Townsend: “Now this massive massive accumulation of debt, people like you and I can say ‘this is crazy, the rate that it’s happening at,’ but holy-cow look at China. They are in a whole different category of rate of accumulation of national debt. It seems to me like they are trying to almost race the United States to see who can get more over-indebted faster.”

Jim Grant: “No they’ve won. They’ve won, there’s no contest… I’m going to describe it not in terms of national debt but I’m going to describe it in terms of bank credit. So, as of the end of 2017 Chinese commercial banks showed assets of $40 trillion… and that works out to… a little more than 50% of total world GDP. Now for this there is no precedent on Earth. More perspective: at the end of last year US commercial banking assets were about $17 trillion in the context of a $19 trillion US economy… Let’s go back to China. $40 trillion on the banks’ balance sheet and the economy was something like $13 trillion in China. So this is a stupefying, an astonishing, literally a fantastic state of affairs in China. They have reinvented the sense of what’s possible. I think it was 2016 maybe that the Chinese expanded banking assets by 60.5%. Now if a single bank was expanding at that rate, you’d fear for its insolvency because you would have a proper suspicion of the credit protocol and lending officers. How could they lend that fast and to whom and to what end? But the Chinese have been growing at such breakneck speeds and this debt has been in the service of all manner of infrastructure and real-estate so the asset bubbles have been equally stupendous… Our sense is that one term presidencies in China are better than two terms and that better than either would be emigration. So we think that Xi Jinping is the president for life in the wrong country. So it’s just amazing what is happening in China and I think that it represents a clear and present danger to everyone with money and risk, not just the Chinese, not just the real-estate markets in favored countries, favored by the Chinese such as Australia, not just in the industrial metals markets, you know China has been 100% of the demand for, the margin for, steel and the like. This debt things is a very very important low hanging dark cloud hanging over the world and we’ve all gotten used to it.”

There is much more to the full interview so enjoy it below:

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