11/08/02: Market Monitor-James Grant,Editor "Grant's Interest Rate Observer."
PAUL KANGAS: My guest market monitor this week is James Grant, Editor of the popular publication "Grant's Interest Rate Observer." And welcome back to NIGHTLY BUSINESS REPORT, Jim.
JAMES GRANT, EDITOR, GRANT'S INTEREST RATE OBSERVER: Thank you, Paul. Nice to be here.
KANGAS: Do you believe Wednesday's half percent cut in the Fed funds rate marked the end of the down trend for interest rates? And, in any event, why would the Fed cut so aggressively while at the same time elevating its view of the economy from weak to neutral?
GRANT: Well, central bankers, no more than diplomats, are held to the literal truth in our society. And I think what the Chairman of the Fed meant to say is I am really scared. I'm cutting the rate by one half of one percent, but I'm going to say I'm not scared.
KANGAS: Do you think the Fed sees the threat of deflation?
GRANT: Interestingly, the Fed is worried about the threat of no inflation. And think about what that means. It means that the powers that be want the currency in which our savings is denominated, they want that currency to depreciate. Inflation is a part of the institutional structure of American finance and the absence of inflation is a very worrisome thing to the Federal Reserve system. So levered, that is to say, so indebted is the economy that the absence of inflation presents, paradoxically, a big problem. And I think that we all ought to reflect on what that means. What it means is that the dollar is meant to depreciate. That is the public policy of the United States government and we ought to take, I think, the proper steps to offset that.
KANGAS: That is a very interesting observation. Getting to your recent visit with us, your strategy has been to wring out as much income from the financial markets as possible without taking big risks.
GRANT: Oh, it's a very begrudging world, the yield world.
KANGAS: Absolutely. But your "buy" recommendation last April was Anoly Mortgage (NLY), which had a huge 15 percent dividend at the time. The stock was then $16. It went as high as $21 in late June. Now it's back to around $17. So it really worked out nicely getting dividends all during this period. But doesn't the hefty yield suggest buy risk?
GRANT: Well, it does. On its face, it is terrifying. The stock yields on $15, but on a run rate, if you project it, which is dangerous, I guess, it's 16 percent plus. What does this thing do for a living? What is it? Anoly, first of all, I should declare an interest. I'm an interested party in this thing.
KANGAS: OK.
GRANT: But Anoly is a leveraged mortgage real estate investment trust, meaning that the management of Anoly, symbol NLY, speculates in these volatile things called mortgages. Mortgages are a very, very tricky fixed income asset. You know, if interest rates go down, you get your money back before you want. If interest rates go up, your asset lengthens in duration. These mortgages are very difficult to manage and every once in a while you open the "Wall Street Journal" and see that a leveraged portfolio has blown up. It happened a couple of times recently. So make no mistake, the management of Anoly speculates in mortgages. It does it on a leveraged basis. I think that they know what they're doing. They have demonstrated that over the years. I have every high regard for them, but the yield reflects the market's skepticism about the likelihood of a yield being sustained. So people, I think, ought to regard this as a very prudent speculation, seemingly a contradiction in terms, but --
KANGAS: So obviously you still like Anoly's stock here?
GRANT: I do, indeed.
KANGAS: Now, you apparently see a rather dull stock market in general ahead. Do you have any other recommendations along the yield line, then?
GRANT: Well, this is a 3.8 percent world. That's what the Treasury 10 Year note yields.
KANGAS: We just a minute left, Jim.
GRANT: Oh. So what we ought to do is think about ways of balancing risk and reward. So Anoly provides you with a lot of yield. You shouldn't speculate with the other fixed income assets you own. Settle for very low yields and spice this thing, your portfolio, up, with Anoly. Buy some gold or gold mutual funds because the dollar is meant to depreciate. There is something called the Treasury Inflation Protected Security --
KANGAS: Right, TIPS, yes.
GRANT: -- which gives you a 2 1/2 percent real yield, which is not so bad in a world of lowering profit margins.
KANGAS: So you're cautious on the market. You think it's going to be dull, and for several years?
GRANT: Oh, I don't know. I mean it astounds me that we have two and a half plus years into a bear market and stocks are still not cheap.
KANGAS: All right, we've got to leave it there, Jim. But thanks very much for being with us.
GRANT: Thank you, Paul. A pleasure to be here.
KANGAS: My guest, James Grant, Editor of "Grant's Interest Rate Observer." |
