The Fed Desperately Needs James Grant to Preserve Its Faux Mystery
Chesapeake Energy is the latest oil company to file for bankruptcy. With oil in the high thirties per barrel, the corporation has lost the ability to service its debt.
Notable here is that lending to oil companies has tightened quite a bit in 2020 with the previously mentioned price of crude plainly a major factor. The Wall Street Journal reports that compared to 2016 when U.S. oil producers raised $57 billion in debt, in the past year the number has fallen to $23 billion.
That credit has tightened for oil producers is a statement of the obvious. Lenders aren’t in the business of losing money. At least they try not to be. So with economic prospects for oil producers (and workers more broadly) quite a bit more perilous now than they were just a few months ago, credit is tighter.
This simple truth is one of those blinding glimpses of the obvious. Debt issuance is a reflection of the economy. When the economy is not doing as well, those capable of lending will become quite a bit more careful.
James Grant disagrees. According to the perpetually negative founder and editor of an eponymous interest rate newsletter, economic and market realities don’t factor when it comes to credit. To believe Grant, the Fed can easily overwhelm tighter credit costs with “a tap on a computer keyboard.” Evidently Chesapeake isn’t privy to what strikes Grant as obvious. Same with countless other businesses, large and small, that find themselves in dire straits in the aftermath of a political panic about a virus that resulted in a forced economic contraction.
To believe Grant, if these myriad businesses just read his various dyspeptic thought pieces on the evil Fed, they would know that credit is plentiful right now. The Fed made it so! Don’t you get it? And rent controls in Manhattan that put limits on how much landlords can charge for rent will similarly result in apartment abundance in Manhattan! In Grant’s other world, “easy” credit can be decreed by central bankers. The title of Grant’s latest Fed-related piece is “Powell Has Become the Fed’s Dr. Feelgood.” More realistically, both the Fed’s Jerome Powell and Grant himself have a not entirely full-bodied understanding of money.
Seemingly missed by both is that no one borrows money. They borrow what money can be exchanged for. This failure on the part of both to grasp what is common sense leads each to highly questionable conclusions.
Powell and the Fed he leads believes that by lowering the Fed funds rate to near zero, that credit will be abundant because the Fed says so. The difference between Powell and Grant is that what the Fed Chair thinks is a feature of central bank power, Grant thinks a bug. In truth, the Fed is a rate follower, not a rate setter. Credit is a consequence of production in the real economy, not a result of Fed rate machinations as both Powell and Grant believe. Grant writes of “overborrowing” that is an impossibility.
Without production first, money has no purpose. It’s worth repeating that individuals and businesses borrow “money” because it can be exchanged for cars, trucks, vacations, newsletters, and all manner of other things. None are free. To believe Grant, those with access to “money” give it away rent free so that the borrowers can attain all manner of market goods in costless fashion. All because Powell’s Fed says so! Naaah. Away from the world of theory and imaginings of a Fed that can rewrite reality with “a tap on a computer keypad,” credit is rather expensive. It’s extraordinarily expensive for businesses seen as lacking good economic prospects. Chesapeake isn't filing for bankruptcy because credit is cheap.
In Grant’s telling, the economic failures of the 20th century never happened; that, or the central planning failures of the communist countries were embraced by the 21st century Fed such that it controls the cost and amount of credit. And since Grant imagines the Fed has made credit costless, the latter has caused “savers to reach for yield” on the way to “flyaway bull markets.” It’s quite a happening that Grant has imagined for readers who presumably share his misery about everything, but apparently Japan and Europe didn’t get the memo about central-bank managed rates launching bulls.
More realistically, Japan and Europe can’t claim as part of their market indices companies like Alphabet, Amazon, Apple, Facebook and Microsoft. All five are American companies, most would acknowledge when not in earshot of Grant that they’re pretty innovative corporations, and that their innovations have resulted in valuations that put them at the top of all corporate valuations. But if you remove those five companies from the S&P 500, the “flyaway” bull that has Grant so angry would be quite a bit more subdued.
Translated, the Fed that’s rented enormous space inside Grant’s surely cavernous head has not been the author of this bull any more than it was in the late ‘90s when companies like Cisco, GE, Intel and Microsoft drove another major bull. Great companies that meet the needs of the world launch major bull markets in the indices they’re part of, not central banks.
Just don’t expect Grant to acknowledge what’s obvious. For him to admit that great corporations populate the U.S. would be for him to acknowledge that his decades worth of pessimism were not just incorrect, but wildly so. It would also force the pessimists in our midst to acknowledge that the value of their musings comes from betting against them, as opposed to buying their endless gloom.
Which means Grant will continue to say “the Fed did it,” despite mountains of evidence that the central bank is a sideshow. And always has been.