Jim Grant on the AI Bubble, Decadent Finance, and the Lessons of History

Jim Grant

Cheap at the price.

Jim Grant

That's the business plan.

Jim Grant

It's a delight to be here. As Charlie Munger would say, it's a delight to be anywhere. He was just glad still to be around. I'm happy to be with you. I attended your wonderful annual fall conference yesterday.

Jim Grant

This comes from David Rosenthal, who was a speaker on economics and who is the fourth employee at Nvidia. He's an extraordinarily gifted computer scientist. Anyway, this story has to do with a kind of reunion of founding employees of Nvidia at a Salvadorian restaurant. Tables full of Nvidia employees then and now. Jensen Huang, the CEO, gets up and says: "I'm pretty good at fundraising. What I want you to do, ladies and gentlemen, is empty your wallets and give me your cash." They complied. For a Silicon Valley crowd, people were carrying a lot of cash. He collects the money, walks over to the proprietor of this not-four-star restaurant, and gives it to him.

Jim Grant

We should.

Jim Grant

It was deeply technical, certainly over my head in many places. He was attacking the pretensions of the technologically sophisticated who contend that Bitcoin is useful and safe and somehow immune from infiltration by the coming quantum computers. He rather exploded that notion. I think there's a link on his blog to a talk he gave to a class at Stanford — electrical engineering, 2021. He was filling in for a professor. It's the most lucid attack on Bitcoin I've read. I thought: why isn't this thing trading at zero? It did not go to zero, so maybe people know something even David doesn't know about Bitcoin. But I thought he made a very good set of close arguments. He winds up saying: "Rarely if ever in the annals of technology have the champions of a breakthrough technology gone to such pains to not use it." He was questioning the utility of it.

Jim Grant

I don't think "smart" is quite it — it's more "familiar" or "trained." Every field has its vocabulary. We are all humbled in the presence of astronomers, for example.

Jim Grant

One is forever humbled by the ways of the market. I still don't understand what people see in it. You can't see it. You can't use it for most things. But it has done well, hasn't it.

I am no longer on certain cable TV stations I used to appear on regularly. I comfort myself by saying it's not age, and not overfamiliarity with the arguments. It is my anti-crypto position — and also the last words I spoke on that particular cable channel when asked about Bitcoin: I said the most efficient price is zero.

This administration is all in on crypto. It's the scammiest thing — the connection between Bitcoin and the Bitcoin promoters and the president and his family and these coins. It began before his inauguration with the Trump coin, which was a kind of rug-pull. It's shocking and contemptible. Crypto is being heavily promoted by the administration both overtly and indirectly through the regulatory approach it has taken.

As for Wall Street — it's monkey see, monkey do, especially when that monkey is moving upward and to the right on a stock chart. Bitcoin's genesis was synonymous with purchasing drugs and surface-to-air missiles anonymously, or getting money out of authoritarian countries. It was off the grid and outside the pale of conventional Wall Street. Now look: Vanguard, for peace's sake. The establishment, which could not abide it, now says: "Bitcoin is a thing. Let's start the next ETF." I still think the most efficient price is zero.

Jim Grant

Let's get the other half.

Jim Grant

You have to understand that it was a self-selected group. Grant's has made its living as one of two odd uses — but people in a gee-whiz world. People say we're always bearish; that's not actually true. We are almost invariably sceptical. What doubting Thomases! This is a market of credulity and conformity. Nothing succeeds like success anywhere, but especially on Wall Street. George Soros himself said: see a bubble, just jump on it. Get there early. But there are so many ways to make money on Wall Street. I happen to have cultivated a following that is innately sceptical. Bear that in mind. People walk out of these conversations thinking: "Oh my god, how could I get up tomorrow morning?"

It was a fair mix, though. Even within credit, you mentioned Victor Khosla, but Jonathan Lewinsohn of Diameter Capital rather said things aren't so bad. John Hughes talked about investing in great companies and not selling. That speaks to the variety of ways people of different temperaments can find a place under the big tent of investing.

And then we had Nate Koppikar — a pure specimen of the bear, an avatar of the sell-first, buy-later approach. He exhibited the wry humour of someone prepared to be wrong 90% of the time in anticipation of being magnificently right 6 or 8 or 10% of the time. You asked him impertinently — in the way only a journalist can — why do you do this? And he said: "For the 15 minutes when you're right, it's so delicious." Some people are so smart and make life very, very difficult for themselves by picking a particularly hard way to play the game.

Jim Grant

The hypocrisy is delicious. Private equity people at first did everything they could to distance themselves from the common man. Their shoes were bespoke, their suits magnificent, their club memberships extensive. They dealt with the institutional world exclusively. Then, interest rates did not remain at near zero after 2021. The valuations that were acceptable in a regime of near-nothing interest rates suddenly became very precarious. Companies — more than 20,000 private equity companies across the world — were capitalised for prosperity and, more meaningfully, for a regime of very easy money. Instead of paying, say, 3% interest, they were now paying 8% or 10% or 12%. That makes a difference.

The endowments and institutions to which private equity had sold — by going around and saying "Yale did this" — had budgeted for the return of their capital and are finding it's not being returned. The dividends and interim payments they'd expected are not quite up to snuff. They're being pressed to produce the draw for the development fund this year, and they're hard-pressed. Some of them are turning to the secondary market for shares in these private equity companies — selling like used cars. That's not what the buyers originally counted on.

Private equity is in trouble because it neglected to honestly value its assets as interest rates began to rise. Now it's stuck with assets carried at unreasonably high prices that are not returning the cash investors need. So what to do? Shouldn't the little guy have a piece of this marvellous asset class? Private credit, by the way, has none of the overtones of debt — and it can't, can it. That's what democratisation means: not benevolence of the promoters, but their increasing desperation.

Nate also made the interesting point that these firms have a reputation for being super sophisticated. But when you look at the record, many private equity firms have shown, as he put it, maximum aggression at periods of maximum risk. They have a tremendous record of momentum-chasing. It's a reminder that often we fall for the illusion that the smart money is incredibly smart and will protect us from turmoil.

Jim Grant

There's a parallel in Emanuel Derman's memoir, My Life as a Quant. He harks back to the Long-Term Capital Management affair of 1997 — the now-fabled collapse of a hedge fund run literally by Nobel laureates. Derman was on a call with Goldman Sachs people talking with the principals after the blow-up occurred. He was startled and deeply impressed by the depth of sophistication of the LTCM people — they knew much more and asked much better questions about valuation and hedging technique than the Goldman traders who were trying to value this stuff. And Derman takes away from this that sheer mental power is not invariably the road to riches. It's not necessarily the equipment that gets you where you want to go.

A lot of times on Wall Street, simple common sense matters most. Tell me again — you're saying that if you put all these sub-investment-grade mortgage structures together and slap them together, the ones at the 40th percentile have been transmogrified into AAA securities? Can you say that again, more slowly? The Federal Reserve, with its thousand or so PhDs in economics, failed to foresee in 2020 and 2021 that if you infuse the wallets of the population with thousands of dollars of stimulus and promise through the central bank that interest rates will remain near zero, what you will generate is a great investment bubble and a spending spree that might result in inflation. Brains aren't everything.

Jim Grant

What we are seeing is the promise of a marvellous technology, combined with very human characteristics — the tendency to fall in line, to do what others do, and if possible to do more of it, higher, faster, and louder. This reminds me a lot of the fibre optics cheque-writing contest of the late 1990s. How much of this stuff can you put in the ground? Is there demand for it? As with the late-1800s railroad-building contests — competitive parallel tracks, redundant capital investment — these things end invariably with a panic and a crash. I think that's the model for now.

Another point David Rosenthal made: the problem with the capital investment may not be so much its size as the demonstrated gap showing that people are not willing to pay for the product. With extraordinary sums laid out for data centres — Meta building something the size of Manhattan Island — are you going to get paid for it? The demand for AI falls off markedly and measurably when college students leave in the spring, because who else has such a deep and persistent need for a plagiarism machine? They have to plagiarise papers to get through. So demand for AI drops measurably come springtime.

I hear myself saying: "Get a horse in 1903. Cars stink. The tyres blow up all the time. Steamboats explode and kill hundreds every fiscal quarter in the 1840s." I'm not talking about the technology as much as the very human response to great technologies and the promise thereof. And don't forget — this is still a promise. The question is: what comes next? Is it the realisation of the promise with the payday? Or is it the crash that precedes the realisation? I perfectly see that this technology is going to do wonders for somebody. But for the time being, people seem not to be willing to pay for what the producers of these large language models are laying out to achieve. I'm all in on comparisons to the busts of yesterday. That's the model for now.

Jim Grant

Yes. Though whenever you trace these quotations back, you discover very inconveniently that nobody said what we claim they said. I suspect Voltaire didn't say it either. But he should have. If Voltaire had been smarter and more cynical, this is exactly what he would have said.

Jim Grant

Everyone has to be in, and valuations show that. But apropos of there being many ways to make money — we heard from John Hughes, who compounds capital in a concentrated portfolio of companies that embody the virtues he thinks define a great investment: barriers to entry, capital allocation, management quality. He holds through thick and thin, and he's done marvellously through all manner of thins. That's very much Buffett's counsel as well.

A lot of this has to do with age and risk tolerance. If you're starting out in your 20s with a reasonably diversified portfolio, it's entirely prudent not to pay too much attention to what I'm saying about macro things. The long term for America is still going to be great. But — hypothetically — if you were a person of a certain age who owns a lot of stocks, you might want to pay more attention to the signs of excess. And they are at every hand. Valuation. Sentiment. The incidence of unmistakable corrupt promotion. The swaggering of newly empowered people who know only one thing, which is that markets only go up. It's all here. The whole theatre of a major financial market top is on the stage. The pageant of top-making — all the scenery, all the actors, all the script — it's all in play.

Does it have to end now? No. Does it have to end in two years? No. But it will. There are legends about people who got the timing right — Bernard Baruch, who is said to have sold on the eve of the crash. No, he did not. I have the stock market records to prove it. What he did do was take the measure of things in 1930 and get out, salvaging perhaps 60 or 70% of his capital in a cycle that would strip the buy-and-hold investor of up to 95% of his capital. And the recovery took 20 years. The Dow made its high in 1929 and recaptured it in 1954 — 25 years, and dividends aside.

I think this is a major top in formation. I'm with Nate Koppikar, with others, and with myself. Nate did such a good job exposing the underside of credit and private markets. It will come unstuck. And when it does, I won't gloat. I've been around the block. At moments of crowning success, just recall how full of beans you were in the run-up. It's a very difficult game.

Jim Grant

I remember watching Tepper on CNBC in 2010, when Ben Bernanke wrote in the Washington Post saying: "We are going to institute QE and this will infuse the net worth of the people who have equities, and America will be growing again because the stock market will be rising again." Tepper was sitting on set and explaining exactly how this was going to happen — and it happened exactly as he said it would. He's someone to pay attention to.

He's also in the business of not getting off the train prematurely. Things go on so much longer than you would think they would — or if you're a moralist, than you think they should.

Jim Grant

And I happen to be a moralist who bets against the Fed. I can't stand the adage "don't fight the Fed." I've made my life throwing left hooks at the Fed and occasional right crosses. They never hit back — except that sometimes I feel the blow.

Jim Grant

We ought to be looking at the administration's attempt to subjugate the Fed and institute a regime of ultra-low interest rates. Steven Miran was a kind of advance guard for MAGA at the Fed. When Elizabeth Warren questioned him on his fitness for chairman of the Council of Economic Advisers and asked him directly: "Did Donald Trump lose the 2020 election?" — he answered: "The Senate confirmed Joe Biden as winner of the election." The robotic response is a little bit concerning.

Now, the quality of federal economic data has been declining, and there are questions about whether political pressure is behind that. What I'm fairly confident of is this: the president's views on interest rates are well known — lower the better. In 2018 he said: "The Swiss have negative rates, the Japanese have negative rates, why can't we have negative?" He still thinks that.

If he does subjugate the Fed and brings his own people in, I think we can look for much lower money market interest rates, a much weaker dollar, and a much steeper yield curve — meaning that longer-dated interest rates on bonds and mortgages will be higher relative to short-dated instruments like T-bills. What MAGA believes — and they may be right — is that AI and transformation of American productivity will allow the country to handle much lower interest rates and a much more dynamic credit market. Affordable mortgages. The housing market picking up after this long period where people can't afford to move. They paint a wonderful picture of what life might be like after the president finds his people and places them at the Fed. As Donald Trump himself often says: "We'll see. We'll know more in four years."

Jim Grant

Let's take the contrary argument first. It holds that yes, debt is a thing, but so is the income that the debt produces. For every debtor who may be worried about overindulgence there is a creditor who is more than happy to buy those IOUs. And in the case of a country such as the United States, whose currency is accepted worldwide, there's no limit to what you can borrow. That line of reasoning has held up until this very moment. The world still seems kind of okay with our shenanigans and our debt, because they still like the dollar. It's the world's reserve currency — the Coca-Cola of currencies.

The argument for concern is that the burden of interest and the weight of issuance will exhaust even the friends of this country. We have seen signs of this already — in 2019 there were anti-bubble eruptions concerning the market's willingness to absorb our debt. There was a crisis in the funding market for US debt in the autumn of 2019, and a fright in March and April 2020 concerning the world's tolerance for buying more of our longer-dated securities. Those were amber lights.

The real question is: what is the ultimate demand for US securities at these rates of interest? What if the United States was selling a 10-year note not at 4% but at 10%? That would be quite something. And the US economy, as resilient as it famously is, has been rendered much less so — rather vulnerable — by the years of near-zero interest rates that encouraged all that deal-making in private equity. These 20-odd thousand companies are now trying to find their footing at a time of interest rates they can't quite handle. What happens if the world loses its taste for American securities? What happens if inflation comes back unexpectedly and the Fed can't lower rates in good faith — and must consider raising them? How would higher rates play in this world of financial fragility?

The reason clean balance sheets get premium credit ratings is that they afford flexibility. The company with a clean balance sheet can borrow opportunistically when times are difficult. But when times are difficult, the government must borrow much, much more. We are borrowing heavily today at a time of 4%-plus unemployment — long thought to be full employment — at a time of roaring markets and GDP growth reportedly close to 4% annualised. And we need a 6 or 7% fiscal deficit to make things work? That doesn't sound like a well-managed public finance operation. These are latent problems. But look at the screen today — credit spreads near all-time lows, no apparent anxiety about private debts. The arguments against heavy borrowing must be made rather defensively for the time being. I'm still confident the too-much-debt argument will prevail.

Jim Grant

I cannot unpack it, because it's like being asked to unpack the Declaration of Independence or Lincoln's second inaugural address. All I can say is: amen. It's an overstraining of things. What Röpke was pointing to was this: under the gold standard, when a country overstrained, money would leave. Gold, being money, would depart because paper money was unacceptable outside the borders of the nation that printed it. The departure of gold was a deflating force — you were losing the monetary base, losing the capacity to issue credit and debt. That was how the body politic began to protest.

Now, in this age, you have a reserve currency country — America — that is the kingpin of the monetary world. There is, to date, no hard limit on how much it can do. There are softer limits. There's domestic protest against too-high inflation — but the Fed is capable of finding that away. Now they're saying 2.8% is fine, we're vigilant. They'll say 3% is a little less fine, but we've got this. And Donald Trump will say AI will wipe inflation from the slate.

Notice as well that under a paper money system, the dollar never regains the purchasing power it loses to inflation. Prices went up in that pandemic era and they have not come down. That's one of the things that helped Donald Trump get elected in 2024. People saw inflation even when the rate of inflation declined — and rightly so, because the prices they saw were not the prices they knew in 2019 and 2020. Economists have been confusing the rate of inflation with what people see to their very eyes in the supermarket.

Jim Grant

I was in the presence of one of the great speculators of our age — with springtime approaching and gold closing in on $3,000 — and I said: "Do you think gold's a bubble?" And he said: "Of course it's a bubble." And I said: "Is it justified by the fundamentals?" And this is where you build the narrative for yourself about what's causing it.

I remember it very well in 2011, when the S&P had downgraded the Treasury from AAA to double-A-plus, and gold had been in the mid-$1,500s for a while. I thought: the world is catching on to the joke, and the world will demand of this country a reform of its finances which will entail some role for gold in the monetary system. Gold will find its place at a higher price — a kind of permanent high plateau, which is literally what a gold standard is. It turned out there was no such permanent condemnation of messy American finance and no intention on the part of the authorities to bring gold back into the monetary system. America has read out gold from its monetary system since 1976 under Treasury Secretary Bill Simon.

My current castle of narrative would consist of an administration that seems unlikely to prove successful in taking over the central bank and imposing its theories of money and interest rates. And the proclivity of the Treasury to borrow much more than it takes in, with the fiscal dilemma talked about but never acted upon. That would be enough to convince me of the upside still in front of us. But you can't be sure. If you have too much of this stuff and you're having restless nights — but you don't want to miss all the upside. That's what makes this line of work so interesting. There's no certitude. People who think they have it: one or two things are true about them — they're not very old, and they've not really had the invaluable educational experience of having their face ripped off during a bear market.

Jim Grant

I own some bonds personally, my wife and I do, because no one's getting any younger. I dearly love gold. But gold pays no interest — which is also one of its great virtues. It's money. It's simple. I own a fund that invests in special situations yielding rather more than those that trade in public markets. It's risky, but the risk is well managed. And I intend to work my whole life. I don't have any intention of retiring, but prudence dictates some reasonably assured income outside social security.

Jim Grant

Or take them thoughtfully. It's well and good to anticipate your peace of mind come the liquidation, but everyone's got a plan until they get hit — as Tyson said. Never underestimate how sweaty your palms are going to be. These liquidations can seem upending. They typically don't destroy you, but they feel like they might.

It's also about being wary at a time of decadent finance — of having stuff sold to you that's marginal and speculative. You said something on the Grant's podcast that I found rather beautiful: instead of credit being man's confidence in man, in this age of decadent finance it now demands man's confidence in the sagacity of his lawyer, because of the ingenuity of the strong and the cunning. All the most rapacious and cunning people come out at times like this to sell you things you should not be buying. And what happens when the Fed, with every good intention, lends its strength to prolonging cycles and forestalling bear markets? Bad conduct goes uncorrected, unchasitised. Mr Market is the best disciplinarian. Nothing succeeds like having your head handed to you as a learning tool.

Jim Grant

For me, great oratory is like music. I read it as I might listen to the third movement of Brahms's Third Symphony, which I happen to love. May I read you something? This is Burke speaking on behalf of his friend Fox in the preface — to bring the British East India Company to heel, to curtail the most abusive practices of its agents in India, Burke and Fox together drafted a bill to revise the governance of this monopoly — the biggest company in the world. Fox, who was the front man for this in the House of Commons, bore a lot of abuse, because if the bill went through he would command a great deal of power in nominating functionaries to the new governance commission. So they questioned his motives.

And then Burke said of Fox: "He has put to hazard his ease, his security, his interest, his power, even his darling popularity, for the benefit of a people whom he has never seen." Burke went on: "You will remember that oblivion, in the Roman custom, was not an accident, but a necessary ingredient in the composition of all true glory. You will remember that it was not boldly by Roman custom, but in nature and the constitution of things, that calumny and abuse are essential parts of triumph." Is that not a wonderful passage? That speaks to the first part of what I tried to make — what they said and how they said it.

Jim Grant

He was a difficult person on many occasions, but also most of the time incredibly generous and courageous in the causes he would take up. For example: two men were caught in an act then considered a serious crime. They were sentenced to time in the stocks, where the crowd could toss things at them — sometimes vegetables, sometimes rocks. One of them died in the stocks. Burke took up their cause in the House of Commons. You can imagine the ridicule that came down on him for this — knowing leers from one member to another across the aisle. But Burke persisted. A newspaper libelled him, he sued and won a modest settlement, which he gave away.

There was also the poet Crabbe, who was at the end of his tether — literally hungry and destitute, sleeping rough. He pulled himself together enough to knock on Edmund Burke's door. Burke not only read his poetry but helped him revise it, got it published, and totally transformed a total stranger's life. I came to view Burke as a kind of next-door neighbour to a saint.

Jim Grant

Burke said: "If on account of such sentiments people call me a Roman Catholic, it will give me not the smallest degree of disturbance. They do me too much honour who aggregate me as a member to any one of those respectable societies which compose the body of Christianity. Wherever they choose to place me, I am sure to be found in extraordinarily good company." That brings tears to my eyes. That was Burke at his best. And his best was fantastic.

Jim Grant

All you need to know about the East India Company is this: it would send to India, as employees of the firm, lads of 16, 17, 18 — scarcely shaving — who were very ill-paid. They were to make their way in the company but also set up shop for themselves as a sideline. Actually, the side hustle became their focus. Instead of enriching their employer, they enriched themselves. That's one thing to know about incentives.

The other is that the East India Company was itself a sovereign. It had its own army, its own merchant fleet, its own navy. What would a profit-seeking company do with its own military power? It would wage wars. Knowing those two things, you can imagine what liberties the servants of the East India Company took on their own behalf — as opposed to the interest of their stockholders, or indeed the interest of the sovereign who gave them the monopoly. They ravaged the country. It was pretty steady and pretty heavy-handed.

Jim Grant

Ah, well — you see why I wrote the book.

Jim Grant

It came to a tearful end in the House of Commons, during a debate that had nothing to do with France. Burke went on about the French Revolution. Fox said: "This is not germaine." Fox quoted back to Burke some of his own thoughts on the American Revolution. Burke went incandescent over the incivility of having his own words thrown back at him. That, to him, was a heinous crime against the unwritten rules of the House — and more especially against the unwritten rules of friendship. He said: "Our friendship is at an end." And Fox broke into tears and said: "No, it's not."

Time passed. Burke's son tragically predeceased him. Burke fell ill and broke. Both men were broke their whole lives. As Burke lay dying, Fox reached out to Mrs. Burke: "May I come and see my friend?" She consulted her husband and wrote back — the spirit of his reply was: Mr. Burke must adhere to the views the public knows so well, and to depart from them would be a great hurt to the community. So Burke died with the breach unhealed.

Fox lived many years afterwards in declining health. Someone asked if he would contribute to a fund to raise a monument to the late Edmund Burke. Fox said: "I cannot pretend to a spirit of forgiveness such that I could do this without being a wanker." And the book closes with Fox having finally succeeded in putting through the law outlawing the slave trade in Britain. That was what he wanted most of all. There is a statue of Fox in Westminster Abbey depicting a freed slave lying on his lap in gratitude. Fox has an enduring monument in marble, and Burke's collected writings are a monument of another kind.

Jim Grant

A little bit of both. As to the material side of life — it is onward and upward, nothing like it's ever been. We would not be having this discussion except for advances in medicine. The marvels with which we live are astounding. This little thing I have in my pocket has the entire accumulated knowledge of the world in it. And people get jaded about that. I hear myself complaining about the pills I have to take to ward off the next round of disease — rank ingratitude. In so many ways, things have never been better and we should thank our lucky stars that we live when we do.

In other respects, with regard to public oratory, we are back to grunting and groaning — wherever mankind conducted business before the perfection of writing and the arts of literacy. Can you compare what comes out of today's House of Commons, or truth social, or the House of Representatives, with what Burke and Fox produced? You want to lay your head down and not watch television.

All of the intellectual energy of Burke and Fox's time, for a certain class of people, was in literary and oratorical pursuit. Albert Gallatin — great American statesman, Treasury Secretary under Jefferson and Madison — retired to pursue academic studies and literary pursuits, and went down to the grave universally honoured. I go over to the churchyard from time to time and read his gravestone and think about him. It's marvellous. So if you're a lover of oratory and language, you'll be disappointed not to have lived in some other time. Otherwise, never mind the commonplace diseases of late life — just go to the dentist and thank your lucky stars. It's pretty great on balance. I'm glad to be here.

Jim Grant

That's awfully kind, and what a pleasure it is to be in your company. I've written my biographies mainly about people whose company I wanted to be in. I like your company too, William.