Market Overview

James Grant on CNBC: 'Adam Smith's Invisible Hand' Will Prevail in the End

James Grant on CNBC: 'Adam Smith's Invisible Hand' Will Prevail in the End

James Grant, the author of the widely read Grant's Interest Rate Observer newsletter, appeared on CNBC on Thursday after the market close to discuss the Federal Reserve, rising interest rates and plunging gold prices.

Grant has been a long-time opponent of central bank policy and his comments on Thursday once again echoed this sentiment. The author and publisher is one of Wall Street's most respected market prognosticators and his newsletter is widely circulated and quoted in financial circles.

Adam Smith's Invisible Hand

Grant argued on CNBC that Adam Smith's "invisible hand," or natural market forces, will inevitably prevail in relation to asset prices despite the near constant intervention and price manipulation employed by the Federal Reserve ever since the financial crisis.

According to Grant, the central bank has little control over the outcomes of its monetary policy despite its attempts to foster a contrary perception to the market. He pointed to last week's volatile market moves, where stocks, bonds and commodities all plunged, as being indicative of the Federal Reserve's inability to manage expectations the way it would like.

Central Planning Will Fail

Grant and other similar thinkers are opposed to the Fed's massive intervention and he argued that every indication is that it will be a failure in the long-run. He acknowledged that the central bank has been successful, to some degree, in delaying and obstructing natural market forces through its various stimulus and quantitative easing programs, but said that it appears control is slipping away.

He also characterized Fed policy as being "seat of the pants central planning," with little likelihood of long-term substantive success.

Grant noted that despite the central bank purchasing billions of dollars worth of mortgage-backed securities every single month under QE3, mortgage rates are now rising sharply. This is evidence that the Federal Reserve's illusion of control is rapidly being exposed as just that -- an illusion.

Last Week's Volatility A Precursor of Future Problems?

Grant also said that he thinks the Fed is very concerned about last week's reaction to Bernanke's comments and is now in the process of trying to jawbone the markets, and interest rates in particular, back into line.

The purpose of this is to avoid a potential catastrophe where both Treasuries and stocks plunge simultaneously, causing a debilitating surge in rates and market panic.

Gold Becoming Even More Attractive Amid Price Plunge

Grant also offered some pointed commentary on gold prices, which have been plunging once again in recent weeks. In his view, the activity has not been entirely rational and gold remains a very attractive investment which is becoming even more attractive as prices fall.

He admitted that he wished he had been prescient enough to predict the decline, but that the fundamental story is still very bullish in his opinion.

He argued that every data point suggests that global central banks will continue printing money through their "quantitative easing" mechanisms and that the natural asset hedge to these policies is gold. If the banking authorities' unconventional and unprecedented market intervention does not work out, investors will want to own the precious metal.

What is Underpinning Today's Asset Prices?

Grant also touched on the "inexact" nature of economic data as being indicative of the underlying uncertainty inherent in today's markets. As an example, he cited the substantial downgrade of Q1 GDP, which was released on Wednesday. The third estimate for first-quarter GDP registered a whopping sixty basis point decline from earlier estimates.

The latest data suggests that GDP grew just 1.8 percent for the first three months of the year compared to original estimates of 2.4 percent growth.

Investors looking for a general takeaway from Grant's comments, should focus on the big-picture uncertainty underpinning financial markets and asset prices in today's environment.

While the stock market has rallied sharply from the March 2009 lows, and interest rates have thus far remained near historically low levels, the policies that have been used to promote these outcomes fly in the face of naturally occurring, free market forces.

The risk is that Adam Smith's "invisible hand" will reassert itself, and central bank intervention and manipulation will eventually unleash devastating unintended consequences.


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