This week on WealthTrack, Consuelo Mack sits down for a rare one-on-one interview with contrarian market observer and historian James Grant, publisher of the influential newsletter, Grant’s Interest Rate Observer. They discuss why the economic recovery could be much stronger than anticipated, and the ballooning federal deficit much more damaging. He also shares his views on the Fed, the US dollar, gold, China and some of his personal investing habits.

Grant is erudite, articulate, funny and opinionated - just the right ingredients for an interview not to be missed.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, October 30, 2009.

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Some of Wall Street’s most prominent bears are turning bullish right now. But that doesn’t mean that your small-cap portfolio is safe. Here’s why these brilliant minds think that we’re back on the path to recovery — and why they’re wrong.

I was in Manhattan last week attending Grant’s Fall Investment Conference. The U.N. General Assembly is meeting there, and the streets were blocked off in places. The NYPD was out in full force. I heard one passerby complain about the inconvenience of it all to one police officer. He responded, “Don’t blame the NYPD, blame the General Assembly.”

With the General Assembly in Manhattan and the G-20 in Pittsburgh, government has taken over the headlines this week. It seems half the world is mostly preoccupied with telling the other half what to do. No doubt, bossiness is in a bull market.

At Grant’s conference, I heard presentations on gold, the dollar, oil,

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Do you remember the first time you saw a rain drenched Peter Finch scream, “I’m as mad as hell, and I’m not going to take this anymore!”? We do. We were too young to see Network in the cinema (the movie came out the year we were born: 1976). Instead, we watched it late one night on TV. And we’ll never forget the moment when Finch’s character, news anchor Howard Beale, arrives in the television studio in his tan raincoat with a deranged look on his face and begins to speak to camera.

I don’t have to tell you things are bad. Everybody knows things are bad. It’s a depression. Everybody’s out of work or scared of losing their job. The dollar buys a nickel’s worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there’s nobody anywhere who seems ...

“In a fundamental shift, consumers are saving rather than spending,” notes the Los Angeles Times. This is the shift we’ve been talking about for months. The great credit expansion of 1945-2007 is over. Now cometh the great credit contraction.

During the bubble years, more and more credit produced less and less real prosperity. It was as if you were borrowing more and more, to invest in your business or merely to increase your standard of living, but your income didn’t rise fast enough to keep up with the interest payments.

In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income - a big turnaround.

We know from logic and experience that saving money - not spending it - is the key to getting wealthier. Saving money gives you capital. And it’s capital accumulation - in the form of factories, roads, ships, buildings,

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Some of China’s stockpiling may well have been due to speculative excess, rather than any rational plan on the ground. That realization played a role in the market carnage seen this week.

As Grant’s Interest Rate Observer has been known to say, “We wrote it. Did you read it?”

My slim hope is that the Chinese really and truly know what they are doing, because, in fueling investor optimism with such flair, they are playing a high stakes game. My worry is that they drop the ball, somehow, and the result shows up as a violent wake-up call for “high beta” assets… emerging market equities, energy, commodities and the like.

What happens next is far from clear. The huge [commodity] stockpiles could continue to grow at a breathtaking pace – after all, Beijing has plenty of greenbacks to work

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Back in December, with the U.S. recession in its 12th month – and showing no signs of abating – Money Morning Contributing Editor Martin Hutchinson warned that an “L”-shaped recession was very possible.

The U.S. recession is now in its 15th month, and many economists now expect the downturn to last until 2010 – if not longer. In fact, some economists now say the U.S. malaise could easily evolve into the virulent “L-shaped” downturn that Hutchinson predicted – a development that would guarantee both the maximum pain and the slowest recovery, experts say.

“I said in December that the recession could be ‘bloody-L shaped.’ With the huge deficits, that now looks the most likely outcome – and believe me when I say that it will be very bloody,” Hutchinson said this week. “The economy will bottom quite soon, but every time it tries to

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In a recent post about “bubbly” Treasuries, we got some comments that deserve attention.

First, this is briefly what we said;

“Treasuries have reached bubbly levels, both in terms of low yield and the rate of change of price.

Interest rates will rise when the economy recovers, or when bond buyers demand more long-term interest to absorb trillions of new issues to fund recovery programs. Rising interest rates mean Treasury prices will fall.

… For investors who invest only “long”, closing long positions in long-dated Treasuries, or being alert to a trend reversal necessitating the closing of those positions is recommended.

… For investors who also invest “short”, being alert to a trend reversal creating a shorting opportunity is recommended. The current trend is strongly upward, but could reverse dramatically …”

Some commenters agreed and some did not.

A supportive comment was;

“The safe haven play into Treasuries is demonstrating a true example of a parabolic

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Last month, I spent some time in San Juan, Puerto Rico. One day, we visited Old San Juan, the oldest settlement within the territory of the United States, with a history that begins in 1508. We also visited the old fort known officially as El Castillo San Felipe del Morro, or simply El Morro.

The fort must have sent shivers up the spines of all those who hoped to take it. The walls of El Morro are 18 feet thick and 145 feet high. Built on a headland, the Spanish Empire controlled the flow of goods in and out of the New World from here. El Morro has been tested many times. Even today, you can walk in the oldest tower in the fort, built in 1539, and see shell fragments in the ceiling that date to the 1898 bombardment of San Juan by the U.S. Navy during the Spanish-American War.

El

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As I am travelling in Europe at the moment (see “Another town, another train…”), this week’s edition of “Words from the Wise” does not provide the customary review of the financial markets’ movements and economic statistics. Given time constraints, today I will only share with you a number of video clips in lieu of excerpts from news items and quotes from market commentators. Quite a few of the video items include links to related articles for those who prefer the written word.

Firstly, as we are awaiting word on the bail-out plan, a very topical quote from Jim Welsh (Welsh Money Management): “We will be told that the Federal Reserve and

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A little history: The way our financial system is and has to be …

Jim Grant said a few months back in one of his Interest Rate Observer bi-weekly missives: “Humans are simply incapable of handling credit,” or something close to that.  We have seen the deleterious impact of easy money before.  And no matter the regulatory environment conjured up to keep it from happening again—it will. 

In perusing an excellent book titled, The Panic of 1907, penned by Robert Bruner and Sean Carr, I ran across this mini-postmortem on why it happened:

“The recounting of events of 1907 suggests that the storm gathers as follows.  It begins with a highly complex financial system, whose very complexity makes it difficult for anyone to know what might be going wrong; by definition, the multiple parts of the financial system are linked, which means that trouble in one institution, city, or region can

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