Interest-rate hike: Why does the formidable Mr Grant warn about an upside-down world?

It will be extremely difficult for well-compensated financial professionals to admit that “the financial assets by which we have all gotten very comfortable have reached a point of inflection and what has worked for the past four decades will no longer work or will work with difficulty, and that everything that you know must now be reappraised”, he said.

Entering a new cycle

The interview--given before the Jackson Hole Economic Symposium-- proved prescient. At the meet, in an eight-minute long speech, Federal Reserve Chairman Jerome Powell smashed to smithereens any hope the market had of the central banker pivoting to a dovish stand. In the speech, Powell reiterated their commitment to fighting inflation even if it means “some pain” to the US economy.

Also read: Jackson Hole: A speech that could act as a preamble for central banks

After four decades of falling rates, starting 1981, Grant sees interest rates going up from here on. “These cycles (interest-rate cycles) can be very, very long,” he said.

“Until about two weeks ago, it was an extraordinarily protracted bull market in bonds, meaning a persistent and irregular decline in interest rates. Interest rates declined to uniquely low levels… (but now) we are embarked on a new cycle of rising rates,” said Grant.

The world has seen just three or four such cycles since modern financial markets came into being, he added.

Stocks and bonds seemed invincible for years thanks to the central bank’s easy-money policy, but in this new environment, there will be “an overhaul of expectations''. While fundamentals did play a part in the appreciation of stocks and the improved credit quality of bonds, he said that what was “integrally important was the fall in rates of interest, the seeming Central Bank’s dominance in conquering inflation and the expectation that inflation and interest rates would trend lower and lower, not perhaps stopping even at zero”.

Expectations, which are built on experience, have acted as guides for investors, he reminded. Now expectations that have been built on the experience of lower and lower interest rates will be overhauled through a “very, very gradual process”. “People will grudgingly accept this new, unfavourable thing and central banks will have to be dragged into it,” he said.

With the stock market valuations still elevated, he said he isn’t sure how the market is going to adapt to the new regime but “it will have to eventually”.

“I don't think the stock market is a bargain… if you add the price/earnings ratios to the inflation rate, you get a different kind of financial misery index. And that is still looking elevated,” he said.