Monday, September 19, 2011

Barron's Q&A With Jim Grant: Gold Still Looks Good; Japan Still Doesn't

The editor of Grant's Interest Rate Observer on gold, gold stocks, the gold standard and why he's stopped investing in Japan.

When Jim Grant left Barron's in 1983, after inaugurating the Current Yield column, bonds already had ended their long bear market and begun the great ascent that put 10-year yields around 2% last week. Grant founded Grant's Interest Rate Observer, and in nearly 30 years of publication, his beautifully written musings on the markets have become de rigueur reading among cognoscenti who appreciate big doses of financial history served up with compelling investment ideas. Among Grant's greatest calls: The eye-catching bull market in gold. We caught up with him last week, as gold was fetching $1,800-plus, European banks wobbled, and central banks pumped dollars into the system to avert the crisis.


You were a great believer in Japanese equities. What happened?

With my friend Alex Porter, I was a general partner in Nippon Partners from 1998 through the end of 2010. We invested in Japanese value stocks. We closed it in December of 2010, because we weren't making money, and it was immensely frustrating. Japanese corporate managers, by and large, don't own equity. They have a platonic interest in the stock price. In the absence of a lively market for corporate control, there is no check on management doing nothing. In 1998, we began investing in companies whose shares were trading well below their pro-rata share of net cash on the balance sheets. In this country, in 1974, 1975, there were a lot of companies like that and they did rather well in the 1970s and the 1980s. But in Japan, many [companies like these] remained at these compelling valuations for year upon year upon year. You get tired. The last straw was when one of our companies was selling at a huge discount to everything, and announced that it would undertake a capital investment larger than its stock-market capitalization.


We've been looking more and more at blue chips, such as Microsoft [ticker: MSFT], Bank of New York Mellon [BK], CVS Caremark [CVS] and ExxonMobil [XOM]. These big, world-dominating U.S. companies are well-financed and adaptive, they have thrived in different monetary environments. ExxonMobil, in the five years through 2010, had an average return on capital employed of 27%. It has boosted its dividend 5.7% annually since 1983, about double the rate of rise in the CPI since then.

Gold will go up a lot, and that's as finely calibrated as I can get. I like some individual gold stocks, like Yamana Gold [AUY], Agnico-Eagle [AEM] and [ Newmont Mining [NEM]. They are very cheap. But a mutual fund like Tocqueville Gold [TGLDX], which John Hathaway manages, can be a better bet; John has been at this since the late 1990s and done much better than the S&P and the XAU [gold index].

What do you dislike?

China, and China Coal Energy [1898.HongKong], the No. 2 miner in China. Weak margins, spotty disclosure, a convoluted organizational table and burgeoning accounts receivable are just some of the problems.