PE, VC industries vulnerable in rising interest-rate scenario: James Grant

moneycontrol.com:

In a rising interest-rate world, many financial sectors and products including private equity and cryptocurrencies will face an existential crisis, according to James Grant.

Grant is the founder and editor of Grant’s Interest Rate Observer, a “contrary minded” journal, which is widely considered an authority on interest rates.

Also watch: Expect an upside-down world: James Grant

“Entire industries have been built on phoney interest rates,” he said, and named the private-equity business as one of them. He was talking to Moneycontrol on products and sectors that can be vulnerable when the US Fed Funds rate climbs above 3 percent. As of now, the Fed’s benchmark rates are at 2.25-2.5 percent, and a 50-75 bps hike is expected in the September meeting.

“The private equity business–which is a great force in this country, both for financial speculation and in politics– is a product to a no small degree of these tiny, little teensy interest rates, or insect-sized and unwholesome interest rates,” he said.

He named other pockets of vulnerability too “in no particular order” and they included non-fungible tokens (NFTs), cryptocurrencies, venture-capital industry and real-estate sector.

Zero-gravity fantasy world

“Interest rates are kind of a universal price and they are, as it were, financial gravity. Without interest rates set at reasonable and logically acceptable levels, we kind of live in a zero-gravity financial world where you get crazy things such as great explosions in venture capital, non-fungible tokens and cryptocurrencies by the trillions, you get a fantasy world with speculations,” he said.

“Without meaning to sound like a killjoy, an ageing baby boomer... these (assets and industries) are not normal, they are cyclical