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Wednesday, November 12, 2008

Wednesday Evening at the Brooklyn Heights Barnes & Noble: James Grant & "Mr. Market Miscalculates: The Bubble Years and Beyond"


We've just come back from the Court Street Barnes and Noble, where we went to see James Grant, author of the just-published Mr. Market Miscalculates: The Bubble Years and Beyond, a collection of prescient essays and articles by the erudite editor of Grant's Interest Rate Observer, whom we've admired since we first saw him two decades ago as a panelist on Friday night public TV's Wall $treet Week with Louis Rukeyser.

During Grant's 45-minute talk and Q&A period, an audience of about 30 to 40 people listened with rapt attention, though we found it slightly disconcerting that a backdrop to the investment analyst was a huge red neon sign saying CHECKS CASHED from the the corner store just across Schermerhorn Street.

On the other hand, perhaps it was a perfect setting for a discussion of the economy and financial world at a time when, as Grant suggested, it's possible to get many recent hits by Googling "worst since the Great Depression."

Wearing his trademark horn-rimmed glasses, a bow tie and black pinstriped suit, Grant was introduced by the Court Street Barnes & Noble's Paul with a standard bio and some of the blurbs on the new book, like
"When it comes to writing about complicated matters of business, Jim Grant has no equal." – Steve Kroft, 60 Minutes

"Jim Grant thinks outside the box - Please read him, listen to him." – Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable
and finally, this from David F. Swenson, Yale University's Chief Investments Officer:
"In the past quarter century, Grant's Interest Rate Observer earned and maintained a place on the 'must read' list of every serious student of markets. Jim Grant's trenchant observations and elegant prose never fail to illuminate and educate....Read, learn and enjoy."


From the side, Grant asked, "Can you read that again?"

Paul began, "In the past quarter century..." and the author said, "Just kidding." We're not sure if Paul was going along with the joke or thought he had a Wall Street diva on his hands. After all, he's got to deal with authors all the time.

As Grant took the podium, the Brooklyn Heights resident said, "Good evening, neighbors. Well, if I'm going to read this whole book, I had better get started. This should take about three or four hours."

We already remembered what we like about Jim Grant from his TV appearances. Although smart and very serious about finance and the economy, he's never taken himself that seriously - or has the wit and skill to effectively pretend that he doesn't.

Grant began by saying his publisher, Axios Press, hates the title. "Mr. Market" is an anthropomorphic invention, a highly flighty and volatile fellow who one day is so depressed that he'll sell you everything he owns for a nickel and the next day, off his meds and madly euphoric, he wants to buy you out because he sees only blue skies ahead.

(He didn't mention that the author's 1993 book also had Mr. Market in the title: Minding Mr. Market: Ten Years on Wall Street With Grant's Interest Rate Observer, which featured cartoons by our wonderful Midwood H.S. Spanish teacher from 40 years ago, the very clever Hank Blaustein.)

Grant skewered the rational expectations school of economics and the idea that the market is a cool, calculating contraption that efficiently absorbs all relevant information and therefore always prices things correctly. Instead, he said, it's a collection of human beings just like us in Brooklyn: not all that efficient but not so totally inefficient as to be predictable.

"Mr. Market needs a hug right now," Grant mused, discussing the day's drop in the Dow.

He called the current stock market a "value restoration project," and wondered why people think it's great "when Barnes & Noble has a sale and you can buy my book for $5 rather than its true worth of $50" [its list price is a rational $22] - but on Wall Street people love to pay high prices. Right now, Grant said, Wall Street is having a going-out-of-business sale and nobody's walking into the store.

Turning to the cause of the current financial disaster, Grant - whose essays and articles have been predicting it for years - speculated on who is to blame: Moody's for giving AAA ratings to now-worthless instruments? "Our masters in the Federal Reserve"? The people "who applied NOT to get a mortgage loan and were turned down" and so were approved for mortgages at a time when "nobody could afford NOT to get a house"? Wall Street's Nobel-track economists who packaged hundreds of thousands of individual lousy mortgages into Goldman Sachs contraptions they sold to investors more than willing to overlook reality? All of the above?

The rare financial writer who's also a gem of a stylist, Grant likened the structured mortgage business as purveyors of 25 pounds of junk in messy and bloated trash bags that were put through a garbage compactor and come out as neat oblong packages. Of course they are still selling garbage, and garbage they have belatedly proved to be.

Grant then recounted some previous episodes of financial madness in U.S. history from what he called "this must-read book." One section of Mr. Market Miscalculates is headlined "In Kansas We Busted."

Around 1888, before the existence of the Fed or Moody's to take the blame, Americans similarly succumbed to mass lunacy when, because railroads needed to settle the lands near the tracks they were receiving federal subsidies to build, entranced Easterners with low interest rates and fanciful tales of the for-a-song paradise they could find in the Great Plains.

Land prices soared at a time when uncharacteristically wet weather caused record-breaking harvests of wheat and other crops. Soon after a University of Nebraska professor proclaimed that man-made climate change would produce increasingly longer growing seasons and ever more bountiful harvests, a drought took place, crops failed, and the now-broke settlers returned east, with wagons bearing signs reading IN GOD WE TRUSTED - IN KANSAS WE BUSTED.

Grant wondered how people would back on the big bust of "2008 and a half" decades from now, when it may seem as if there was "a mass stepping off a cliff." The book's theory is that the Fed reacted wrongly to globalization. Saying we're all kind of sick of hearing Tom Friedman go on about the earth being flat, the New York Times columnist did have a point: In recent years people around the world have been lifted into the middle class by dynamic capitalism and advanced technology in what has been, in many ways, a wondrous time.

But the Fed "hates falling prices," Grant said, because they fear deflation and do everything to prevent it. By chopping interest rates to 1%, the Fed got prices up again in "a furious bull market" as home values increased many times over. But deflation, in Grant's opinion, is not so much prices falling but a mass withdrawal of credit, a margin call on nearly everyone.

As usual, we've got pages of semi-legible memo-pad notes, but we'll close out with just a few highlights of Jim Grant's interesting talk:

- Treasury Secretary Hank Paulson, who's "become a law unto himself," seems to be changing on a daily basis what the bailout will look like. When Paulson and other administration officials say that the financial crisis is "contained and limited," Grant said, they mean "on planet Earth."

- Now, as in many historical periods of great technological change, such as the period after the building of the Suez Canal, those who had a vested interest in the world as it had been ended up losers, but many more were winners and society as a whole benefited. We think Grant used this as justification for his feeling that the feds should let failing companies like General Motors fail.

- Right now will be looked up as the good old days for serious long-term investors as Mr. Market is giving them a once-in-a-lifetime opportunity to buy low and sell high, which Grant says is exactly the opposite of what the many in the foolish herd actually do.

- The Obama administration probably won't be much different than the Bush administration in regard to reacting to the credit crisis, financial meltdown and economic turmoil: "If you'd asked me eighteen months ago, I wouldn't have said that, but there's not much left for the Democrats to socialize and nationalize that the Republicans already haven't."

- "Long live the Value Restoration Project. Don't lose hope now. The market is like Major League Baseball: try as they might, those in charge can't destroy it."

You can read the author's own words in these post-bailout op-ed pieces in The New York Times and The Washington Post.

The witty and often on-target Jim Grant is too laissez-faire for our tastes, but then we're all socialists here at Dumbo Books. Also, we suspect that he's a bit premature in telling people stocks are at rock-bottom prices now and we lean more to the view of Nouriel Roubini that a severe recession "implies further downside risks to global equities on the order of 20% to 30%" and that bargain-hunters should wait a while, even if they're young and investing with a very long time frame. Not all of Grant's calls over the past few decades have been proven right, but then whose have? After all, look at the books we've published. (You'll be one of the few.)

Meanwhile, having joined the burgeoning rolls of the Cautious Cheapskate Consumer Club, we passed up the chance to buy an autographed copy of Mr. Market Miscalculates tonight but are on the waiting list for the book at the Brooklyn Public Library. We look forward to reading it and are grateful that we got to see Grant in person in Brooklyn tonight, as we suspect Ben Bernanke may soon make him an offer even Jim Grant can't refuse.

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